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Q2 2015 Earnings Call Transcript

Published: 8 Aug 2015

[Richard Johns:]

Good Afternoon, ladies and gentlemen and welcome to the Alliance Healthcare Services Second Quarter 2015 Earnings Call. My name is Rick Johns and I am the companies Executive Vice President and General Counsel. 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 opportunity, the impact of the Affordable Care Act, the 2014 Medicare fee schedule, our 2015 guidance, our expected capital expenditures for 2015, expected cost reduction, and the companies effective 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 2015 guidance release under the heading forward-looking statements as well as in the risk factors section of the company's Annual Report on Form 10-K for the year ended December 31, 2013 as such report may be modified. The company disclaims any intention or obligation to update or revise any forward-looking statements whether 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 commentary regarding our second quarter 2015 results and business performance. Our chief financial officer, Howard Aihara, will follow with the financial details of the second quarter 2015 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 our call today. As Rick mentioned I would like to begin the call with an overview of Alliances second quarter 2015 earnings in a brief commentary regarding our business performance. I am pleased with the second quarter 2015 results in which we produced revenue of $118.5 million, an increase of approximately 7% year over year. Our solid results reflect continued progress on executing our strategic plan to capitalize on growth opportunities in our alliance oncology, alliance radiology, and interventional platforms. We generated strong operating cash flows of $27.7 million in the second quarter an increase of $3.8 million year over year. With our Alliance Radiology business we produced high single-digit same-store volume growth in our MRI and PET/CT business lines driven by increased position facing sales efforts and other programs that help our hospital partners gain market share. As I communicated during our 2015 guidance call we have chosen to be strategically aggressive in our price strategy in radiology in order to sustain and grow market share. As a result adjusted EBITDA results of $34 million were negatively impacted by these pricing actions we took across our business in the quarter. Consistent with our strategic view of the business our heightened competitive posture has been a key element of our strong performance in retaining existing customers, securing new customers, and scoring a number of competitive takeaway wins. Overall our results are in line with our internal expectations for both near-term performance as well as our full-year guidance, which we are reaffirming. Howard will provide a full overview of our second quarter financial performance in a few minutes. We remain committed to disciplined use of capital, making good investments on growth projects, as well as keeping leverage at a reasonable level. We continue to identify and accelerate cost and productivity initiatives to both enhance the profitability of our business and the value proposition we provide to our customers. Year-to-date we have executed $2.8 million of cost saving initiatives, the recent completion of a $30 million term loan financing will strengthen our balance sheet and enhance our financial flexibility as we continue to make investments in our long-term growth initiatives. Now on to more details on our second quarter 2015 results by division. In our oncology business revenues are up 6% over the same quarter last year as we continue to drive strong results from partnerships we initiated in 2014, including the medical University of South Carolina or MUSC, and the Charleston area radiation therapy center, or CARTC, in West Virginia. As we move through the balance of the year we expect to drive growth at MUSC and CARTC as a result of technology improvements designed to expand their radiation oncology programs. At MUSC the technology investments made in the third and fourth quarters of last year have enabled us to expand their stereotactic body radiosurgery program, facilitating new treatments, services, and capabilities in 2015. In the third quarter we expect to install new radiation therapy units at the CARTC cancer center, which will expand the cancer treatments available at the new state-of-the-art radiation therapy department and fuel growth in the back half of 2015 and beyond. In terms of same-store performance stereotactic radiosurgery and linear accelerator volumes increased sequentially in the second quarter after recovering from the impact of adverse winter weather to the start of the year. SRS volumes rebounded stronger from the first quarter for some continued weakness lingers in our linac volumes. We are taking actions to improve performance across our linac offering, near term priorities to address this