Global X Artificial Intelligence & Technology ETF
Q4 2015 Earnings Call Transcript

Published: 11 Mar 2016

[Richard W. Johns:]

Good afternoon, ladies and gentlemen, and welcome to the Alliance HealthCare Services Fourth Quarter and Full Year Earnings Call. My name is Rick Johns and I'm 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. Please visit our Web-site for replay information. 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 2015 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 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 Web-site. On today's call, our CEO, Tom Tomlinson, will provide a brief overview of our business, our fourth quarter and full year 2015 results, the progress of our strategic transformation, and finally, growth strategy initiatives and our priorities for 2016. Our Chief Financial Officer, Howard Aihara, will follow with the details of the fourth quarter and full year 2015 results and our guidance for 2016. With that, I will now turn the conference over to Tom. Tom, please go ahead.

[Tom C. Tomlinson:]

Thanks, Rick, and good afternoon everyone. Welcome to our call. We're pleased to be sharing our fourth quarter and full year 2015 results with you today. From my perspective, we wrapped up our fiscal year on a positive note. As you can see in our press release issued earlier today, we achieved solid results in the fourth quarter, consistent with our guidance, highlighted by strong cash flow generation and 13% year-over-year revenue growth. Over the past 12 months, our main strategic objective has been to return the Company to growth in revenue and earnings, and thereby to maximize value for our shareholders. We're pleased with the momentum we've built across our businesses and the progress we've achieved against our strategic growth goals for the year. Our share price has not reflected the performance of the underlying business. Nevertheless, we remain confident that as uncertainty clears related to our majority shareholder, the value of our improvements to Alliance's business will become more visible to investors. Prior to discussing our 2015 results and strategic updates in depth, I'd like to address two topics. First, as you know, in September of 2015 the Company announced that our majority shareholder, Oaktree, has signed an agreement to sell their block of shares to the Thai Hot Group. At that time, we understood that the parties were targeting a close to their transaction near the end of 2015. Further updates have been provided to investors as the transaction timeline has pushed out a few months. The most recent communication has been from Oaktree on January 22 of 2016. You'll note that this filing included the second amendment to the stock purchase agreement between Oaktree and Thai Hot. The time period for transaction completion described in that agreement included an automatic extension to March 29 of 2016, if certain conditions were met by the end of February. Both of the transaction parties have advised the Company that they consider their stock purchase agreement to be valid and operating within the extension period I noted. I remain hopeful that the parties will complete their transaction in the near future. Next on the agenda, I'd like to introduce you to Rhonda Longmore-Grund. As we announced recently, Rhonda will become our new Chief Financial Officer. We're very excited to have Rhonda join our leadership team as we continue building on our growth strategy as the partner of choice to hospitals and providers who are seeking to accelerate the performance of their radiology, oncology and interventional service lines. Her experiences in leading high-performing financial teams in the capital markets and in overseeing a global finance organization will be invaluable assets to our efforts in driving long-term growth. We look forward to introducing our investors to Rhonda in coming weeks. So, Rhonda, welcome.

[Rhonda Longmore-Grund:]

Thank you, Tom. It's a pleasure to be here and I look forward to meeting and working with the team and the investors over the several weeks ahead. Good luck to you as well, Howard.

[Tom C. Tomlinson:]

