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Q1 2013 Earnings Call Transcript

Published: 2 May 2013

[Nicholas A. Poan:]

Good morning, and welcome, ladies and gentlemen, to the Alliance HealthCare Services First Quarter 2013 Earnings Call. My name is Nick Poan, and I am the company's Senior Vice President of Finance and Chief Accounting Officer. This conference is being recorded for rebroadcast. [Operator Instructions] 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 2013 guidance and statements related to expected capital expenditures, imaging and radiation therapy center openings, long-term debt reduction, expected cost reductions, the company's effective tax rate and the weighted average number of shares outstanding. 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 2013 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, 2012, as such report may be modified or supplemented by the company’s subsequent filings with the SEC. 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, Larry Buckelew, our Chairman and CEO, will first provide an overview of our business, as well as first quarter 2013 results and achievements; followed by Mike Shea, our Chief Operating Officer, providing an update on trends in both the economy and the healthcare services sector. Our Chief Financial Officer, Howard Aihara, will follow with the details of our financial results, as well as an update to our 2013 guidance. We will conduct a Q&A session after our prepared remarks. With that, I will now turn the conference over to Larry. Please go ahead.

[Larry C. Buckelew:]

Thanks, Nick, and good morning, everyone. I'm very happy to welcome you to Alliance's first quarter 2013 call. We sure appreciate your time, your interest and participation in this event. We're also pleased with our first quarter results, which represent our fourth consecutive quarter of adjusted EBITDA growth, which we believe is clearly a sign of Alliance's ongoing ability to execute on our operational efficiencies, even in the face of a turbulent healthcare market. As illustrated by many of the nation's leading hospital groups who've reported their patient volumes in the first quarter, as well as other reports that track patient volumes in specialty care areas, physician visits and so on, clearly, patient flows have not come in quite to the level that many had expected. And so the industry, in general, as we know, during this first quarter, has experienced a little less than what the industry had been looking for. In spite of that lower-than-anticipated patient volumes during the first quarter, Alliance HealthCare was able to deliver adjusted EBITDA growth, and this is due in no large -- or no small part, I should say, to our disciplined expense management and cost controls that we've implemented over the past 1.5 years. We've continued to leverage our operational efficiencies to maintain our organic adjusted EBITDA growth, and we believe the fundamentals of the healthcare industry are stabilizing and that they'll improve and help to drive growth in the remaining part of 2013. Another accomplishment Alliance is really proud of achieving during the first quarter is completing an additional $15 million voluntary term loan payment, reducing our net leverage to 3.7x. Combined with the amended term loan payment made during the fourth quarter of 2012, Alliance has made $90 million in debt payments or a full 22% of Alliance's term loan debt, and this has all been done since September. Additionally, as announced in our earnings release yesterday, Alliance is taking steps to take advantage of what we view as the ongoing favorable credit markets, and we're currently in the process of exploring opportunities to potentially refinance our term loan and credit facility. Alliance continues to execute on the 3 critical elements that drive the company's long-term growth and generate ongoing free cash flow. With the aim of building upon this positive momentum, we have evolved our key strategic initiatives to ensure that we're maximizing our results in 3 key areas. Those specific areas, I'll speak briefly to, but number one, now that we've stabilized our imaging business, we're now clearly focused on growing our imaging services; number two, we've commented in previous calls about really bringing together a powerful new management team in our Oncology division, and so we're looking to the future now to expand our radiation oncology services; and then last but not least, item number three, we've spoken in depth in previous calls about our restructuring, the success of that project, but more importantly, we've spoken about a culture that's now been created, where we're committed on a regular basis to driving a culture of organizational efficiencies. So you'll see, as we had anticipated and had commented before, that while we'd restructured the business in prior quarters and achieved some success in doing that, we're finding, on a regular basis, now opportunities to manage expense and look for cost reduction programs that help deliver cash flow and earnings to the bottom line. So with these 3 key areas in mind, let me just touch base briefly on them before I turn this call over to Mike Shea to share some operating highlights and then for Howard to speak to our financial results. When we talk about growing our imaging services, we prided ourselves in our market leadership position as being a hospital-centric organization. Again, I think sometimes, the message gets lost to those who don't follow the sector closely, but Alliance has a long 30-year history of being very focused on waking up every day committed to hospital partners, making sure that those hospitals can be the best that they can be. And we're dedicated to that. So instead of competing with hospitals, our mission in life is to help hospitals not only achieve their goals in the areas that we serve, but exceed the market in the catchment areas that they serve. So with this hospital-centric model, that has continued to be the driving force as we refine our strategic vision for our business. And so as we look to continue to exceed and meet our customers' expectations, we're really finding opportunities to recognize the benefit of what we've called enhancing our value proposition to more strategically partner with hospitals to maximize their success and profitability. I've referenced in the past, this continues to be a key platform for our success as we ended up 2012 and now migrate into 2013. This reality that we have divided our field force into 2 business development teams, one focused solely on new customers and one on retaining customers. Additionally, we now have 2 executives leading these new sales organizations, again, one focused solely on pursuing the new, one on making sure that we're focused on a steady cadence of visiting our existing customers to make sure we're meeting and exceeding their expectations, so that we end up with a successful renewal rate. And now as we've migrated our strategy, we now have a seasoned executive with lots of experience that wakes up now every day solely focused on pursuing large hospital networks and systems that we think are sorely in need of hearing from us and working with them side by side to help them strategically look at ways to drive efficiencies in the key service areas that we provide. The second piece related to growing our image servicing business is derived from driving higher customer retention rates. Again, we've learned in the past. We continue to see more and more evidence that getting in far earlier than when a contract would expire, not only speaking to and making sure, in the radiology departments, we're meeting and exceeding their expectations, but we're finding it now a pretty steady practice, where as we make these visits to our existing accounts, making sure we're meeting and exceeding their needs. We're finding opportunities to migrate into the C-Suites of these hospitals, not only individual