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Q4 2014 Earnings Call Transcript

Published: 17 Mar 2015

[Rick Johns:]

Good afternoon, ladies and gentlemen, and welcome to the Alliance HealthCare Services Fourth Quarter and Full Year 2014 Earnings Call. My name is Rick Johns, and I am the Company's Executive Vice President and General Counsel. This conference is being recorded for rebroadcast and all lines have been placed on mute. As is customary, we will open the conference up for questions and answers after the presentation. This conference call will contain forward-looking statements, which are based on the company's current expectations, forecasts and assumptions, including statements related to our business strategy, growth opportunities, the impact of the Affordable Care Act, the 2014 Medicare fee schedule, 2015 guidance, expected capital expenditures for 2015, 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 2014 guidance release under the heading Forward-Looking Statements, as well as in the Risk Factors section of the company's Annual Report on Form 10-K for the year ended, December 31, 2013, as such report may be modified. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Financial and other statistical information presented on this conference call or information required by the SEC's Regulation G may be accessed through the Investor Relations Section of the company's website. Please visit our website for replay information of this call. On today's call, our CEO, Tom Tomlinson, will provide a brief overview of our business, fourth quarter and full year 2014 results, the progress of our strategic transformation and growth strategy initiatives and our priorities for 2015. Our Chief Financial Officer, Howard Aihara, will follow with the details of the fourth quarter and full year 2014 results and our 2015 guidance. With that, I will now turn the conference over to Tom. Tom, please go ahead.

[Tom Tomlinson:]