And I'd also like to take a moment to thank Howard Aihara who will be stepping down from the CFO role, now that the 2015 audit and 10-K filing is complete. He'll serve in an advisory capacity through the end of April to support the team during the transition. We're grateful for Howard's significant contributions, his dedication and leadership at Alliance for the last 15 years. Howard has been a vital contributor to our success and we wish him all the best in the future. Now I'd like to transition to discussing recent Company performance. Let me highlight some of our key results and initiatives during the year. Our 2015 full-year results were in line with our previously provided guidance, reflecting continued strong cash flow generation and 8% year-over-year revenue growth. As we discussed a year ago, our strategy to meet competition on price in the Radiology segment resulted in year-over-year EBITDA and margin compression. The competitive environment remains consistent with our expectations and we're achieving better customer retention and sales performance as a result of this decision and other factors. While this pricing strategy results in near-term earnings pressure on a year-over-year basis, it's imperative for us to sustain our market-leading position and long-term profitability. We achieved significant progress executing on the key strategic initiatives we outlined at the start of 2015. We're especially proud of our team's commitment to consistently deliver extraordinary care to our patients, as evidenced by the Avatar award for exceeding patient expectations, while also strengthening the foundation of the business with strong execution of our revenue growth, productivity and strategic positioning initiatives. While encouraged by the progress on our results, we remain laser-focused on enhancing the value proposition we provide to our customers and improving the long-term profitability of our business. Throughout 2015, we outlined a few key strategic overall objectives; positioning Alliance as the outsource partner of choice for hospitals and health systems in our core radiology and oncology service lines; expanding into the adjacent space of interventional services in order to capitalize on attractive growth segments and build a third division with excellent growth and return on investment prospects; and leverage our ability to cross-sell multiple service line opportunities into single customer relationships in order to accelerate growth. As we report on our achievements in 2015 and look ahead to 2016, I'm pleased that our team has delivered specific measurable progress. In Radiology, consistent net revenue growth in our core business and the addition of new fixed-site multi-modality centers in partnership with our hospital customers are powerful evidence of the strong value proposition we offer. Our Oncology team is expanding on existing hospital joint venture relationships such as the Medical University of South Carolina and also launched our first center with a new joint venture partner this year. Both instances are validation that our hospital customers are attracted by our outsource partner value proposition. 2015 also saw Alliance take significant strides in laying the foundation for expansion into attractive high-growth adjacent segments. During the year, we expanded our interventional services' geographic footprint via partnerships with The Pain Center of Arizona, and an acquisition of a majority interest in PRC, a market-leading high-profile practice with eight locations across Central Florida and the Palm Coast. One of the benefits of the transaction with PRC is that it allows us to take advantage of brining ancillary lab services into our centralized lab processing facility that was part of the TPC acquisition, creating efficiencies and lowering our post-acquisition multiple. These partnerships build upon Alliance's interventional services growth strategy with two strong initial platforms in two different regions of the country. We continue to see very compelling future opportunities in this fast-growing segment of the healthcare services market. As to our cross-sell strategy, in Q4 we validated the basic premise that hospitals and health systems need to be partnering with outsource providers who can come alongside their acute operations and help them drive exceptional performance. Our Oncology division opened a new joint venture stereotactic radiosurgery treatment center in partnership with a large hospital system operator who is also a joint-venture partner in our Radiology business. I'll provide some additional details on this new location a bit later. We will remain focused on leveraging hospital relationships across all divisions and there is no company better positioned than Alliance to do this in radiology and oncology. We made some meaningful and disciplined investments in 2015 to position our business for long-term success. While our leverage has increased in the near-term as a result of these growth investments, we remain disciplined in allocating capital to growth projects with the highest risk adjusted return on capital. Long-term, we look to gradually reduce our leverage back to where it was prior to this year. Now moving to the details of our fourth quarter and full-year results by division, Alliance Radiology revenues increased 3% this quarter compared to the prior year period. Same-store volume continued to be strong with an increase of 3.6% in MRI and 8.6% in PET/CT, further supported by robust new contract and contract retention performance. For the third consecutive quarter, we achieved positive net sales in our core business and delivered an excellent retention rate, indicating that our strategy is gaining traction. Our revamped sales team as well as improvements in customer service and quality have been key elements of our strong performance in retaining existing customers, securing new customers and scoring a number of competitive takeaway wins. Returning our Radiology business to growth was a key priority for 2015. We added a multi-modality de-novo site in Wasilla, Alaska as part of our RAD360 growth strategy. This new site expands our current footprint in Alaska where we have an existing high-performing center located in Anchorage. It's the combination of these efforts, increased competitive intensity driving hospital sales in our core business, expanded physician-facing sales and marketing efforts driving same-store volume growth and leveraging the unique advantages of our RAD360 comprehensive service line solution that represent the key drivers of growth for Alliance Radiology. We delivered solid performance in our Oncology business as revenues grew by 2% in the fourth quarter. Frankly, we had higher expectations for the quarter but delays in the pace of some pipeline transactions negatively impacted our growth. As I'm sure you noticed, the acquisition of Pacific Cancer Institute or PCI occurred on December 31, so all the benefit of this attractive acquisition will fall into 2016 and future years. Alliance Oncology continued its same-store volume trends with strong same-store performance in stereotactic radiosurgery volume at plus 3.9% with linear accelerator volume decreasing by 6.4%. Linear accelerator volume remains challenged but our team has taken actions to improve performance across this offering. Through January and February of this year, we've seen improving