include leveraging new marketing, and direct consumer programs, and enhancing our referring physician facing selling efforts. I am confident that we will get our linac performance in line with where we need to be. Looking forward we remain excited about the strong pipeline that we have built for our oncology business. We have signed definitive documents for a new partnership in the Northeast with one of the largest hospital systems in the region. We are excited about this partnership, which will not only prove beneficial in the near term but will also provide additional opportunities for our services as the relationship deepens. We expect this new site to be operational in the fourth quarter and that it will add $3 million in annualized revenue once it matures. We have an additional six letters of intent signed and are working to move these opportunities into the next stage of our pipeline, which is negotiation of definitive deal documents. It is worth noting that three of these LOIs are with existing customers with whom we have other centers. These projects and others in our pipeline will contribute to revenue and earnings in the current year as well as 2016. Our expanded business development efforts are ongoing and have produced a robust pipeline of opportunities with numerous active deal discussions taking place with hospitals and health systems across the nation. As I noted a minute ago we recently signed our first definitive joint venture with one of the largest operators of hospitals in the country. We anticipate significant growth with this customer in future years as we execute on our strategy of being the partner of choice for the oncology service line. We believe our pipeline will only strengthen and expand as more hospitals look for joint venture partners that provide our level and breadth of expertise. In terms of new De novo centers coming online this year our San Francisco CyberKnife center, in partnership with Dignity Health, is now open and has begun treating patients. As a result we are now realizing revenues from this new center and expect to continue to grow these revenues substantially as the year progresses. Now I am going to shift to radiology. As expected our radiology business continues to be impacted by price reductions and as a result of the strategic price changes we have implemented to sustain and grow market share, and our position as the market leader in this segment. As a result radiology revenues were down approximately 3% in the second quarter. We anticipate that the impact of price reductions will continue throughout 2015. The mobile segment of our business continues to be an important component of our value proposition to customers who need flexibility and scalability as they navigate the changing healthcare landscape, and challenging market dynamics seeking to grow their radiology service line. The mobile contracts also generate significant free cash flow which we are using to invest in higher growth businesses. More importantly the strategic decision we made to more aggressively compete at current market levels by taking down our prices as we contracted with new and existing mobile customers has proven effective. As we continue to successfully win business in the majority of cases. The combination of this competitive pricing strategy coupled with targeted investments aimed at maintaining our fleet and securing contract wins from our competition are critical to sustaining our market-leading position and competitive advantage and have enabled us to improve customer retention and secure eleven new mobile contracts. It is worth noting that our customer retention metrics are the strongest they've been in over eight years which demonstrates our ability to sustain our existing market share. In fact, we have increased our customer retention rate 500 basis points year-over-year. In addition, our team is keenly focused on a sales initiative to score competitive take away wins, and we were able to win five new contracts away from our competitors in the quarter as a result. The performance of our sales team provides clear evidence that were gaining traction with the more competitive market posture as far as pricing in radiology coupled with the number of customer focus performance improvements. In terms of performance by modality our radiology same-store growth was strong in the second quarter with MRI up 6.8% and PET/CT up 7.6% over the same quarter in 2014. This same-store growth is the result of a combination of factors. First, improvements made of build and improve performance in our physician facing sales and marketing team have helped us deliver referral volume growth in customer accounts. Second, payer actions effecting coverage and utilization which initially impacted volumes in Q1 of 2014 have set a new baseline for same store volume growth, particularly for PET/CT. Our Red360 opportunities are progressing nicely through the pipeline. We have had 1 new Red360 site start operation in the second quarter of 2015 