Thanks, Rick, and good afternoon, everyone. Welcome to our call today. During the call, we'll address Alliance's fourth quarter and full year 2014 earnings, and our financial and strategic outlook for 2015. Thanks for joining us today. For the fourth quarter of 2014, we delivered organic revenue growth for the third consecutive quarter. Revenues of approximately $110 million are up 148 basis points over the same quarter last year after adjusting for the sale of our Professional Radiology Services business. Earnings per share increased $0.55 from 2013 with the company showing positive net income of $1.9 million versus a loss of approximately $4 million in the prior year. Our fourth quarter adjusted EBITDA results of $31.2 million were lower than our initial expectations for the quarter. This was driven primarily by a renewal of certain contracts in the PET/CT business that previously were priced above current market conditions. We elected to price them at market levels to retain the business. These price changes began in Q3 and continued in Q4 and were more significant than we had expected. I'll discuss this in more detail when I turn to our 2015 guidance. We also experienced higher than normal repair and maintenance costs and have already taken steps to address those issues with key vendors including the termination of a national contract covering equipment on our mobile trailers. As a reminder, on a year-over-year basis, we also had planned investments to develop our RAD360 capabilities and to expand the business development team and Alliance Oncology as we've discussed on previous calls. In spite of the Q4 EBITDA performance, we're pleased with the progress we've made to transform Alliance into the outsourced partner of choice for hospitals, health systems, and providers. We still have work to do to drive topline improvements to the P&L to produce earnings growth. As discussed in prior calls, we continue to experience very strong results in our Oncology business and face the market headwinds in parts of our radiology business, driven by revenues from new partnerships, strong same-store volume performance, and stable reimbursements, Alliance Oncology again delivered double-digit revenue growth, up 24% when compared to the same quarter last year and up 19% for the full year of 2014. We believe our growth rates are well in excess of industry averages. Alliance Radiology revenues trailed prior year by 4% due to our strategic decision to protect and maintain market share in a very competitive market. Beginning in Q3 and accelerating into Q4, we took our prices down as we contracted with new and existing mobile PET/CT customers, but we were successful in winning business in a majority of cases. Although we experienced same-store volume declines in PET/CT as a result of payor actions targeted at reducing utilization of this modality, we believe that we outperformed the overall industry trend in terms of same-store volume as our results were stronger than the overall industry volume of the key provider of injectable radioisotope. It's important to note that our team delivered strong same-store growth in our MRI business, up 6.9% in the fourth quarter and 3.8% for the full year. This performance mirrored the strong volume performance of our hospital customers in the fourth quarter driven in part by the Affordable Care Act. The ability of our referring physician facing sales teams to drive demand is a clear strength of Alliance in both oncology and radiology and an important element of our value proposition to hospital customers. During 2014, the industry landscape rapidly evolved due to the unfolding implementation of the Affordable Care Act, many of our hospital customers benefitted from increased volume, particularly in states that elected to participate in Medicaid expansion, and industry data suggests this trend will continue over the next two years. Along with this volume lift, there is increased pressure on hospitals and providers to reduce costs and become more efficient in delivering service. This increased focus on cost efficiency is a positive trend relative to our outsourced services strategy where our value proposition demonstrates that we can deliver low cost, high quality services in radiology and oncology. In the near term, we're seeing that it also puts increased pressure on the price and margin structure of our mobile diagnostic radiology business. However, these mobile contracts continue to be an important component of our value proposition to customers and they generate significant free cash flow, which we're using to invest in higher growth businesses. For Alliance, 2014 was the beginning of our transformation as we began to execute on our multifaceted strategy to drive growth. The investments we made in 2014 to transform our oncology and radiology businesses are establishing Alliance HealthCare Services as the partner of choice for hospitals, health systems, and providers. The powerful value proposition we've created demonstrates our deep service line expertise and consequent ability to drive operating efficiency, market strategy, demand generation, and the overall clinical resources needed to navigate competitive challenges in the hospital sector. We also made significant strides in laying the foundation for our expansion into attractive high-growth adjacent segments in 2014. As mentioned on previous calls, we entered into the interventional services space via a partnership with the Pain Center of Arizona or TPC, our market-leading interventional pain management practice. We’re thrilled to have partner with TPC. They’re recognized for their industry leading services and brand, strong management team, and deep clinical expertise. Interventional pain management is the largest segment within interventional services, which also encompasses interventional radiology and is a natural complement to our diagnostic radiology business. I’ll speak more about this exciting new addition to our plans to develop and grow this new service line a little later. Now I’ll move into the details of our fourth quarter and full year results by division. The strong performance in our Oncology business where revenues grew by 24% in the fourth quarter and 19% for the full year was driven by the combination of revenue from new partnerships, same-store growth, and stable pricing. The addition of two new partnerships contributed significantly to this year-over-year growth, The Medical University of South Carolina or MUSC at the end of the first quarter in 2014 and the creation of a new joint venture with Charleston Area Medical Center or CAMC and the Charleston Area Radiation Therapy Center or CRTC in November of 2014. Technology investments made since the inception of our MUSC partnership including the installation of the first Varian TrueBeam STx in the third quarter along with the installation of a second TrueBeam at a more pleasant location in the fourth quarter are critical to expanding MUSC's stereotactic body radiosurgery program, and