results with same-store linear accelerator volume, now higher when compared to the prior year. Our continued focus on clinical excellence, patient service quality, clinical benchmarking across all locations, best practice sharing and demand generation through marketing and referring physician education enable us to be confident in our outlook for solid same-store performance. Another success in our Oncology business is Commonwealth Health CyberKnife, a department of Pottstown Memorial Medical Center, which is a joint venture we have with Community Health Systems. This is the new site I mentioned earlier where we're partnering with a hospital system operator who we work with in both radiology and now in oncology. We're making strong early progress since opening in December, establishing ourselves as the first regional resource for CyberKnife across Southeastern Pennsylvania and we're pleased to be increasing the market penetration of stereotactic radiation services and are already treating patients for many hospitals in this region. As you may recall, we added additional resources and talent to the business development team in Alliance Oncology 18 to 24 months ago. These examples of new growth projects are the result of these investments. Our pipeline of growth opportunities continues to be robust and our track record of exceeding the expectations of our hospital customers positions us well for 2016 and beyond. In Interventional Services, we recorded our third quarter of results from this new business offering, which we're now calling Alliance HealthCare Interventional Partners. As you heard me mention on prior calls, interventional pain management is the largest segment within the interventional services space and is a natural complement to a 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, physician referrals by way of example. So it makes sense that they'll 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. Our initial investment in The Pain Center of Arizona is off to a positive start contributing over $30 million of revenue in 2015, and our new partnership with PRC serves as another building block to support our growth strategy within this market. We're being very strategic and deliberate in our partnerships and continue to see compelling future opportunities in this fast growing segment of the healthcare services market. Now I'd like to shift my focus to our strategic plan and outlook for 2016. Howard will discuss our specific guidance ranges for 2016 later on in the call. As we progress through 2016, we expect to continue the positive revenue momentum we've built in 2015. In addition, 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. We're confident and focused on delivering growth across each of our three businesses and I'll walk you through an overview of our strategy within each of these businesses. First, Radiology; through a combination of growth initiatives and productivity enhancement strategies, we'll continue to be a financially successful market leader in the radiology business. We expect to take additional strategic pricing actions, though fewer and less significant than in the prior year, in order to maintain and protect market share. Key drivers for our mobile and fixed-site radiology business include; continued same-store growth in volume at our hospital-based customers and our fixed-site clinics as a result of our successful referring physician marketing program; leveraging our re-tooled hospital-focused sales team to drive improvement in customer retention; expand relationships with existing mobile customers through added services; and aggressively capture market share from weaker competitors. We'll make targeted investments to maintain our fleet and secure contract wins from our competition and we expect additional wins in our RAD360 outsource radiology services platform, including the conversion of existing mobile customers to joint venture partners. And of course maintaining our cost discipline by delivering $5 million in identified cost savings to partially offset year-over-year price reductions that we expect will impact our core mobile MRI and PET/CT businesses. Looking at our Oncology business in 2016, we're confident that the investments we've made in the Alliance Oncology team position us to deliver double-digit growth going forward. The transaction with PCI in December is further evidence that this confidence is well placed. The Alliance Oncology pipeline of new opportunities continues to remain very strong and we're looking forward to continued success in 2016. Our strategic focus within Oncology remains unchanged. We're focused on leveraging the expanded business development team that we've built to drive a stronger more robust pipeline of better qualified opportunities; shortening the average oncology development cycle from 18 to 24 months to a shorter time period; further enhancement of our value proposition leveraging our data and analytics capabilities to expand into full outsourcing of the oncology service line; growing same-store linear accelerator and stereotactic radiosurgery volumes at existing sites through the application of clinical benchmarking, dynamic physician sales and education and consumer marketing; and of course capitalizing on cross-selling opportunities to develop new partnerships. In Interventional Services, as we focus on building out our initial strategic investment in TPC and in the later acquisition of PRC, our emphasis on providing interventional therapeutic care will include interventional radiology services like angiographies and biopsies as well as the current business of providing interventional pain management services. Our strategic focus in 2016 will be to firm up the platform and foundation of this new business, so we're prepared to execute effectively as we further grow this business. We'll look to harvest this synergy opportunity that we've described on past calls to drive incremental revenue in lab and imaging services, we'll build a robust physician recruitment capability and pipeline of new providers, and finally work to establish and formalize a national medical director's counsel to ensure consistency and clinical quality across our growing network of clinical sites. So as we enter 2016 with momentum and with confidence in the fundamentals of our business as well as in our future prospects, and as our guidance indicates, we're expecting a second consecutive year of revenue growth. Along with top line growth, we're anticipating growth in adjusted EBITDA in 2016. Our market positions in radiology and oncology remain very strong and we look to continue expanding our footprint into interventional services, which creates many exciting opportunities to drive long-term profitable growth. Additionally, we remain excited about our future partnership with Thai Hot. The majority of requirements have been cleared to successfully close the stock purchase agreement transaction with Oaktree and other related shareholders, and as I mentioned earlier, the parties have entered into an amendment to the extended termination date of the stock purchase agreement which I think provides evidence of the commitment by all parties to work towards a successful close to the transaction. So I'll now hand the call over to Howard who can provide financial details for our fourth quarter and full-year 2015 results as well as our 2016 guidance.