and were on track to deliver an additional four to eight new Red360 sites this year as a result of ongoing business development efforts. As outlined in our 2015 guidance we expect some of these market realities including price reductions, and payer coverage and utilization actions will continue to impact radiology revenues throughout 2015. So to partially offset this impact, we have identified $5 million in annual cost savings in 2015 along with the number of growth initiatives that we expect to speak about more as the year progresses. At this point in time we realized $2.8 million of cost savings through the first half of the year. We believe that the combination of increased competitive intensity driving hospital sales in our core business, improved physician facing sales strategy driving same-store volume growth, and expanded business development activities driving new Red360 partnerships will continue to produce strong results and deliver both customer and business growth. And finally, we recorded our first full quarter results from our new business offering in interventional services which we are now calling Alliance Healthcare Interventional Partners. We remain excited about our expansion into this attractive high-growth interventional services space which was initiated by our first quarter acquisition of a majority ownership position in the Pain Center of Arizona, or TPC, a market leading interventional pain management practice. This new division will be focused on providing interventional therapeutic care including interventional radiology services, like angiographies and biopsies, interventional pain management services, like nerve blocks and injections, and interventional therapeutic services, like stents and embolization. Now as you have heard me mention in prior calls interventional pain management is the largest segment within the interventional services space and is a natural complement to our diagnostic radiology business. As an adjacent service line there are a number of synergies between diagnostic radiology and interventional services. The use of imaging modalities, hospital customers, and physician referrals by way of example. So it makes sense that they will benefit from a coordinated sales and business development effort contributing to organic growth. This also aligns with our vision to provide multiple service lines to a single hospital customer. Even in this early stage we are starting to see examples of how this new offering provides additional opportunities across our existing customer base. We are currently in discussions with one of the largest hospital operators to provide interventional strategies similar to what were doing in oncology and radiology. This particular customer is one where we already have existing joint ventures in both radiology and oncology. Over the next several years we believe the opportunity to cross sell, if you will, multiple service line solutions and partnerships to our hospital customer base will accelerate. Just recently we completed initial training with our sales and business development leadership team on the new interventional platform and we continue to expect to identify and capitalize on these opportunities as we grow relationships with our customers. Now as I mentioned in my opening comments our acquisition of TPC continues to positively affect our financial results as it added $8.2 million in revenue to our second quarter results. As we drive growth in this new segment were actively looking for ways to broaden and build the business and expect to make one or two more strategic acquisitions to strengthen our offering. Our interventional business development team is very active and currently has five opportunities subject to letter of intent and due diligence. We’ll continue to provide further details throughout the years this new business segment develops and grows. So in summary our efforts in the second quarter in the first half of 2015 show solid progress that we've made to strengthen our service line competencies, expand our services, and diversify our business offerings. More importantly we are excited about the interest that is being generated by our expanded offerings and the breadth of our services that we can offer to our hospital customers and this is evidenced by our strong pipeline. Although we still have work to do to drive consistent earnings growth we are executing well against our strategic initiatives and gaining strong momentum within our markets and seeing good traction with new and existing customers. Adding multiple additional sites to the existing oncology and radiology partnerships is proof that our customers appreciate the powerful value proposition and results that we bring to the table. We are excited by the many opportunities that lie ahead in the oncology, radiology, and interventional services space, and are confident that we can deliver long-term growth. Now I’ll hand the call to Howard to provide the financial details of our second quarter 2015 results.