it will help to drive our ability to expand service offerings and further growth in 2015. The same is true of our CAMC partnership, where we expect to install new radiation therapy units by mid-summer of 2015. First year revenues from the new state-of-the-art radiation therapy department at the CAMC cancer center are expected to yield alliance approximately $11 million. In terms of same-store performance, our stereotactic radio surgery business increased volume by 5.5% and our LANAC business grew by 3.1%. These strong results are driven by our continued focus on clinical excellence, patient service quality, clinical benchmarking across all locations and demand generation through marketing and referring physician education programs. Our Q4 performance marks our fourth consecutive quarter of same-store growth in Alliance Oncology with a division level same center growth volume of 5.1%. As part of our transformation efforts in 2014, the planned investments we made to strengthen our business development capabilities are driving a stronger new business pipeline from which we expect to deliver over 20% growth in 2015. Our team is focused on accelerating the development cycle, which historically averaged 18 to 20 months as contrasted with less than 11 months on a CAMC transaction. The work we’ve done in 2014 to transform Alliance Oncology into the full service, comprehensive oncology partner that we are today, provides a great foundation for future success. Our pipeline of growth opportunities continues to be robust and our track record for exceeding the expectations of our hospital customers bodes well for 2015 and beyond. In our radiology business, consistent with my earlier comments we’re aggressive in retaining market share and sustaining our position as the market leader in this segment. As a result radiology revenues were down approximately 4% in the fourth quarter end of full year after adjusting for the sale of the professional radiology service business in the prior year. PET/CT same-store volume decreased slightly in the fourth quarter and 2.7% for the full year. You’ll note that the Q4 same-store comparisons improved relative to earlier in the year due impart to the fact that Q4 in the prior year was partially affected by the payor actions noted earlier and the improvement in our hospital customers volumes resulting from the ACA. We believe the industry has set a new base line for PET/CT utilization and we’re looking for modest same-store volume growth in 2015 as the ACA continues to have a positive impact on hospital volumes. The story is somewhat different in our MRI business, in which we were able to grow MRI same-store volume at 6.9% in the fourth quarter for the third straight quarter and 3.8% for the full year. These improvements were driven largely by improvements in our referring physician facing sales and marketing efforts and the improvement in volumes at our hospital customers. Fourth quarter same-store MRI revenues were up 1.8%, but full year MRI revenues were flat as price reductions offset volume growth. We do expect this volume growth to continue in 2015. Still a strong cash flow generator our core mobile radiology business also benefited from focused efforts to increase our competitive intensity in the hospital sales spot and grow our pipeline of opportunities. As a result we successfully secured four national hospital and health system wins in 2014, which we believe will result in approximately $25 million in annualized revenue. The most recent win came in the fourth quarter for we converted a regional mobile radiology contract with the national integrated healthcare provider into a nationwide sole source mobile contract. This win not only provides preferred access to a national network of hospitals, but it also ensures that any new mobile radiology business within this network over the next few years will come to us. Shifting to the Alliance RAD360 program we initiated in early 2014, we continue to see positive momentum building from early successes. Our RAD360 program brings to our hospital partners immediate access to best practices in all key areas critical to radiology service line performance including demand generation to drive market share, patient scheduling and inference management, clinical operations that deliver the lowest cost of service, excellence in patient care and clinical quality, billing, reimbursement and payor management and market strategy and competitor intelligence. As we mentioned on prior calls in 2014 we invested approximately $5 million to develop the internal competencies to support this strategy and to-date have added over $5 million in annualized revenue from new operations. In Q2 of 2014 we established our first two RAD360 multi-modality joint venture sites with a large for-profit hospital system partner in the south and in very short order were able to deliver over 26% volume growth in those sites. Since these early RAD360 wins we added another multi-modality site with this same large for-profit hospital system and these sites are compelling demonstration that our RAD360 strategy, tools and investments are not only resonating with hospital and the health system partners, but are also having a significant impact and our ability to remove market share and generate volume growth for our partners. 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 proprietary advantages of our RAD360 comprehensive service line solution that represent the key drivers of growth for Alliance Radiology. I’d like to shift my focus to our strategic plan and outlook for 2015. Howard will discuss our specific guidance ranges for 2015 later in the call, but note that our guidance ranges do take into account the weather impact we've experience in Q1 of this year. As we progress through 2015, we expect to continue the positive revenue momentum we built over the last three quarters. We’re confident and focused on delivering growth across our three businesses and I’ll walk you through an overview of our strategy within each business. First radiology, through a combination of expense reductions and growth initiatives we’ll continue to be a financially successful market leader in the radiology business. And we expect to take additional strategic pricing actions to protect and maintain market share in our markets. Key drivers for our mobile and fixed radiology business include continued volume growth at our hospital customers due impart to be Affordable Care Act, leveraging our retooled hospital focus sales team to improve customer retention, expand relationships with existing mobile customers through added services and aggressively capture market share from weaker competitors. Continued focus on our successful program of referring physician marketing, which has produced strong same-store volume results in 2014. Targeted investments to maintain our fleet and secure contract wins from our competition. Additional wins in our RAD360 outsourced services program including conversion of existing mobile customers