[Howard K. Aihara:]

Thanks, Tom, and good afternoon. As Tom mentioned, I will first review highlights of our fourth quarter and full-year 2015 financial performance, followed by a discussion of our full-year 2016 guidance ranges. Revenue totaled $124.3 million in this year's fourth quarter, an increase of 13% or $14.7 million over last year. Our revenue increase year-over-year was primarily due to the addition of our partnerships with Charleston Area Radiation Therapy Center in West Virginia in the fourth quarter of 2014, The Pain Center of Arizona which began in the middle of the first quarter of this year, and a joint venture with PRC Associates in mid-October 2015. These new partnerships combined contributed $12.8 million of revenue in the fourth quarter. In addition, in August, we modified the governance structure and increased our equity interest in HNI, our long-time radiology joint venture partnership in Michigan, and began consolidating HNI's financial performance into Alliance effective in August resulting in an increase in Q4 revenue of $1.9 million. This HNI step consolidation is expected to impact Alliance's revenue by approximately $7.5 million annually. HNI was previously an unconsolidated joint venture with HNI's results through July previously reflected in the 'earnings in unconsolidated investees' line item of our income statement. On an organic basis, revenue was essentially flat due to the $4.8 million of competitive contract price reductions in MRI and PET/CT to maintain and grow market share, which we expected and discussed in our 2015 guidance call a year ago, offset by strong MRI, PET/CT and SRS same-store volume growth. Alliance Oncology revenue totaled $25.2 million and is 20% of total Company revenue. Oncology revenue increased 2% year-over-year due to our partnership with the Charleston Area Radiation Therapy Center and strong same-store volume growth in stereotactic radiosurgery, offset by a decrease in same-store volumes in linear accelerator treatments and the closure of our linear accelerator center in Missouri in the third quarter. As Tom mentioned, on December 31, we announced the formation of a partnership with Pacific Cancer Institute in Maui, Hawaii. While the Pacific Cancer Institute partnership had no impact on 2015 results, this radiation oncology center is expected to generate approximately $6 million of annualized revenue in full year 2016. Alliance Radiology revenue totaled $86.9 million this quarter, an increase of 3% over Q4 of last year. This was driven primarily by MRI and PET/CT scan volume growth due to strong same-store volume and new contract and contract retention performance, increased revenue from our RAD360 growth initiative and revenue from the HNI step transaction, offset by $4.8 million of competitive price reductions I previously mentioned. Same-store volume growth continues to be strong and was 2.6% for MRI and 8.6% for PET/CT. Our Interventional Services partnership with The Pain Center of Arizona continues to grow and together with PRC Associates our new partnership in Florida contributed $12.2 million of revenue in the fourth quarter. In total, our Interventional Services business contributed 7% of total revenue in the fourth quarter. PRC is expected to contribute $12 million of annualized revenue. Fourth quarter adjusted EBITDA totaled $33.3 million, a year-over-year decrease of $2.1 million or 7%. Organically, adjusted EBITDA decreased $1.3 million year-over-year. This decrease was due to MRI and PET/CT competitive price reductions I mentioned previously, which was partially offset by cost saving initiatives in our Radiology division. For full-year 2015, revenue totaled $473.1 million and adjusted EBITDA totaled $131.3 million. Both revenue and adjusted EBITDA were within our full-year 2015 guidance ranges we provided a year ago last March. In terms of earnings, pro forma diluted EPS was $0.31 in the fourth quarter of 2015, compared to $0.34 a year ago. Pro forma diluted EPS was $1.28 in full year 2015, compared to $1.66 last year. As-reported diluted EPS for the fourth quarter was a $0.02 loss, compared to $0.17 of earnings in last year's quarter. For full year 2015, as-reported diluted EPS was $0.62, compared to $0.98 in full year 2014. Included in as-reported diluted EPS was a $0.33 charge in the fourth quarter of this year and $0.17 charge in last year's fourth quarter for legal matter expenses, non-cash impairment charges, transaction and shareholder transaction costs, restructuring charges, severance related costs, a non-cash gain on the fair market value of asset step-up related to the HNI consolidation, and differences in the GAAP income tax rate from our historical rate of 42.5%. Included in as-reported diluted EPS was a $0.56 charge in full year 2015 and a $0.68 charge in 2014 for the same charges I just referenced. In terms of CapEx, we made significant investments in growth capital projects and upgrades of our assets. In the fourth quarter of 2015, our CapEx investments including equipment deposits totaled $28.7 million, compared to $16 million last year. These 2015 CapEx investments were consistent with our 2015 full year guidance range. In the fourth quarter of 2015, we invested $11.9 million in growth CapEx including equipment deposits. Also in the fourth quarter, we invested $16.8 million in maintenance CapEx. Cash CapEx totaled $14.6 million and finance CapEx was $14.1 million in this fourth quarter. For full year 2015, we invested $46.2 million in growth CapEx and $36.9 million in maintenance CapEx. We were within our full-year guidance ranges of $45 million to $55 million in growth CapEx and approximately $35 million in maintenance CapEx. Alliance continued to generate strong free cash flow. We define free cash flow as a change in net debt before investments and acquisitions and debt financing fees. Alliance generated $5.8 million in free cash flow before growth CapEx investments in the fourth quarter of 2015. For full year 2015, we generated $31.5 million of free cash flow before growth investments. After growth CapEx investments, Alliance's net debt increased $6 million in this year's fourth quarter. For full year 2015, net debt increased $14.7 million. At the end of 2015, Alliance had cash balances of $38 million, long-term debt totaled [$778 million] [ph], net debt was $540 million as of the end of 2015, and our net leverage ratio was 3.83x. Now I'll provide our financial guidance for full year 2016. As Tom mentioned earlier, this is a dynamic time for Alliance where our business development team is generating significant growth opportunities in Radiology, Oncology, and Interventional Services. Full year 2016 revenue is expected to range from $505 million to $535 million, increasing from $473 million in 2015. Radiology revenue is expected to grow from $340 million in 2015 to a range of $340 million to $360 million in 2016. Our growth in Radiology revenue is focused on our growing pipeline of core new business opportunities and RAD360 partnerships. This growth will be offset by approximately $8 million of competitive price reductions to maintain and grow our market share that we expect in our core Radiology business. Our 2015 and 2016 competitive price reduction is consistent with our commentary on last year's guidance call. We expect an even smaller price reduction in 2017 as we want to price substantially all of our core Radiology customers at competitive market levels. Oncology revenue is expected to grow from $100 million in 2015 to between $110 million and $120 million in 2016. Oncology growth is expected to come from a full year contribution from our new Maui radiation oncology center, our new JV center with CHS, as well as from our Oncology pipeline of new business opportunities in 2016. Our Interventional Services revenue is expected to grow from $33 million in 2015 to $50 million to $55 million in 2016. This growth is expected to come from a full year's revenue from our PRC partnership in Florida, completed in mid-October 2015. In addition, we expect organic growth from our TPC partnership in Arizona. 2016 adjusted EBITDA is expected to range from $130 million to $150 million. Offsetting growth in adjusted EBITDA from Radiology, Radiation Oncology and Interventional Services, is the aforementioned competitive price reductions to maintain and grow market share in our core Radiology business of approximately $8 million. 2016 maintenance CapEx is expected to total approximately $35 million. With a pipeline of our growth projects, we expect growth CapEx to be in the $45 million to $55 million range, including amounts financed under debt arrangements for our joint venture equipment purchases. These growth projects will positively impact our 2016 and 2017 results. Free cash flow before growth CapEx is expected to range from $20 million to $40 million. Free cash flow after growth CapEx is expected to range from minus $15 million to minus $25 million. Thank you for your interest in Alliance. We look forward to answering your questions. I'll now turn the call back over to the operator to begin the Q&A session.