freestanding hospitals but hospital campuses and systems, where we talk about our enhanced value proposition. So we're not only seeing that result in higher retention rates. You may have recalled from a previous discussions, where historically, our retention rates had dropped. We're now having strong and continuing success in migrating our contract renewal retention rates in the direction of a goal of achieving a 90% retention rate. And we think we're on track to achieve that by year end. So I'm confident that these efforts to more strategically partner with both our current and prospective customers has us firmly on a path to sustainable growth in the imaging business. So with that overview, I'd like to now migrate the conversation and speak briefly to some of the success we're having in the radiation oncology business, which, as you know, represents approximately 20% of our revenues. We've spoken in the past about bringing together 2 different businesses with the acquisition of the U.S. radiosurgery business in 2011 with our existing business at that time, which we called our AO, our Alliance Oncology business. We've now integrated those cultures. We've really reorganized the business and come up with a very efficient operating structure. And that is now guiding what is in total 28 centers. And very excited about the fact that of those 28 centers, 17 of those are stereotactic radiosurgery facilities. And with that number and that leading position, we clearly have, throughout the U.S., a leadership role in leading this technology throughout the market and bringing this technology to some of the premier healthcare campuses across the U.S. We intend to fully integrate our, what we're calling, spectrum of care. As you know, as we launched into this market segment of radiation therapy, we started off with a more basic platform of Linac technology, and while that continues to be the workhorse in terms of caring for many patients, we're finding ways and opportunities to upgrade that technology in hardware and software. But we're also finding that providing this cutting-edge SRS technology has enabled us to really excite and enthuse many of the hospitals that we're involved with and those hospital campuses and bring to them our knowledge now on a spectrum of care of products and services that allows our customers to potentially be market leaders in the regions and catchment areas that they serve in terms of delivering a broader area of care for radiation therapy, again, leading with the SRS technology, but clearly helping them manage their Linac business. And so what we're also delighted to tell you is, while this model could easily follow what has been called our traditional model in the imaging business, where we bring in technology and know-how and technical support to help these hospitals, in this healthcare environment, we are oftentimes asked without even soliciting their interest. We're being asked by C-Suites of hospitals to come in and talk to them about the opportunity to take the entire oncology radiation area and help them build strategic plans that drive efficiencies, maximize the utilization of their equipment and make sure that they are operating at the maximum efficiencies and generating kind of the best care. So we're excited about the credibility we continue to gain in that area and excited about the future growth opportunities. Shifting to the last item, again, we've talked in depth in the past about the success with Project Phoenix. Easy to say, hard to do to go in and really surgically look at your business and carve out areas of the business that either don't offer long-term promise, don't fit your strategic vision or don't really contribute profit. So a lot of times, companies won't be disciplined enough to take those actions. We've done it, and we've done it in spades. We've highlighted the fact that this business successfully took out approximately $36 million in cost savings. But I've referenced in prior calls, and we continue to see it, it's one thing to restructure your business and then go about the business of the day. It's another thing in that process to build a culture where all of your key leadership team members in mid-level management realize they now have a responsibility in this healthcare environment to look for cost savings in every way, shape and form possible. So I'm proud to announce that this culture of looking for cost savings is alive and well at Alliance HealthCare. And as we look at our financial guidance and forecast for the year, I can tell you that a portion of that guidance comes from a lot of confidence that we will continue to achieve some savings as we go forward as we look under every rock and, again, find ways to deliver the very best care, exceed our customers' expectations, but do it in a cost-effective way. So if we talk about this culture of cost discipline, clearly, the key components that we've got in maintaining the positive trends that we've achieved has helped us, once again, achieve organic adjusted EBITDA growth now over the past 4 quarters, and it's allowed us to maintain our 2013 EBITDA guidance despite industry softness that many have experienced in the first quarter of the year. However, I think it is timely to announce that based on us continuing to look for opportunities to prune our business, we are looking to update our revenue guidance for the full year of 2013. This decision primarily relates to the planned divestiture of what we've been referring to in the past couple of years is our professional radiology services business. You may have recalled from public filings in the past that we kind of stuck our toe in the water in this business in 2010 with a small acquisition to see if it would be complementary to our offering to provide reading services under this umbrella of professional radiology services. We then, in 2011, made another small acquisition, bolted those together. And again, the intent was, could we potentially offer some services to our radiology professionals who may feel like they either would like some assistance with preliminary or final reads? And why we really do like this business and we think it provides a wonderful service is we continue to look at the success we're having with a very focused business model that's hospital-centric. Our operating model is now so focused, and we're getting so much interest with the C-Suites, we're finding that we now are better served to continue to look at our enhanced value proposition with our hospital-centric model and really move away from trying to provide reading services for radiologists that are outside of our defined strategy. So we've come to the conclusion that for this small little piece of our business, we're not the ideal parent, so to speak, for this business and are taking this opportunity to explore other options that will better suit this offering. And later in the call, Howard will provide a full overview of our 2013 guidance a bit later. But in essence, we just think it's the right time to steer down the guidance on the revenue side only because we are committed to divesting this piece and expect to do that in the back half of the year. And we've got some interested parties that we think this business would provide a nice strategic fit for them. So with that introduction, again, very enthused with the success that we've had in our first quarter. While patient volumes did not show up as many had predicted, we're delighted that Alliance HealthCare was prepared for that. We had our belts tightened. We've been running a tight ship and delighted to provide yet another record quarter of EBITDA growth year-over-year and quarter-over-quarter. So again, delighted with that. So with that in mind, what I'd like to do now is hand over to Mike Shea this call so that he can share a few thoughts on why Alliance is poised to thrive in the current industry environment. Mike, please, I look forward to hearing your thoughts.