to joint venture partners and maintain our cost discipline by delivering $5 million in identify cost savings to partially offset year-over-year reimbursement pressures that we expect will impact our core mobile PET/CT business in 2015. Within our hospital outsourcing strategy, our RAD360 focus is to accelerate growth through our expanded business development team. As mentioned earlier, our pilot sites are performing well and our first several hospital partners are pleased with the value we're delivering. In just one of the joint ventures we added in 2014 with a large multihospital operator, the growth goal we and our partners have set for 2015 is $12 million in new revenue and we have a solid plan to achieve this goal. Our pipeline continues to grow with other similar opportunities and we believe we're on track to deliver 8 to 12 new RAD360 sites in 2015. Thanks to the expanded business development teams recruited during our transformation year of 2014, our pipeline of new business opportunities for both our core mobile and our RAD360 businesses robust. In addition we're seeing solid results from leveraging the reputation of Alliance HealthCare Services overall as the partner of choice for hospitals. Coordinating between our radiology and oncology businesses we're leveraging our broad skill set to successfully form joint ventures in both businesses with a single large multi hospital operator. This cross-selling opportunity is in the early days, but we believe will become a critical driver of long-term success as there is continued consolidation within the hospital sector. Turning to our new and exciting business offering, as you probably saw in our February press release, we successfully acquired a 59% ownership position in The Pain Center of Arizona. This strategic investment in TPC will form the nucleus of a new growth division that we're calling interventional services. Focused on providing interventional therapeutic care, Alliance interventional services will include interventional radiology services, like end geographies in biopsies, interventional pain management services like nerve blocks and injections and other interventional therapeutic services. TPC is Arizona's center of excellence for the diagnosis and treatment of people with chronic pain disorders with 12 locations statewide. Their industry leading services and reputation for excellence along with their strong management team created in natural strategic fit and the perfect partner with which to expand into this adjacent segment of healthcare services. What made TPC such an attractive partner for us in the interventional space was their clinical excellence, operational expertise and managing interventional clinics and ambulatory surgical centers and the reputation of the partner physicians as leaders in their field. These capabilities combined with Alliance's footprint of hospital relationships, national, operational infrastructure and business development resources make for a powerful combination. We'll be working closely with the TPC management team leaders to build this important division. We're untied in our goal of improving care of patients by advancing the way in which pain management services are delivered on a national wide basis. As an adjacent service line interventional services, we'll naturally augment our capabilities in Alliance Radiology. There are a number of synergies between diagnostic radiology and interventional services, the use of imaging modalities, hospital customers, physician referrals. So it makes sense that they’ll benefit from a coordinated sales and business development effort. As I noted earlier, we're beginning to drive positive results in selling multiple service lines within a single customer. I also want to note that our 2015 guidance reflects the February closing of the transaction with TPC, which was immediately accretive to earnings. We'll provide further details throughout the year as we continue to build this new service line both organically and through strategic acquisitions. Now looking at our oncology business in 2015, we're confident that the double-digit growth we delivered in 2014 will be sustained in 2015. Thanks to the combination of strategic investments made in 2014 to add new business development resources and an expanded integrated cancer care offering, under which we partner to provide all radiation oncology services at hospital partnership sites. Our pipeline of opportunities is stronger than ever before. This year our strategic growth initiatives in oncology are focused on leveraging the expanded business development team we've built to drive stronger and a more robust pipeline of better qualified opportunities, shortening the average oncology development cycle from 18 to 24 months, further enhancement of our value proposition, leveraging our data and analytics capabilities to expand services into full outsourcing of the oncology service line, grow our same-store Linac and SRS volumes at existing sites through the application of clinical benchmarking and dynamic physical sales and consumer marketing and capitalize on cross-selling opportunities to develop new partnerships. One success story from our cross-selling efforts grew out of our RAD360 radiology partnership with a large core profit hospital system. That relationship has since grown into a new business opportunity for our oncology division as well and I am pleased to report that Alliance Oncology has since signed two Letters of Intent with the same RAD360 customer to establish two outpatient oncology centers in the South. You can expect to hear more about this new oncology business win as these two deals progress to definitive documents. And I am pleased to report that our oncology growth plans are on track to deliver great results in 2015. At our new stereotactic radio surgery site in partnership with Dignity Health, is on track to begin treating patients in May of 2015. As noted earlier we have two signed LOIs with a national for-profit hospital system in place. We expect to have definitive documents signed for another new partnership in the Northeastern a few days. And finally a certificate of need for a new center in North Charleston South Carolina, which will be an expansion of our existing MUSC relationship has been filed. In summary based on our recent successes and customer response to our strategic growth initiatives, we're confident that Alliance can continue to deliver long-term goal. We will succeed through a combination of competitive strengths, growth initiatives, constant attention to operating efficiency and capital discipline. Our market positions in radiology and oncology are very strong. Our expansion into interventional services creates many exciting opportunities. Our execution against our strategic initiatives is gaining momentum and we'll maintain our unwavering commitment to customers and patients. Now I'll hand the call over to Howard to provide financial details for our fourth quarter, our full year and our 2015 guidance.