[Howard Aihara:]

Thanks Tom, and good afternoon. I’ll review the highlights of our second quarter 2015 performance, affirm our full-year 2015 guidance range, and discuss the impact of the proposed 2016 CMSP schedule changes, which are not significant to Alliance. Revenue totaled $118.5 million in this year's second quarter, an increase of 7% or $7.3 million for the last year's second quarter. Revenue increased year-over-year was primarily due to the addition of a partnerships with Charleston Radiation Therapy Center in West Virginia in the fourth quarter of 2014 and the Pain Center in Arizona, which began in the middle the first quarter of this year, which contributed $8.2 million in revenue in the second quarter. On an organic basis revenue decreased $2.8 million dude to $4.9 million of competitive contract pricing reduction in MRI and PET/CT which we expected and discussed in the 2015 guidance call in March. Partially offset by strong MRI and PET/CT and same-store volume growth. Our oncology revenue total $25.3 million, is now 21% of total company revenue. Oncology revenue increases 6% year-over-year due to our recent partnership with Part C and strong same-store treatment volume growth in stereotactic radiosurgery, also by a decrease in same-store volumes in linear accelerator treatments. Alliance Radiology revenue totaled $85 million this quarter, a 3% decrease over Q2 of last year. This is primarily driven by $4.9 million in competitive price reduction I mentioned previously offset by MRI and PET/CT scan volume growth due to strong same-store volume and contract retention performance. As Tom mentioned, same-store volume growth was 6.8% for MRI, and 7.6% for PET/CT. Revenue growth for MRI and PET/CT scanned volume growth and continued contribution from our Red360 growth initiative totaled $2.6 million in the aggregate. This is the first time the since the first quarter of 2012 that we have increased quarterly total scan volumes in both MRI and PET/CT in the same quarter. Second quarter adjusted EBITDA totaled $34 million, the year over year decrease of $2.7 million. Organically adjusted EBITDA decreased $4.6 million year-over-year, this decrease was due to an MRI and PET/CT price reductions I mentioned earlier which was partially offset by cost savings initiatives in our radiology division. Now moving on to earnings, pro forma diluted EPS was $0.34 in the second quarter 2015, compared to $0.52 a year ago. As reported, diluted EPS for the second quarter was a loss of $0.18 compared to income of $0.26 last year. Included in the Alliance reported diluted EPS was a $0.52 charge in the second quarter this year and $0.26 charge in last year's second quarter for legal matter expenses, impairment, transaction costs, restructuring charges, and difference in the GAPP income tax rate from our historical tax rate of 42.5%. In this years second quarter we recorded a $6.7 million non-cash charge or $0.36 per share against our intangible assets included in the impairment line item. We made the decision to close one of our rural radiation therapy centers in lieu of making significant equipment investments in this center in an area with increased competition. This center was initially acquired in 2007. In terms of CapEx we made significant investments in growth capital projects and efficient upgrade of our assets. In the second quarter of 2015 our Capital investments totaled $19.8 million, compared to $12.7 million last year. In this quarter we invested $15.8 million in growth CapEx including equipment deposits. Also in the second quarter we invested $4 million in maintenance CapEx. Cash CapEx totaled $13.4 million, and finance CapEx was $6.4 million in this quarter. Alliance continue to generate strong free cash flow. We continue to manage our balance sheet through free cash flow generation. We define free cash flow as a change in net debt before investments and acquisition and debt financing fees. Alliance generated $16.7 million in free cash flow, before growth investments, in the second quarter 2015. After growth investments Alliance net-debt increased $3.5 million this year's quarter. In late June we completed a $30 million tack-on to our term loan facility, We used proceeds from the tack-on, minus fees and expenses, to completely pay down our revolving loan facility for funds that we borrow for The Pain Centers of Arizona acquisition in the first quarter. At the end of this year's second quarter long term cash balances of $43 million. Long-term debt totaled $543 million, net debt was $500 million in June 2015, and net debt leverage ratio 3.66 times. Now we are affirm our full-year guidance for full-year 2015. As we mentioned in our guidance call we feel it is a dynamic time for alliance with many growth opportunities in our core radiology, oncology, and interventional service business lines. Full year 2015 revenue is expected to range from $470 to $505 million. 2015 adjusted EBITDA is expected to range from $125 million to $150 million. Also in growth from adjusted EBITDA from radiology, radiation oncology, and interventional services to the appointments in price reductions in our core radiology mobile business of approximately $15 million. 2015 maintenance CapEx expenditures are expected to total approximately $35 million. In the pipeline of our growth projects we expect growth CapEx to be in the $45 million to $55 million range. Clearly amounts financed under debt arrangements for joint venture equipment purchases. These growth projects will also positively impact our 2016 results. Free cash flow before growth CapEx is expected range from $20 million to $45 million. Free cash flow after growth CapEx is expected to range from minus $10 to minus $25 million. In early July CMS announced its proposed fee schedules for both non-hospital Medicare physician fee schedule and hospital outpatient prospective payment system providers. As you know, Alliances business model is to partner with hospitals in a direct relationship. Revenue that we build directly to Medicare managed care plan and other third-party payers is 22% of our revenue, with the result being the Alliance is not directly exposed to CMS fee schedule reductions for the most part. As I mentioned in my earlier comments the proposed 2016 Medicare fee schedules, if enacted as published, would not have a significant impact on Alliance, it is essentially neutral in terms of radiology, oncology, and interventional services. Using direct billings to Medicare in 2015 the 2016 impact on our radiology division will range from a positive $100,000 to a negative $600,000 if the Medicare intermediaries matched the 9% cost reduction in PET/CT rates to keep the NPSS and HOPS rates in parity. In 2015 hospital and non-hospitals are reimbursed in parity. For radiation oncology the proposed 2016 impact of the proposed Medicare fee schedules is a positive $100,000. For interventional services the proposed 2016 fee schedule is about neutral. Typically, the CMS publishes its final fee scheduled in early November. If CSM stays on their historical schedule we should be able to provide you an update on the final CMS rates on our next quarter's earnings call. Thank you for your interest in Alliance. We look forward to answering your questions. Now I 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] And your first question comes from [Kyle Mallory].