[Michael J. Shea:]

Thank you, Larry, and good morning, everyone. I'd like to begin by providing an update on our current operating environment. We continue to see healthcare consumers becoming more and more discretionary in their spending, specifically out-of-pocket costs, and high deductibles, the increase in payroll taxes and continued high employment (sic) [unemployment] rate placed pressure on volumes and may have a permanent impact on patient flows. This could be seen readily in the declines in physician office visits and hospital volumes. But as Larry said, we concur with many others in the healthcare sector that we will see increased patient volumes as the year progresses. I read a recent article that identifies a slowdown in healthcare spending to be about 75% directly linked to a lackluster economy and about 25% stemming from efforts to keep spending down. However, the article states that as the economy picks up, healthcare spending is expected to increase up to more than 7% annually by the end of the decade. These positive trends are certainly encouraging, and they're in line with our expectations. Pricing, while stabilizing somewhat, is still an issue for Alliance, as well as for our competitors, but since we're uniquely positioned as hospital partners, we are able to take advantage of the current and future hospital-centered healthcare delivery dynamics. The timing is perfect for our enhanced value proposition, which Larry mentioned earlier. We believe there will be a consolidation or continued consolidation in the hospital market, where large hospital systems become even larger and more complex. And physicians will continue to seek the shelter of the hospital, and hospitals will continue the trend to employ physicians. And with all the consolidations and all the complexities that ensue from those consolidations, one thing will remain very clear

[Howard K. Aihara:]

Thanks, Mike. Today, I will review the highlights of our first quarter financial performance before discussing an update to our 2013 revenue guidance range. I'm pleased to report organic growth in adjusted EBITDA in the first quarter after adjusting for the sale/leaseback transaction and the short quarter in 2013 caused by the leap year in 2012. I'm also pleased to report continued free cash flow generation, which is the strength and focus of our business. Let me provide you with highlights from our first quarter. Revenue in the first quarter of 2013 totaled $110.4 million compared to $120.8 million in the first quarter of 2012. The decrease in revenue was driven by several factors

[Larry C. Buckelew:]

So folks, what we'd like to do is just simply highlight the fact that -- in closing, we're in a unique position at Alliance, and our business is evolving in a positive direction. The initiatives that we've described and the hard work that has been completed over the past 1.5 years have set us up for success in this transition year of 2013 and beyond. While this year will be a transition year, we are confident in our long-term ability to grow our revenues and adjusted EBITDA by becoming the value-added partner that hospitals need to be successful in the new healthcare environment. Ultimately, our goal to be more indispensable to our hospital customers aligns us well with the fact that hospitals are looking for value-added partners to help them tackle the challenges they face. We're pleased with the current momentum that is apparent in the company's performance, and we look forward to continuing to execute on our strategic growth initiatives that will ultimately create value for our shareholders, and so again, delighted with the progress we've made. So as always, we'd like to thank each of you for your interest in Alliance. And Howard and I look forward to answering any questions you may have. So at this point, I'll now return the call to the operator to begin the question-and-answer session. So please, with your assistance, operator, let's kick off the Q&A portion of the call.

[Operator:]

[Operator Instructions] Our first question comes from the line of Miles Highsmith with RBC.