[Howard Aihara:]

Thanks Tom and good afternoon. Today I'll review the highlights of our fourth quarter and full year 2014 financial performance, followed by a discussion of our full year 2015 guidance ranges. Following our highlights from our fourth quarter and full year 2014 revenue totaled $109.6 million in this year's fourth quarter. After adjusting for the sale of our professional radiology services business in December of 2013 totaling $2.6 million where Alliance Oncology West Virginia acquisition in November of 2014 our Q4 organic revenue was essentially flat over last year's fourth quarter. Our Alliance Oncology revenue continues to grow, primarily driven by a combination of strong same-store treatment volumes across both stereotactic radiosurgery and Linear Accelerator and our new partnership in West Virginia with Charleston Area Medical Center, which contributed revenue of $1.8 million in the fourth quarter of 2014. On an annualized basis, we expect to generate approximately $10 million of revenue for CMC joint venture. Alliance Oncology revenue totaled $24.7 million in the quarter or a 24% increase over Q4 of last year. Our oncology division now represents 23% of our total revenue. Oncology same-store results continue to trend favorably. Same-store volume growth for our stereotactic radiosurgery was up 5.5% and for Linear Accelerator was up 3.1% in this quarter. Alliance Radiology revenue totaled $84.5 million in the fourth quarter after adjusting for the sales of professional radiology services business a 4% decrease over Q4 of last year. This was primarily driven by scan volume pressure in our PET/CT business, as payors updated policies require CTs and other less expensive diagnostic tests. Also we had price reductions on certain contract renewals in PET/CT and MRI to maintain and drive market share. In the fourth quarter on a same-store basis, radiology MRI volumes were a positive 6.9% and PET/CT volumes were a negative 0.8%. This continued positive same-store volume trend for MRI is related to both our increased marketing efforts for the referring physician community as well as a positive impact for patients that are now insured through the ACA as evidenced by the strong reported growth in patient volumes for hospitals in the fourth quarter. PET/CT same-store volumes although down slightly in Q4 have improved on a same-store basis over the last three quarters in 2014. On a combined basis, for our two main modalities in radiology, MRI and PET/CT same-store volume growth for full year 2014 was about 1%. Revenue for full year 2014 totaled $436.4 million compared to $448.8 million last year. After adjusting for the aforementioned sale of our PRS business, revenue increased $2.2 million or 50 basis points over last year. On an organic basis, revenue was up 9 basis points after adjusting for the PRS sale and the Alliance Oncology West Virginia acquisition. Fourth quarter adjusted EBITDA was $31.2 million and totaled almost $136 million for the full year 2014. Reducing this year's adjusted EBITDA was $5.2 million to build our consultative, sales, marketing and strategic business development capabilities to support our RAD360 program. Another highlight for this fourth quarter and full year 2014 is related to our bottom line profitability, pro forma diluted EPS was $0.34 in the fourth quarter of 2014 compared to $0.26 in last year's fourth quarter. Full year 2014 diluted EPS was $1.66 compared to $0.86 last year. As reported diluted EPS for the fourth quarter was $0.17 compared to $0.38 loss in last year's fourth quarter, Full year diluted EPS was $0.98 compared to a $2.02 loss a year ago. Included in the as reported diluted EPS was a $0.17 charge in the fourth quarter of 2014 and a $0.68 charge for full year 2014 through the following items; restructuring charges and maturity cost, transaction cost, legal matter expenses and differences in the GAAP income tax rate from our historical rate of 42.5%. In terms of CapEx, we continue to invest in solid capital projects, an efficient upgrade of our assets. For the fourth quarter of 2014, our CapEx spend totaled $9.1 million compared to $8 million a year ago. For full year 2014 including purchases financed by capital leases and equipment debt, CapEx totaled $37.1 million compared to $27 million last year. Of those CapEx investment, $9 million was for growth projects in Alliance Oncology and RAD360 and $28 million was for maintenance CapEx. Alliance continues 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 $45.7 million of free cash flow before growth investments in 2014 and $36.7 million of free cash flow after growth investments of $3.37 per share. The strong free cash flow generation continues to strengthen our balance sheet. At the end of the year Alliance had cash balances of $33 million, Long term debt totaled $492 million and net debt was $474 million. Now I'll provide a view of our outlook for full year 2015. This is an exciting time for Alliance in many growth opportunities in radiology, oncology and our new venture in interventional services. Everyone has expected a range of $470 million to $505 million. 2015 radiology revenue is expected to be in the $335 to $355 million range. Radiology revenue in 2014 was $344 million. Our growth in radiology is focused on our growing pipeline of RAD360 partnerships. This growth will be offset by approximately $50 million of price reductions that we expect to make on certain mobile contracts primarily in PET/CT. Oncology revenue is expected to growth from $93 million in 2014 to between $110 million to $120 million in 2015. Oncology growth is expected to come from a full year contribution from our 2014 MUSC and West Virginia partnerships and from our San Francisco CyberKnife center for project that is in the final phases of construction and is expected to begin servicing patients in Q2 of 2015. In addition, our pipeline is well developed and we expect to sign and start a number of additional projects in 2015. As Tom mentioned, The Pain Center of Arizona which consistent of 10 pain management centers and two AFCs in the greater Arizona market represent a strong platform to build our interventional servicing division. Revenue from interventional services is expected to range from $25 million to $30 in 2015. 2015 adjusted EBITDA is expected to range from $125 million to $150 million. Offsetting growth in adjusted EBITDA from RAD360 radiation oncology and interventional services is the aforementioned pricing pressure in our core radiology mobile business. 2015 maintenance capital expenditures are expected to total approximately $35 million with the pipeline of growth projects we have for RAD360, life oncology and interventional services, we expect growth CapEx to be in the $45 million to $55 million range much of which is expected to be financed under capital leases. These growth projects will start also positively impact our 2016 results. 2015 cash income taxes are expected to be in the $10 million to $15 million. As of yearend 2014 we are $13 million above Federal and State NOLs of which we expect to use during 2015. Free cash flow before growth CapEx is expected to range from $20 million to $45 million. Free cash flow after growth CapEx is expected to range from minus $10 million to minus $25 million. Thank you for interest in Alliance. We look forward to answering your questions. And I’ll turn the call back over to the operator to begin the Q&A session.