[Operator:]

[Operator Instructions] Your first question comes from the line of [Brooks O'Neill] [ph].

[Unidentified Analyst:]

Howard, good luck to you, I'm going to miss you, and Rhonda, welcome. So, I was hoping, Tom, maybe you could just comment a little bit about the competitive response you've seen in the Radiology market? It sounds like you feel pretty good about how things are going, but I'm curious, as you've been more aggressive with pricing, what have you seen from the competition?

[Tom C. Tomlinson:]

Thanks for the question. I do feel it's an insightful one. Here's my view on it. When we looked at this issue a year ago, prior to issuing guidance for the 2015 year, we looked at our existing book of business, we took a very deep look at what the current market conditions were at that time and what we expected them to be, and everything over the past year has really confirmed our analysis and our view from a year ago. And the important part of that is I think what we're seeing is that the pricing that allows us to be highly competitive, and as we mentioned on the call, begin to grow our net revenue quarter by quarter in that core business with this new pricing strategy as well as some of our other initiatives, that pricing is consistent with what we thought it would be a year ago. We don't see competition necessarily driving it down materially beyond the current conditions that we've seen over the last year, and we find again that we're very competitive and we're able to grow our business and not only compete to defend our share but actually take share away from competition. And since we are the largest in that core mobile segment in the United States, it's really essential that we use that as a growth vehicle. And so, I'd like to say, we think the pricing environment is one that we understand well. We were very I think accurate with our outlook that we communicated about this past year, I think we have a good handle on where it sits this year and the pricing that we're articulating allows us to be highly competitive and continue to grow our business successfully.

[Unidentified Analyst:]

Great. That's fantastic. The second thing, I'm just curious about, I don't know if you have any further comments on weakness in the linear accelerator part of your Oncology business, but I've heard the United States market described in that business as a replacement market and I'm curious your perspective, A, is that a fair characterization, and B, if it is, how will that affect you guys, will it require you to put more capital to work or sort of how do you see yourselves behaving in a replacement market environment if in fact that's what you see out there?

[Tom C. Tomlinson:]

I think with regard to in particular the linear accelerator portion of our radiation therapy business, I think it is largely a replacement market. However, I would tell you honestly, we don't see that as a negative, we see that as an opportunity. Probably about a year and a half ago, when we scoped out whether or not we should make incremental investments to grow our business development team in Oncology, one of the things we looked at was the size of the market opportunity where hospitals are looking to replace older aged equipment because we think when they are faced with that decision, which is a sizable investment as you know, a new piece of linear accelerator equipment, if you buy the good equipment that has full capabilities, it's $4.5 million plus, so when they are faced with that sizable financial investment, we think it's actually a great time for us to engage with them, lay out for them how at our sites we can show you that we drive greater volume than the market average when we're in those sites because of the other capabilities we bring to the table. So we think that because it's a replacement market, that actually gives us a lot of great opportunity to engage with hospitals when they are faced with that significant economic decision and therefore are looking for a partner that can help them make that decision a very, very successful one for them. So we think it's a great opportunity.

[Unidentified Analyst:]

Great. That's fantastic. And then , I just guess I'd love for you to talk a little bit more about your growth strategy on the interventional side. Obviously you made two significant acquisitions there in different parts of the United States. How do you see the Company building out that business say in 2016 and beyond?