[Miles L. Highsmith:]

Howard, I just missed a number. Can you tell me again -- you went through the rad onc revenue and then some of the non-normalized items, and then you said excluding those items, I think it was a positive number. I just didn't get what the growth was for the quarter.

[Howard K. Aihara:]

Sure, Miles. In terms of radiation oncology, what impacted the quarter was obviously the short quarter related to the leap year, as well as the pruning of business. So the growth organically in radiation oncology was 1.4% over last year's first quarter.

[Miles L. Highsmith:]

Great. And how much incremental is there in the way of cost saves beyond the current run rate that's embedded in the EBITDA guidance range?

[Howard K. Aihara:]

We continue to look for ways to operate more efficiently. It's become part of our culture here at Alliance, as Larry mentioned. And what's baked in is that we expect to find approximately about $8 million of annualized savings in 2013, of which approximately $3 million to $4 million is built into the EBITDA forecast.

[Miles L. Highsmith:]

Sorry. So you're saying $3 million to $4 million more of annualized cost saves that you don't have currently is embedded in the guidance range?

[Howard K. Aihara:]

Actually, embedded in the guidance range, it's about $8 million on an annualized basis of new savings that we are tending to find here in 2013, actually, we've identified already, of which approximately $3 million to $4 million would be realized in year.

[Miles L. Highsmith:]

$3 million to $4 million during the year, but you're saying it would be, on an annualized basis, $8 million.

[Howard K. Aihara:]

That's correct.

[Miles L. Highsmith:]

Got you. Okay. And then in terms of the customer retention rates, you guys -- I think Larry mentioned looking to be at close to 90% by the end of the year. Just remind me again or kind of directionally, are you guys kind of in the mid- to high-80s now? Are you close to that number, or is there a lot more wood to chop?

[Larry C. Buckelew:]

Larry, here. You're exactly right. Directionally, that's where we're going. As we had highlighted literally about a year ago, when the company had taken their eye off the ball a little bit in these turbulent markets, we had actually allowed our retention rates to drop below 80%. So once we reorganized ourselves, got focused on this area and began to have a steady cadence in meetings with our customers long before it would become renewal time, we started seeing a steady improvement in retention rates. And so we migrated into the 80s. We're now migrating more into the mid-80s and looks like directionally, would be in the high-80s and pretty comfortable with the trajectory we're on that we could be at 90% by the end of the year.

[Howard K. Aihara:]

And Miles, to add to Larry's comments here, not only have we improved our retention rates, but we're also very focused on working with our customers in terms of pricing. And I think you've seen some nice pricing stability in the first quarter, where MRI pricing was actually increased a little bit, up about 0.5%. And PET/CT has actually improved from historical rates. We were down about 0.8%, but historically, we've been down somewhere in the 3% to 5% range. So not only are we doing a good job renewing customers, but also looking to do so at good rates for us.

[Miles L. Highsmith:]

Okay, great. And then kind of a 2-part pricing question, I guess, for Larry. First of all, anything you're hearing on the hospital front, on the OPPS front? I guess we'll get a proposal probably in July or early August. Anything brewing out there that concerns you on the Medicare side that's getting looked at for hospital outpatient imaging? And then kind of a follow-on, on the commercial side, I guess there's a decent disparity between hospital and some of the freestanding pricing. I'm just curious if you're expecting any battles as it relates to consumer-driven choice or trying to push more towards fee per value, whatever it might be, tiering co-pays, that could motivate people into a lower-cost setting. Is there anything that concerns you as it relates to that or just commercial price pressure?

[Larry C. Buckelew:]

Yes, a couple of thoughts on that. One is, as you well know, our hospital-centric model really does give us tremendous cover as it relates to kind of the pricing that comes out of CMS. And so we have contractual relationships with the hospitals. They do the billing. We always have a little bit of pressure from our hospital customers. When they feel like they're getting pinched, they'll come to us. But one of the things that we've seen again and again here as we've become very focused in meeting with our renewal customers early in the process and doing it on a really deep kind of looking at dashboards and key metrics and helping them help themselves gain scan volumes. It's one of the reasons why our pricing has stabilized. Once you go in and you help a customer understand that you're paying attention to their patient volumes, their throughput, it takes some pressure off of us to cave in on price. So it's just paying huge dividends to really wrap our arms around our existing customer base. As it relates to the freestanding pieces of our business, obviously, that's a very small part of our business. We don't expect any cuts that we are seeing on the horizon to really be material to us. But I'll ask Howard to maybe comment on what he may see for those who are largely freestanding, are only freestanding in terms of what he may have heard in terms of potential impacts to them in the calendar year, for example.

[Miles L. Highsmith:]

I think I probably asked the question poorly. I apologize. I guess the question was more in realizing you're indirect because you're negotiating with the hospital, but I guess I'm wondering if you're hearing anything out there as it relates to pressure on the hospital for outpatient imaging, whether it's commercial or anything expected in the Medicare proposal later this summer. Just if there's anything anecdotal that you're sensing today that might be different from 1, 2, 3, 4, 8, 12 quarters ago, whatever.