[Operator:]

[Operator Instructions] Your first question comes from Brooks O'Neil.

[Brooks O'Neil:]

Good afternoon. Can you hear me okay.

[Tom Tomlinson:]

We can hear you really well Brooks.

[Brooks O'Neil:]

Can wait, so obviously I sense you are having good success with your growth initiatives to a degree offset by the pricing pressure in the PET/CT business. So I’m curious if you can see any end to those pricing pressures or any significant things you could do to mitigate the impact of those pricing pressures in that core business?

[Howard Aihara:]

I think, we have a pretty good read on where the market is at given that we’re the largest player in that segment. Yeah, I think what we’re experience right now is kind of a reset to a new baseline in terms of price in that part of business and between the price that we’ve already taken in the back half of this last year plus what we baked into our '15 year guidance we think that’s the significant majority of the price pressure that we expect. And so, we see it -- certainly see it moderating back to kind of more normal levels after the 15 year for the most part.

[Brooks O'Neil:]

Right. So secondly, I’m curious I’m pretty excited about your initiatives in the interventional radiology business, I’m just hoping you might be able to contrast the model you’re thinking about using in that business relative to the model you use in either the oncology business or the core radiology business today?

[Howard Aihara:]

Yeah, it’s very good question. Let me mention two things related to that; one so that you know what we’ve baked into our guidance that we provided is the TPC transaction, which as you know we closed in February. So to the extent we add additional sites that would be incremental to guidance we provided. Second, the business model that we’ll use there is much more like the Alliance Oncology model, which is more of a partnering joint venture model. So, as we disclosed in our release, this first transaction with the doctors at TPC as a joint venture as we continue to grow that business. New markets that we add will also have a sizable minority interest element from the physicians that are key to that market.

[Brooks O'Neil:]

Sure.

[Howard Aihara:]

We think in a business like this that is very physician services centric it’s important to have that kind of strong alignment and economic interest between Alliance as the business partner and the key physicians who are delivering care to patients every day.

[Brooks O'Neil:]

That makes a ton of sense to me, and I’m pretty sure obviously given your strong start with TPC that that will work in many markets around the United States.