[Tom C. Tomlinson:]

We as you know continue to be very excited about the interventional space. Our initial focus was to find a couple of initial platform acquisitions that would bring to Alliance HealthCare interventional partners, high-profile doctors that are well respected in their specialty, because we believe that will help us attract the best physicians in this particular marketplace. So we've had a very specific focus with our first couple of transactions and feel very good about the first couple of sizable deals that we've done. As I mentioned in my prepared remarks, we're at a phase now where we need to kind of consolidate those two large deals if you will, get the management team fully settled and in place that can now run a 20 plus site business across two geographies and have a good foundation for further growth. And so our focus right now is kind of that foundation element. You can certainly expect that before the end of 2016, we'll be looking to do some additional growth deals in this space, but I think in the next quarter or two, our focus is primarily going to be digesting what we've already acquired, getting that foundation in place. I mentioned, for instance, one of the initiatives is to get a national medical director's counsel in place so that we can ensure consistency in terms of clinical quality and process across multiple sites. That's a really important element of our strategy. So there will be further growth probably towards the latter portion of the year. I will mention, the guidance we've provided does not include additional acquisitions in the interventional space. So to the extent we do additional transactions in the back half of the year, it would be something likely incremental to guidance we've provided.

[Unidentified Analyst:]

Great. That's very helpful. And do you see any opportunity for organic growth given the platform deals you've done so far and do you think there could be some organic growth in that business or will most of it be driven by further platform acquisitions?

[Tom C. Tomlinson:]

I think there will certainly be some organic growth. I think with both of these existing practices, there's the opportunity to bring some of the things Alliance is very skilled at, in particular referring physician sales and marketing. So I think there's a real opportunity to bring those competencies to bear in this business and drive improvements in same-store volumes at the sites that we've already acquired. In addition, there is some de-novo opportunity around the market areas where we've added these two acquisitions. And so, when we mentioned again in our prepared comments about having a more focused effort on physician recruitment, one of the key elements to this business is recruitment of new physicians because that's key to being able to execute on de novo center growth. And so certainly, there will be organic growth opportunity through those two avenues.

[Unidentified Analyst:]

Great. Thank you very much and congratulations.

[Operator:]

[Operator Instructions] And your next question comes from the line of [Alan Webber] [ph].

[Unidentified Analyst:]

I guess my first question is, when you talk about at the lower end of 2016 guidance, if you compare that to 2015, it's essentially flat. Yet you talk about, I don't know if it's $100 million between growth CapEx and acquisitions between 15 and 16. So can you explain, is the assumption, if you don't get any growth in EBITDA, is all of that just negative pricing on the Radiology side?

[Tom C. Tomlinson:]

I think as we've mentioned, the year we just completed, the guidance we provided was, we thought there would be about $15 million worth of price pressure in Radiology. That's consistent with how we finished the 2015 year. And then as Howard mentioned I think in his remarks on guidance, we're looking for the 2016 year to be about half of that. So I think it was about $8 million worth of price reduction. As our existing book of business in the core Radiology business comes to end of contract, it needs to be renewed and typically renews at a price level that's more reflective of current market conditions. And so, when you see the issue you observed, which is a great observation, is that the core mobile radiology business in particular is under price pressure as we've described, that compression in EBITDA is being offset by improvements we're making in the business. So we've talked about some cost reduction programs that we've executed in the core Radiology business to offset some of that price pressure, and then it's also offset by some of the growth capital projects for either acquisitions or de-novo centers both in Radiology and Oncology and then of course the more recent initiative into Interventional. So it's a combination of those factors.

[Unidentified Analyst:]

Okay. Actually I missed the $8 million. Okay, that's fine. Then I guess two separate questions. Regarding the transaction, again first, Howard, I guess good luck, and I guess can you just explain to me if the price was down at $18.50, the stock has not traded there and now it's trading at $8, what is possibly good about this acquisition for the existing shareholders other than those who are getting $18.50 a share, and you make a comment that you look forward to the deal being concluded?

[Tom C. Tomlinson:]

We do look forward to it being concluded. As I think we've articulated before and even touched on a little bit on this call, we think Thai Hot will be a fantastic majority shareholder for the Company. We believe they'll be very supportive based on dialog I and others inside the Company have had with them. So we think they will be supportive of the strategy that we've been executing in the United States, including with capital if needed. In addition, and again as we've talked about, there is an opportunity to look at how we might grow healthcare business overseas in China, and having a majority owner whose economic interests are very tightly aligned with all of the non-majority shareholders of Alliance, as we consider that is I think a very positive factor that makes a majority ownership by Thai Hot attractive. Now look, we all can see the stock price chart and we would acknowledge that it's not been very attractive. It would be my view, again as I commented on it in my prepared remarks, that as the ambiguity around this transaction begins to clear, I think people can and will refocus on the core performance of the business, on the opportunity that we have in front of us and on this team's growing ability to execute against a set of revenue and earnings strategic initiatives that I think reflect the market conditions that we're in and I think paint a very exciting and positive future for Alliance.

[Unidentified Analyst:]

Okay, fair enough. So, Howard, according to the Proxy, you owned like 100,000 shares. Are you selling in the deal and are you getting compensated somehow given the decline in the stock?