[Howard K. Aihara:]

Yes, it's interesting -- I appreciate you clarifying your question. It's interesting, as you mentioned, that my good friend Mike Shea here passed across a note, and he said it's all opportunity. When you start forming a relationship with these hospital C-suites and they start talking about getting squeezed on all kinds of fronts and you're able to come into them and you say to them, listen, work with us, and we think we can help you begin to gain patient volumes. If all we do is, on your campus, gain 4 scans a day, at the end of a year, that will represent $1 million in contribution profit right down to your bottom line, it just changes the tenor and tone of the discussion. So the answer is, what is rattling and stressing to others looks like opportunity for us every day.

[Operator:]

Our next question comes from the line of Henry Reukauf with Deutsche Bank.

[Henry Reukauf:]

Just a question -- I got on the call a little bit late. I know there was a little bit of volume erosion that accounted for some of the sales decline. Have you seen that stabilize in the April time frame, or any comments you can make about this quarter?

[Howard K. Aihara:]

Thanks, Henry, for that question. This is Howard. In terms of where our volumes are in terms of the early second quarter read is that the volumes have improved and has steadied and improved. I've seen that both in Imaging and Oncology. So it gives us comfort and confidence that the rest of the year is looking better, and we're pleased by that.

[Larry C. Buckelew:]

Henry, Larry here. I would just simply add, we all reflect back to the beginning of the year as we're wrapping up the holidays, and we had a lot of stress with the pundits saying, gosh, what's Capitol Hill going to do? They seem to be dysfunctional. We're going to have payroll tax sequestration. There was questions about whether or not all this dysfunction would rattle main street. And I think the first quarter volumes across the entire health industry have answered the question. You are able to rattle the American public and make them pause and realize that there's some portion of healthcare that's discretionary. So we saw it with some of the biggest and best operators. Doesn't matter if it's HCA, the bigger, larger lab companies, year-over-year physician visits, everybody's volume came in lighter. The great news is, as we see the economy start to improve, stock market stayed healthy. We've seen the housing market start to improve. I think people getting -- feeling better about their 401(k)s, the value of their homes. And I think part of this is starting to weave its way into a greater confidence and reflects the numbers that Howard's seeing. So we think -- we reflect the larger hospital market, with a thousand contracts across the U.S. And so the great news is we think our hospital partners are going to see a rebound, and we think some of the anxiety that was in Q1 is going to subside.

[Henry Reukauf:]

Okay. Just looking at the number of scan-based systems that you guys have outstanding, I guess it's down from about 228 to 215 kind of year-over-year. You mentioned on Miles' question about additional cost savings. I guess where are those cost savings coming from, first off? And then, I mean, is this -- the scan-based systems, is there sort of a bottom to that business? Or does that -- you just keep shrinking that and getting cost savings as, I guess, routes become unprofitable?

[Howard K. Aihara:]

Henry, this is Howard. In terms of our asset utilization, I mentioned in our prepared comments that we continue to look at operating very, very efficiently. And we continue to look at route profitability, and as opportunities arise, we do take systems out of service, which is reflected in our number of scan-based systems. So we continue to optimize, and I think that's -- the key word is optimize our business. And our Imaging division is very, very disciplined about doing that. And we will continue to do that as -- and take systems out of service as the needs arise.

[Larry C. Buckelew:]

One thing I would add to that also, Henry, is while we have 1,000 hospital contracts, you start picturing it -- many of those contracts are in the 3- to 5-year kind of time period, and so think about how many contracts we look to renew on a week, quarterly -- and literally, we have the opportunity to figure out who's winning and who's losing, which hospitals literally are losing significant volumes to neighboring hospitals, which may also be a client of ours. And so we have the opportunity to figure out within this consolidation, on a regional basis, who's winning and who's losing, and how do we decide to deploy our assets, so that within every region of the country, we pick the best partners to be with. And so it's a very selective process, where we are absolutely focused on making sure we partner with winning healthcare providers.

[Henry Reukauf:]

Okay. On the radiation portion of the business, you mentioned a lot about the stereotactic or CyberKnife. I guess about $18 million was the total radiation revenue in the quarter. How much of that is coming from stereotactic, kind of CyberKnife right now?

[Howard K. Aihara:]

In terms of the $18 million, it breaks down approximately to about -- ballpark is about $11 million of that $18 million comes from stereotactic.

[Henry Reukauf:]

Okay. Is that -- I'm trying to get a feel on the reliance on specific codes. Is that based on specific codes that you bill on? Is there a fear here that we could get a reimbursement cut to -- aligned with that higher technology treatment type? And I guess in conjunction with that, just if you have that concern, how much more profitable is stereotactic than, say, traditional chemo -- or radiation treatment?