[Howard Aihara:]

We're absolutely sure of your enthusiasm. We think there’s a tremendous opportunity here as you know it’s a huge segment within healthcare north of $10 billion in revenues and extremely fragmented and like I said in my prepared comments, the combination of the clinical excellence that we bring with the platform TPC acquisition and the existing national operational footprint in hospital relationships and operational expertise that Alliance already has is I think a very, very compelling combination.

[Brooks O'Neil:]

Yeah that’s great. Could you just talk to shift gears for a second to the oncology business. Clearly, you have a tremendous success there as well. Could you just talk about what the outlook is in a little bit more detail for 2015 in terms of continued expansion opportunities and benefiting from the core trends in the oncology business in general?

[Tom Tomlinson:]

I’ll be happy to expand on that, but about a year ago we did some work around trying to understand the size of our market opportunity in oncology and what we decided was the right lens to evaluate that through is, we looked at some data produced by IMV that’s based on survey feedback from existing providers of radiation therapy service,. It asked the whole series of questions of those providers around how likely are you in the next several years to make significant capital investments to upgrade your equipment to expand your service lines. Because as we’re finding as we talk to hospitals, the key time where we can engage with them is when they’re at that decision point of looking at making multi-million dollar sizable investments and looking at their existing service line performance and looking at that and saying if I had a partner that could demonstrably help me grow volumes, demonstrably help me implement new technology better and faster than I would do it myself, then I’m open to that dialog. And we’re seeing that that’s what is filling our pipeline. So as we determine the size of that market opportunity and it was when we first looked at it was roughly 750 current providers of radiation therapy services over the next three years planning to make those kinds of investments, we realizing we need to scale our business development team differently, because the size of their opportunity is far bigger than our current team could effectively chase. And so as we’ve added more talent into that area of the oncology business, we’ve seen significant growth in the pipeline. As we mentioned on the call, we’ve got one transaction in definitive documents. We expect to announce shortly we’ve got two Letters of Intent and a very thick pipeline of additional followon opportunities all targeted on existing providers of radiation therapy service, where we can come in and provide significant differential advantage helping them ramp up new equipment, providing care to new disease states more quickly than they're able to on their own. So we’re extremely excited about the growth that’s ahead of us for Alliance Oncology.

[Brooks O'Neil:]

I really appreciate all that color. I’ll just ask one last question, I’m curious, in the oncology business, I know it is a global market and I know that historically primarily you’ve been focused in the U.S.? Would you expect the near-term growth opportunities to continue to be domestically focused or could you see opportunities in other markets around the globe in that area?

[Tom Tomlinson:]

Our focus right now is executing on the strategic plan that we outlined in our comments. We have been asked to look at some opportunities outside of the United States of America, I think we would be cautious and careful. In looking at that certainly, if we do anything, it wouldn’t be deploying capital at least not in the near-term certainly. So our focus is executing the strategic plan that we’ve outlined, which is within the United States, I think if we did anything overseas, it would be a bid out in the future and a very careful and cautious evaluation.

[Brooks O'Neil:]

That makes total sense. Thanks a lot for all your comments.

[Tom Tomlinson:]

Yeah, thanks for your questions Brookes.

[Operator:]

Your next question comes from Mark Kaufman.

[Mark Kaufman:]

Good afternoon. How are you?

[Tom Tomlinson:]

Hi Mark.

[Mark Kaufman:]

Question about the new businesses and the corporate structure on JV structure, where basically, where is the CapEx going to reside at the JVs. And also I’m asking a bigger question about the reporting and the cash flow to the company coming from the JV, would it be in the form of dividends or would it be reinvested in the JVs themselves if you could discuss that a bit?

[Tom Tomlinson:]

Sure any joint venture would have as part of the way that joint venture is setup, a provision such that if the joint venture is making a capital investment, all the partners participate in that capital investment on a pro rata basis to ownership or would absorb dilution such that one of the other partners could fund their portion and effectively they could fund theirs through some equity dilution. So certainly the way they're set up is that the expectation is that all parties come to the table with their pro rata portion of required CapEx to continue to grow operations within that joint venture. In terms of how we repatriate cash from those joint ventures, it would be a fairly ordinary course to have monthly or quarterly distributions of excess cash from a joint venture. Obviously our pro rata portion coming back to Alliance HealthCare Services and our joint venture partners receiving their pro rata portion as you would typically expect, does that answer your question.