[Howard K. Aihara:]

In terms of selling shares, no, I am not.

[Unidentified Analyst:]

You're not selling, so you're not part of the group that's selling [indiscernible]?

[Tom C. Tomlinson:]

The selling shareholders are predominantly Oaktree and MTS. And in addition to those two, Larry Buckelew, who is the Chairman of the Board, is selling a portion of his shares and specifically the portion that related to an option grant he was given when he stepped in off the Board as Interim CEO for a 14-month period. He has other share holdings outside of that particular option grant that he is continuing to hold and we expect Larry to continue on the Board. But no other management or Board members are selling shareholders in the transaction.

[Unidentified Analyst:]

So, Tom, you don't own as many shares, but some of the other members of senior management own more shares. How are they going to be compensated to offset this kind of hit in the stock price?

[Tom C. Tomlinson:]

Our belief is again that once the ambiguity and the noise around what is a shareholder transaction, it's not a Company transaction, once that ambiguity and noise clears, we think there's an opportunity for investors to refocus on the long-term value of this Company. As you know, we trade right now at a historically very low multiple to EBITDA, and I think people will see that that's a compelling opportunity. We do plan to be more proactive through the balance of the year in terms of investor relations activity and plan to go speak and I think we're scheduled for three conferences right now over the next several months. And so, I think getting the story out there about the exciting and compelling future of Alliance and frankly the very attractive investment opportunity to be able to enter the story of what is a very low EBITDA, we think can be attractive.

[Unidentified Analyst:]

Okay. So there's no extra bonus or anything like that paid to management to offset the decline in their stock?

[Tom C. Tomlinson:]

There's no specific compensation to anyone in management because of the change in the share value.

[Unidentified Analyst:]

Okay, all right. Thank you.

[Operator:]

Your next question comes from the line of [Vijay Patel].

[Unidentified Analyst:]

My question is just related to the previous callers. Can you help reconcile for me sort of your enthusiasm for the business, go-forward strategy, the growth initiatives that you have, and you acknowledged that the stock price is where it is and actually it's undervalued, and yet we've seen zero shares purchased by anybody within management team, it sort of seems a little bit odd to me that you say all these things but is not reflected with any of your personal money, so can you help reconcile that for me please?

[Tom C. Tomlinson:]

We would be happy to address that. So it would be the view of Company counsel that from the time the Thai Hot transaction was announced in September up to today's date that the Company has been in a closed window period and would therefore be legally inappropriate for any insider, so management, Board members, et cetera, to transact in Company stock.

[Unidentified Analyst:]

When does that window open?

[Richard W. Johns:]

It could possibly open – this is Rick Johns – it could possibly open three days from now, but we haven't made any final decision on that.

[Unidentified Analyst:]

Okay. Thanks for explaining. My second question is, this is also related to the previous caller, one of his questions. It's sort of hard to piece together what you're going to earn from the new acquisitions given the fact that you've got your existing business that's declining. What's your hurdle rate for – you've invested this money, what kind of hurdle rate are you expecting – again margins, whatever metrics you want to give me – are you expecting on these acquisitions and your growth CapEx? I asked this question in the last quarter. You asked me to go to the footnotes and the segment financials, but to be honest with you, I couldn't make any sense of it. How do we know that you're actually earning a cost of capital with these expenditures and whether or not capital could be better used to say buy back stock?

[Tom C. Tomlinson:]

We target a mid to high-teens internal rate of return, return on investment, when we make decisions about projects for instance like the Maui transaction that we've talked about and others. So that's the hurdle rate that we target. So does that answer your question?

[Unidentified Analyst:]

It does, but again the math doesn't make any sense to me. In 2015, you're at $131 million and I see that you have an add-back of around $8 million or $9 million if you assume that all of those acquisitions closed January 1. That gets you to $140 million. In 2016, your projection is sort of the midpoint is $140 million. You've articulated that there is a decline [indiscernible] on your legacy assets. And I can do the math on, you spent $85.8 million for growth in 2015, you'll spend another $50 million in 2016. That's a lot of money and I just don't see – I would expect, and if you say mid-teens, a simple enough math will get me to a lot higher EBITDA number. Is [indiscernible] or am I not thinking about this correctly?

[Tom C. Tomlinson:]

I understand the question. We certainly would be willing to give some thought about whether there's a more clear way to present the financial information about the Company that would allow you to pull apart and parse kind of the core historical legacy business and new investments we're making, whether it's to grow that core business or other investments, are we doing acquisitions in Oncology or Interventional. We could certainly give some thought to that. Maybe there's a more clear way that we can present that in our financial statements in public filings.

[Unidentified Analyst:]

Right, because $85.8 million plus $50 million, you say mid-teens, 15% on that, you would expect a bump of at least $20 million in EBITDA I would think, if not more. And yet we're looking at flattish.

[Tom C. Tomlinson:]

As we've talked about the challenge in our business is the $15 million of price reduction that we saw in that range in 2015 and then the number that we've talked about for 2016. So there's an appreciable amount of competitive price pressure in the core Radiology business that we're offsetting with some combination of productivity improvements and new business investment.