[Howard K. Aihara:]

Henry, that's a great question. I'll try to answer it in a couple of parts. In terms of reimbursement pressure, first of all, I just want to mention that all of our stereotactic business is billed under the hospital. So it's billed under HOPPS, not under the freestanding schedule. And as you know, the HOPPS schedule has been largely protected by CMS, so it's not under that much pressure at all, in fact, under no pressure at all. You always worry a little bit about what Medicare will do, and obviously, we're very aware of that. But stereotactic radiosurgery is a very small portion of the radiation oncology spend across the country. So it doesn't draw the same attention as some of the larger ticket items, and I think that's -- I just want to make sure and point that out. In terms of the profitability of stereotactic radiosurgery, it is a -- first of all, as you know, most of our business is pretty high fixed cost. And stereotactic radiosurgery is even one of those lines of business that's even more highly fixed cost because in the end, the actual investments you make upfront is somewhere between $4 million and $6 million of capital to build the site out, including the equipment and the vault and everything that goes along with it. And in the end, there are very few patients that are actually serviced in that business. Average site across the country is probably in the ballpark of maybe 200 patients a year. And in terms of -- and I will tell you that our sites, on average, runs much higher than that. So our margins in the Linac business, the margins are probably, ballpark-ish, in the low 30% of adjusted EBITDA. In the stereotactic business, the margins at the levels of patients that we run tend to run closer to 50% of adjusted EBITDA margins. But that's because of our structure and the way that we align incentives between radiation oncologists and the hospital and ourselves. That's what is kind of the reason why we run higher-than-average patient volumes.

[Larry C. Buckelew:]

One thing I would add, Henry, to that, too, which just adds a little more color to give you some comfort, I did a little bit of digging around and connected with some folks on Capitol Hill, where I've been involved with some lobbying efforts in the past in prior lives, and kind of tested the awareness of this SRS technology. And what's interesting is, there's pretty good alignment between CMS, MedPAC and others, recognizing that this technology, being able in 1 or 2 treatments to deliver what oftentimes takes 15, 20, 30 treatments on more traditional basic care, actually not only saves the healthcare system quite a bit of money, but it reduces the likelihood of what I'd call human error when you do repeated procedures under more traditional methods, where you've got collateral soft tissue damage, that becomes very expensive to the healthcare system. So given the lower volumes, the specialty care, what I hear from the regulators is -- they're actually pretty delighted with this technology, and we don't sit around worrying about them trying to adjust our prices down.

[Operator:]

Our next question comes from the line of Elie Radinsky with Cantor.

[Elie Radinsky:]

With all the consolidation that's going in the hospital industry right now, what is the percentage of your business or your revenue that's actually coming from hospital systems that have 5 or more hospitals versus hospital systems that have less than 5 hospitals each?

[Howard K. Aihara:]

Well, Elie, this is Howard. In terms of kind of how our revenue is generated, first of all, it pretty much follows the -- because we're national, we have 1,000 hospital contracts or [ph] 1,000 hospital contracts. In terms of how it falls in terms of for-profit versus not-for-profit, I'd call it -- it's about...

[Elie Radinsky:]

Howard, I'm not asking for-profit and not-for-profit, system versus nonsystem.

[Howard K. Aihara:]

Yes. I understand your question. I'm getting to that. But in terms of how much comes from hospital systems directly or hospitals that are, in terms, affiliated with hospital systems, I'm going to say a rough estimate, probably about 50% to 60%.

[Elie Radinsky:]

Okay. And how are you looking at future consolidation there? I mean, is that where you're really looking to penetrate? I would imagine that most of your oncology revenue comes from the larger systems. Is that correct?

[Larry C. Buckelew:]

Larry here. What we're finding is that the hospital campuses that have the highest interest in the SRS technology tend to be what I would call kind of premier campuses, key names, and so that's where we've gone. One of the things I really enjoyed earlier this year, I spent quite a bit of time at J.P. Morgan Healthcare Conference in San Francisco up on the 32nd floor, hearing presentation after presentation of regional healthcare systems that some of them may have been between $1.5 billion to $2 billion. And all of them in that range are committed to trying to get to $5 billion. And then it was interesting, those in the kind of $4 billion to $6 billion in regional kind of revenues are absolutely committed to getting to $10 billion. And the overall theme, as you, I'm sure, have heard, is they're really believing that it's time to consolidate, and the stronger would buy the weaker. They would be pretty aggressive in terms of looking for synergies and integrate. And so yours truly took a lot of notes, and it was pretty clear when you left that meeting, on a regional basis, which healthcare systems are aggressive, looking for acquisitions. I'll tell you that I was pretty active passing out my business cards to the guys who looked like they were on the front edge and going to be gobbling up others. And the wonderful news, as we would come back and do our homework, is that we held usually strong positions in the more aggressive healthcare regional hospital groups that were looking to expand. And we also were oftentimes a service provider for community centers where they were looking to acquire. And that reality started creating an increased interest in getting into the C-Suite and making sure, as they do these consolidations, we're at their hip to make sure we rationalize with them their radiology assets, people, throughput, strategies. So this is a time like I've not seen in a long time, where really smart regional hospital systems are looking to partners like us to help us formulate a strategy.