[Unidentified Analyst:]

Hi Tommy and Howard. Quick question for you with respect to radiology. Volume increases obviously offsetting most of the reduction of price on a first hand basis, do we have a sense of when we are going to see pricing reductions on a per-scan basis begin to abate?

[Tom Tomlinson:]

You have a sense of our business which as you know in the mobile side is driven by your periodic contract renewals. So what were saying in terms of the price environment today, is the market is pricing to a more competitive level. To date this year we've not seen, what I would consider to be further price reductions below that that we already see and have planned it to our business model. And what were seeing is that the price that we’re going to market with were very, very effective in winning customer accounts. So we have communicated what we believe to be the impact of year-over-year price change on a full-year basis, what we are seeing so far through the first half of the year is consistent with that. We will carry over into 2016 some contracts that will probably get repriced in 2016. So there will be some effect I expect in the 2016 year, but we don't see the price level moving down beyond what we had planned for this year.

[Unidentified Analyst:]

Okay, excellent. With respect to your Red360 initiative, obviously the wins that have previously been announced, or discussed on the last call, kind on [Stone Hopper], any reaction in the marketplace? How are the conversations ongoing with the other prospects in the pipeline?

[Tom Tomlinson:]

I would say generally they are good. We need to do, candidly, a better job of moving things through the pipeline. We have got a number of project that I would consider to be still in the ramp up phase so we need to use those as proof cases, if you will, on how we are able to come into partnership with a hospital, buy or build a couple of multimodality imaging centers and drive performance. We do have a couple of the early sites where we now have enough track record we could show we positively effect the volume by 20% to 30% on sites that we are taken over and run in partnership with the hospital. So we are strengthening our ability to deliver on our value proposition, a big part of which is demand generation, and so we have still have got some work to do to be able to drive that at the pace that I believe is possible. But I feel like we are making good progress.

[Unidentified Analyst:]

Excellent, thank you. With respect to the interventional services segment you went through the verbal comments a bit quick. You said you have five business under LOI, at the same time if I look at your increase in net debt of $25.4 million that is roughly at the high end of your guidance therefore implying you would not be increasing net debt over the next two quarters. So, A, assuming those facts and readings are right, you know, how do you intend to plan on a financing any proposed acquisitions in interventional services segment?

[Tom Tomlinson:]

You know, they first transaction we did was fairly sizable in comparison to most of the things were looking at. So I think what you will see with the next couple of transactions is a little smaller bite-size. I would remind you that our approach here, our strategy, in growing interventional is that we will only look at opening a location or acquiring an interest in a location if the doctors that currently own the practice stay on as very significant minority shareholders. So as we grow this business, you know, were not writing a check, if you will, for 100% of enterprise value because we believe that alignment with the physicians who are core to the success of the business is an essential element to what were doing. So the capital intensity maybe isn't quite what you might otherwise think it would. Now, of course, that also means that our minority interest element of our P&L is going to grow to some extent over time as well because we'll have more of our revenue and earnings that have a joint venture component to them. But we think that's the right strategy. So I think the couple of deals, you know, one to two deals that we mention we think we can get in the current year. I think we can finance within the availability of capital that we have. As we get into 2016 we will be assessing what our growth prospects are and what we should be doing from a financing standpoint. But were not, you know, we are not that far into our 2016 financial planning yet.

[Howard Aihara:]

And Kyle, this is Howard, we will also generate more free cash flow in the second half of 2015. So in that regard will generate free cash flow and may deploy a chunk of that to finance these acquisitions. So that's another source of cash for us.

[Unidentified Analyst:]

No, that makes sense. I will save the line as I am sure there are many other questions.

[Tom Tomlinson:]

Thanks Kyle. End of Q&A

[Operator:]

If there are no further question. I will now conclude the conference call.

[Tom Tomlinson:]

Thanks everybody for dialing in today and I appreciate your ongoing interest in Alliance.

[Operator:]

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