[Mark Kaufman:]

Yes it does and leads to another question. Looking at the two components of CapEx for this year, so the -- how would the recent purchase, the Arizona Pain Center be accounted for within that?

[Howard Aihara:]

Thanks Mark, this is Howard. In terms of how we’re going to treat or how we are going to treat TPC The Pain Center of Arizona, that acquisition is going to show up on the cash flow statement as the purchase of approximately 60% of that entity. For us the cash flow that actually went out the door to fund that acquisition. In terms of CapEx in the future, the CapEx or TPC will be shown up, because we consolidate that joint venture, it will show up as total CapEx. But as Tom, mentioned, only a portion of that will we be funding, our partners will also fund their pro rata share of the CapEx.

[Mark Kaufman:]

Okay. So going forward if I would look at it on the cash flow statement, would I be looking at EBITDA and then basically I would take off for minority interest down below the -- what would that be?

[Howard Aihara:]

No, it’s going to play with non-controlling interest.

[Mark Kaufman:]

Right, right come out there and where would the offset be let’s say on cap if I was doing a free cash flow analysis going forward, where would the offset come on the income -- assuming on the cash flow statement?

[Howard Aihara:]

I think what we’ll have to do is provide that level of detail to you. So you can see what the net cash out is for joint ventures.

[Mark Kaufman:]

Okay, well you can realizes the reason why I’m asking, because you’re talking about this going forward I’m just thinking about it on how might -- how our investors are going to be looking at it in the future as that business grows?

[Howard Aihara:]

Make sense.

[Mark Kaufman:]

Okay, now I have one other question if you will entertain it. I look at the company's valuation overall and it seems it’s not your fault per se, that you traded discount to other companies. When I talk to other investors, one of their issues is typically this is just not your company alone. They want to know if they can get out before they get in. And so floating the idea about is there anything that you thought about to increase the liquidity and the name, one option of course would be a stock split of some type if you too would like to discuss that I’d appreciate it?

[Tom Tomlinson:]

It’s a good question. We hear the same question close to Howard and I as we go around and discuss with investors. So I appreciate the perspective. I would tell you we haven’t -- don’t have any specific plans at this time to address the issue either through stock split or other means. But I guess I would tell you that it’s an active part of our thought process. We understand that it’s an issue that we need to solve in order to make the company an attractive investment opportunity to a broader cross section of participants in the investment community. So we’ll continue to be thinking about it, we have been thinking about it, but no specific plans at this time.

[Mark Kaufman:]

Okay well I appreciate that if I could ask one more question and that would just be you can give any thoughts about the contribution margin on these investments once you’ve made them. Now how is it, how do you think about it excuse me, how do you think about contribution margin and going forward?

[Howard Aihara:]

Well in terms of contribution margin, we really look at our different capital projects. In terms of internal rate of return, and what we’re looking for is a internal rate of return in the ballpark of call it mid-teens to high-teens type of return on a cash-on-cash basis. So in essence, we’re looking for call it around a 3.5 to 4 year return on a cash-on-cash basis in the radiology area and probably slightly longer than that in the oncology area but both businesses produce nice contribution and EBITDA margins.

[Mark Kaufman:]

Okay I appreciate it. Good luck gentlemen.

[Howard Aihara:]

Thank you, Mark.

[Operator:]

Your last question comes from Kyle Mallory.

[Kyle Mallory:]

Good afternoon Howard and Tom. Just a quick question on the growth CapEx pretty robust number there. But you mentioned that you maybe utilizing capital leases in there. To what extent is that decision based on your liquidity versus what your potential partners might want or is it -- does it relate at all to the IRR or the ROIC on that CapEx. Thank you.

[Howard Aihara:]

Well thanks Kyle for that question. In terms of our growth CapEx, a large number of these projects you RAD360 projects in intellectual services and in Alliance Oncology are structured as joint ventures. And largely our joint venture partners don’t want to come up with the cash upfront can make a large investment in the equipment. So in large part, it’s driven by the fact that it’s a joint decision by us and our partners and typically their desire is to fund the initial capital through leasing, so hopefully that answers your question.

[Kyle Mallory:]

Yeah, thank you.

[Operator:]

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

[Tom Tomlinson:]

Well, thank you everyone for listening in on our call today. I appreciate your time and attention. Thanks for the good questions and we look forward to giving you further in another quarter. Thanks.

[Operator:]

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