[Elie Radinsky:]

And when they're looking to you, are they looking just for the capital or looking for the expertise? What is it that you're providing them that is most important to them?

[Larry C. Buckelew:]

Yes. It's a little unique and custom in each case. I would say, by and large, most of them are trying to preserve their capital to go out and acquire the facilities that they think increase their catchment area and their strength. And they'd like to preserve capital when it comes to the capital equipment that we specialize in. So they really want to make sure that they don't end up gobbling up potential community hospitals that increase their catchment and then don't have the cash to invest in, let's say, new or upgraded equipment. So they see us as a financial partner to help them in focused ways, number one. Number two, what they'll readily admit when you spend time with them is they really are pretty well attuned to what they think is their core competence in what they do. They'll tell you they don't have the confidence and knowledge about outside of their catchment area, referral patterns, what they look like in terms of co-pays, how they compare in terms of -- in our 1,000-hospital portfolio, would they rank in the top 10 in terms of operating performance, patient outcomes, easy to do business with. So they look to us to provide them metrics and some guideposts and milestones for what right looks like.

[Elie Radinsky:]

Okay. And lastly, I think you mentioned in the release something about you're looking at capital structure initiatives. Could you just elaborate on that?

[Howard K. Aihara:]

Sure, Elie. First of all, we've spent the last 18 months really improving our operations, as you've noted. And in the last 5 quarters, we've delevered by about half a turn, so our credit metrics look much, much, much better than they have in the past. And secondly, as you know, the credit market appears very favorable at this time, and we want to take advantage of that. And so as Larry mentioned, we intend to go out and take a look at that market in terms of the term-loan market, and we'll see what we get accomplished.

[Operator:]

[Operator Instructions] Our next question comes from the line of Alan Weber with Robotti & Company.

[Alan Weber:]

Two kind of quick questions. One is, when you talk about the retention increasing, can you talk about previously if there was kind of a typical type of situation that you lost? And then kind of relating to the previous question, going forward on kind of adding new contracts, can you talk about if there's been a change in the type of hospitals that you are affiliating with?

[Larry C. Buckelew:]

Larry here. I'd be happy to. What we learned and we reported in prior calls -- because I think it's important for companies like us to be very transparent when you have an opportunity to learn. This company, in times when the tides were rising for hospitals and patient volumes were coming in and you didn't have a tough economic environment, you had unemployment at much lower levels and people were feeling good about spending, whatever it took for healthcare, what we had as a structure was literally, we could almost be challenged every day just keeping up with new business opportunities. And so you look at kind of the 2009, 2010 time period, that started shifting when capital markets started to crunch down, main street got nervous, unemployment started to rise, people started worrying about their discretionary money, and some of them started deferring care. And so as hospitals felt that crunch, we came up for renewal, and our typical pattern during that time period was we just expected everybody to renew with us because we were offering them a great product, great technology. We were upgrading, and we'd run in there and, literally, late in the game, try to do a renewal. During those time periods, CFOs, who were under huge pressure in hospitals, were basically looking to save money and said, gee, do we really need to pay Alliance for this service on a monthly basis, or can we bring this service in-house and do it ourselves? And so during those turbulent times, we experienced a real reduction in the retention of accounts. So we dropped into the 70s in terms of account retention and recognized that this new paradigm we were entering was going to require us getting in earlier, telling our story earlier and helping the C-Suite understand how critical and valuable we were to their success. And so that was a learning curve for us that resulted in us structuring our organization like it is today. It's also the reason that we decided, after talking to C-Suites, that they really think we can be a huge asset in helping them understand the competition they face within their catchment areas. So if you're looking at a hospital and they're saying, gee, we think we're losing about 1/3 of the physician referrals to maybe regional freestanding. We don't know why. Can you help us? We will actually -- either ourselves or we will hire independent research firms to go out and analyze who's the competition for the hospital we service in a catchment area. We'll do ghost studies. We'll go into those accounts. We'll find out what it takes to get scheduled, what the out-of-pocket is, what the patient experience is. And then we'll actually ghost shop the hospital itself and give a call and see how are they doing. And so in that process, we really start to help them build a strategic roadmap on how to get better. And so that's a lot of the enhanced value proposition we're bringing. And with that, we're seeing our hospital customers' volumes really start to pick up and gain some share.

[Howard K. Aihara:]

And Alan, just to add a little bit more color to Larry's comments -- and Elie asked this question. The health system consolidations that's going on the -- the consolidation that's going with health systems is providing us incremental opportunities. And we're seeing more and more that we have opportunity to sell into system-wide kind of -- in terms of opportunities where -- larger system deals and where we can kind of delay kind of a master agreement and, in turn, capture a number of hospitals in one larger deal. So we're seeing more opportunities in that realm, and we're optimistic about those opportunities.

[Alan Weber:]

And I think on a previous question, you started to answer but then changed -- what you're seeing in terms of pricing at the hospital compared to the freestanding facilities?