[Unidentified Analyst:]

Right. Just one last one. Your leverage will tick up again in 2016. Can you just remind me what the covenants are and how much room you have to increase that?

[Tom C. Tomlinson:]

Go ahead, Howard.

[Howard K. Aihara:]

Our total leverage covenant is currently at 4.55. We're levered at 4.1x total debt to adjusted EBITDA as of 12/31/2015. There's one more step-down in the covenant but that isn't going to come until 2017.

[Unidentified Analyst:]

Okay. So 2017, when it steps down, I imagine that you'll actually have to generate free cash flow after acquisitions growth, whatever add-backs you want to fill in, or is that fair that the Company given what you know now will not burn cash in 2017?

[Howard K. Aihara:]

I think that there's obviously another option to think about there too as we may be in a position to refinance at that point.

[Unidentified Analyst:]

All right, okay. Thank you so much.

[Operator:]

Your last question comes from the line of [Indiscernible] Johnson.

[Unidentified Analyst:]

Just I want to echo some of the other questions. I'm a little curious about, again [indiscernible] to the discrepancy between the transaction price and your stock price, is there something with Thai Hot that we're just not aware of? I know it's not American company. Is there something, is it just that we've gone from premier U.S. private equity firms to a firm that perhaps most U.S. investors aren't familiar with? I'm just a little curious about the continued massive gap between the exit price for your existing investors and where your stock trade, and I wouldn't have asked it but I'm actually less concerned about your financials than if there's something with the buyer that just has made people uneasy and perhaps you can elaborate on maybe other transactions they've done or maybe just something we're missing.

[Tom C. Tomlinson:]

I can't really speculate on what's in the mind of investors related to that. I can tell you part of our internal process as it relates to getting to know Thai Hot. A number of us have spent a reasonable amount of time with them. As I think we've announced publicly, there's three Board members that would join the Board when the transaction closes. As any public company would, the special committee of the Board, which is the independent directors, have done the necessary and typical background check kind of work to make sure we understand those people's relative independence and other things like that. Everything we've seen is that I think, as we've said, we think Thai Hot will be a very strong majority owner of the Company. It will bring benefit to all shareholders. We think the Board members they've proposed, who we've gotten to know, will be just fantastic Board members and add value. And so we're just looking forward, as a management team I can say, we're looking forward to seeing this transaction complete and move forward with a new majority owner who we think will be very supportive of the Company and help us be more successful on behalf of all shareholders.

[Unidentified Analyst:]

Okay. And again, maybe this is – I've been an investor in your Company on and off for a long time and I guess my other question would be, and maybe even this is just something very obvious, is there a reason why you keep doing this kind of private equity kind of controlling stake transactions as opposed to just selling the Company to a private equity firm in total? I mean I'm just curious, we've had KKR, then we've had Oaktree and now we're having Thai Hot. It doesn't seem to be working as a public company for any sustained period of time. So I'm just curious that why not it can just control transaction, strategic, financial to perhaps maybe get best value for all shareholders?

[Tom C. Tomlinson:]

So to be clear, I mean the transaction that we're talking about is the transaction between Oaktree and Thai Hot. So there wasn't a transaction in the Company [went on unarranged] [ph]. So it's their transaction, not the Company's. I will highlight for you that I do think Thai Hot is a different investor than either KKR or Oaktree, in that Thai Hot is not kind of a classic U.S. filed private equity investor that in four or five years is going to need to harvest that investment. In dialog with Thai Hot, they see this as a long-term strategic investment that opens up an opportunity for them to be a participant in the U.S. based healthcare marketplace and helps them have a platform of clinical healthcare operational expertise to look at strategically expanding into the country of China. So I think it's a very different type of investor than the traditional private equity view that you kind of I think summarized [indiscernible].

[Unidentified Analyst:]

Okay, that is very helpful. And then just my last I guess follow-up comment, really more like a question is, I think it might help us, and maybe you've done this and I just wasn't invited, perhaps having some of the Thai Hot executives or Board members maybe do an Investor Day. Maybe it will help kind of sell the transaction because I don't think I can ever recall such a gap between a transaction price and a public share price for a deal that's going to be consummated.

[Tom C. Tomlinson:]

I would tell you that our go-forward plan is, once the transaction get closed, is to bring one or two of the Thai Hot Board members along with us, do some investor meetings, meet with lender community, et cetera, just for exactly the reason you described. I think Thai Hot and their Board members are obviously not names that are known in the United States. We intend to make that introduction. And so it's one of the things that's in our go-forward plan as we get more proactive with our investor relations activity once the deal is done.

[Unidentified Analyst:]

Great. I think that makes a lot of sense. I would encourage speaking at conferences and get all of the above. But anyway, I've taken enough of your time. Thank you very much.

[Operator:]

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

[Tom C. Tomlinson:]

Thanks for participating everybody. Appreciate all the good questions and we look forward to talking to you again in another quarter.

[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.