[Howard K. Aihara:]

In terms of the hospital versus the freestanding facilities, I think our comment was that we're not seeing -- first of all, the Medicare Physician Fee Schedule, which is the freestanding schedule, is under much more pressure. The hospital fee schedule for Medicare is actually not under pressure, so we're not seeing pressure from Medicare to our customers. And I think the other comment that we made was that because of the services, the enhanced value proposition that we're offering to our customers, that we're showing that we provide much more service than just providing the equipment and a maintenance contract and the technology, but we're also providing much more in terms of other services, that we're really showing our value. And therefore, we're not getting as much pricing pressure because of that.

[Operator:]

Our next question comes from the line of Amit Chosky [ph] with Canaras Capital Management.

[Unknown Analyst:]

Just a question on the guidance. Does that -- with all the talk about these hospital-centric services and things like that, does that updated guidance allow or bake in any kind of wins in that area? And can you help kind of quantify what that is as you expand that pie in the hospital? I mean, how material is that going to be in the next couple of years in terms of your revenue trajectory?

[Larry C. Buckelew:]

Great question. One of the things we've decided to do in our guidance is really be pretty cautious. We've got a wonderful business that's highly fragmented, built over 30 years, and we don't have the problem that some service providers do where a handful of customers make up a disproportionate amount of their business. We built this house on a strong foundation one brick at a time. And so we don't lay awake at night worrying about losing a handful of customers because we're so fragmented. But you speak to a great point, and that is, as we migrate our business model and find regional systems, larger systems, who want to sign up for our enhanced value proposition, those revenues will likely come in, in kind of a lumpy form. I mean, traditionally, we've been pretty steady. Tell us what the same-store growth is, what the patient flows are for hospitals across the U.S., and we would tend to stay pretty close to that. But as we look at -- and each one's custom, and it depends on how much help they want. But it won't be unusual in the years in the future for us to maybe pick up a hospital system, and they ask us to come in and provide more than our traditional services, so we may help them with scheduling. We may help them with managing their department. We may drive efficiencies. We may add far more marketing and sales support. And with that level of depth of support in potentially staffing key areas, we may end up with contracts, on a lumpy basis, that could be from $10 million to $15 million. They could come in, in a whack that you wouldn't see on a regular basis, but they would come flowing in. And we've not included any of that in the guidance that we've provided.

[Unknown Analyst:]

And is that sales cycle about -- is it like a year, 18 months or shorter? I mean, just again, just to kind of tame any potential excitement in terms of that business opportunity, just trying to get a sense of how long it takes to kind of check all the boxes before you can kind of get one of those wins under your belt?

[Larry C. Buckelew:]

It's a great question. One of the things that we're learning on this journey is kind of step 1 is you don't understand kind of the pinch points and anxieties the C-Suite feels until you form a relationship. So we're learning with our AD structure, where we start having regular meetings with the radiology, and we migrate up into C-Suite. The first thing that happens is we start to get really comfortable that we're going to get a renewal. And so that's kind of step 1 as you start migrating into the fact that they understand the value you bring today and what you can bring. Then what we learn is once we get comfortable that we're going to likely get a renewal, then the relationship starts to improve. And you start talking about broader projects and additional market analysis you could do and gee, what would it take to potentially improve their scan volumes and then what could you to do to come in operationally and drive out some waste and inefficiencies and drive dashboards so that they can have a better process. You're exactly right. That is a longer sale process and can take anywhere from 12 to 18 months before they'd really get what it is we would do and sign us up for one of those types of deals. And I'll tell you as we started realizing that, we're about halfway down the road on several discussions where we're trying to do exactly that.

[Unknown Analyst:]

Got it. And then just a question on the refinancing. You guys had mentioned looking at the term loan, but I noticed on the notes, I mean, they're over 102, I think at this point. So they're above what you could call them at. So they're yielding 6-ish percent. I don't know if you'd consider doing a full-on -- if you could consider doing a full-on refinancing because rather than pay 8%, if you could reissue those notes at a much more attractive rate, you could save quite a bit across the board on a full kind of -- the term loan and notes, everything. I think you could save quite a bit on the interest expense. I mean, is that something you'd consider, or the notes kind of off-limits?

[Howard K. Aihara:]

Well, we continue, Amit [ph] to take a look at our entire capital debt structure. However, I think at this point, we believe that the term-loan market is very, very attractive. And kind of given our improved performance, it's probably the first place to go. And again, we continue to look at our notes as well, and we'll see what happens in the future.

[Operator:]

Presenters, that was our final question. I'll turn the floor back to you for closing remarks.

[Larry C. Buckelew:]

Well, as always, everybody, we'd like to, at Alliance HealthCare, thank you for your interest in Alliance. We certainly enjoy and appreciate your -- the quality of your questions and the fact that you've followed us closely. All of us here at Alliance look forward to speaking with you again in discussing our second quarter results for 2013 in July. So with that, again, we'd like to thank you. And at this point, we'll conclude the call.

[Operator:]

Ladies and gentlemen, thank you, again, for your participation. That does conclude today's conference. You may now disconnect.