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Q2 2013 Earnings Call Transcript

Published: 2 Aug 2013

[Richard W. Johns:]

Good morning, and welcome, ladies and gentlemen, to the Alliance HealthCare Services' Second Quarter 2013 Earnings Call. My name is Richard Johns, and I am the company's Executive Vice President and General Counsel. This conference is being recorded for rebroadcast. [Operator Instructions] 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 2013 guidance, 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 and second quarter 2013 results; followed by Mike Shea, our Chief Operating Officer, who will provide an update on trends in the economy and the health care services sector; our Chief Financial Officer, Howard Aihara, will follow with the details of our financial results for the quarter. We will conduct a Q&A session after our prepared remarks. With that, I will now turn the conference over to Larry. Larry, please go ahead.

[Larry C. Buckelew:]

Thank you, Rick. Good morning, everybody. I'm very pleased to welcome you to Alliance's second quarter call. As always, we sure appreciate your time, your interest and your participation in this event. I recognize that this is a busy time of year for each of you on this call with so many companies currently issuing earnings, so thanks for making time for us. Before we outline our results for the quarter, I'm delighted to take a moment and discuss an announcement we made last night. As you likely saw in our press release, we at Alliance are ready to execute what we call the next phase of our leadership transition, and we have selected Tom Tomlinson to be our next Chief Executive Officer. As you can imagine, this is a key appointment that's coming at an important time for Alliance. As you saw from the press release, Tom has more than 25 years of diverse executive management and leadership experience. His experience comes in a variety of operational and financial roles. In Tom, we found someone with a well-rounded executive background and experience, not only in our field but also a broader business world, which was important to the search committee of our board as we conducted our search. I think it's also worth mentioning that this was a very robust search. We were delighted with the high level of interest, the caliber of the candidates that were considered over the last handful of months. We looked at both internal and external candidates, and we were delighted that Tom was the candidate that came into our scene and has now agreed to join us as CEO. Tom is joining us from Midwest Dental. Midwest Dental is a leading U.S. provider of dental care services, where he's been CEO since 2012. Previous to Midwest Dental, he spent about 10 years with the Center for Diagnostic Imaging, or CDI, which is a national network of imaging providers, and they provide a full range of diagnostic imaging, pain management and interventional radiology services. He spent his last year there as CEO, previous 6 years as President and Chief Operating Officer. And then prior to that, he was the company's Chief Financial Officer. So once again, you could see one of the things that makes Tom an appealing candidate for this role is he does have that breadth of knowledge in terms of having held key roles in each primary functional areas. So he certainly has been there, done that and knows what right looks like. I think it's also, though, key to indicate that before joining CDI, Tom spent approximately 17 years in development roles and finance roles, including Executive Vice President and Chief Financial Officer for Department 56, which is a publicly traded wholesale and retail consumer products company. And early in his career, he decided he would be a part of one of the toughest industries in the world and held numerous finance and development positions in such large organizations as Northwest Airlines and American Airlines. So he certainly has public experience and a broad base of background to draw from. Tom is in the process of fulfilling his obligations at Midwest Dental and organizing a relocation of his family from Minnesota to Newport Beach. And Tom will be joining Alliance on the first day of October. I'm certainly confident that Tom's wide range of experience, track record of delivering results will be valued by our shareholders, partners and team members. We're delighted to have Tom lead and execute the strategy we've developed, and I look forward to working closely with him starting in the fall. That brings me to my ongoing role at Alliance. It has been my absolute privilege to serve as interim CEO for the last 14 months. This time has given me the opportunity to work with a great team of executives and help set the course for the long-term future. Along with Howard Aihara, Mike Shea, Rick Johns, Rich Jones, Greg Spurlock and Deb Rodriguez, plus a host of talented team members, we have been able to work collaboratively to move our strategic goals forward. I would also add that each of these folks have done a wonderful job in the last 4 quarters, building a bench strength underneath each of them and have been great mentors for the teams they are building. So it goes back to comments I've made before. I really see Alliance continuing to evolve to have a perfect mix of folks with legacy background and experience in our core businesses, as well as some fresh thinkers coming from the outside. And although I'll be stepping back from day-to-day management of the company on October 1, I can assure you I'll remain 100% committed to the future of Alliance HealthCare Services and will remain Chairman of the Board for the foreseeable future. In the meantime, I'll spend the next 2 months continuing to help bring our enhanced value proposition to our current and prospective customers. So with that, what I'd like to do is take just a few minutes and share some highlights and give you a clear sense from my perspective of why we continue to be proud of the results we're putting up for Alliance HealthCare. As you likely saw in our press release last night, we are happy to be able to report another strong period of financial results for the second quarter. This was an important quarter for Alliance. We were able to achieve a fifth consecutive quarter of adjusted EBITDA growth, which is a continuing testament to our ability and dedication to managing the business efficiently even in an uncertain marketplace. Tremendous progress continues to be made with our margins. Our margins for the quarter grew to 35.5%, an increase of 280 basis points over the prior year period. And again, this comes as a result of really thoughtful management, a combination of pruning of portions of our business that were not accretive to our margins, and focusing on higher-margin businesses. So we are, as a company, now very disciplined at managing our mix and coordinating our activities with pieces of the business that we think will bring added value to our shareholders. This margin includes adjusting for the $2 million of rent expense related to the sale/leaseback for the quarter. But obviously, that's an extraordinary expense, which I want to make sure we're clear on. It's also worth noting that this quarter marked a milestone in Alliance in that we've achieved a neutralized revenue GAAP, and this is something we've been aiming to achieve as we've aligned our growth and used the enhanced value proposition with our ongoing and growing relationship with our hospital customers. While this metric will be deemphasized going forward due to our hospital-centric strategy, we're pleased to have closed this gap as we shift priorities. Finally, we'll be able to strengthen our balance sheet through the refinancing of our debt during the quarter, which will allow us to continue to maximize the efficiency of our capital structure. Also worth mentioning that as we've continued to have ongoing success in the execution of our broader strategy, it's certainly been reflected in an improved valuation for our company. And as a result, we have been honored to be included in the reconstitution of the Russell Index. As you know, this is an index that takes a look at its constituents every year. There are certain requirements that they have for being admitted to their index, and certain minimums and market cap values, and we were delighted to be included. And we're clearly seeing that the inclusion of being in the Russell Index has added additional exposure to our company and elevates our profile and brings Alliance's story to the attention of a wider audience. And we look forward, folks, to continuing to build on this positive momentum. Those of you who watch our stock closely have seen in the last 2 months, for example, our daily trading volume has pretty much doubled. And again, we think that interest level, the doubling of our volume on daily trading, not only shows the demand for our stock, but we also are seeing a continuing migration to what I would call more-value investors, which we embrace. Now briefly, I'd like to just share a few comments about our industry. As we stated in the past, we have had tremendous success and continue to do so getting traction around what we call our enhanced value proposition. And it's, as we've stated before, a very hospital-centric operating model. We're the largest and best at what we do, over 1,000 hospital contracts covering 44 states, and we now as a team wake up everyday and every team member with the goal of becoming indispensable to every hospital partner we have and every new customer that we are interested in having partner with us for future business. We're excited and confident in aligning our long-term growth with that of the hospital market, but we're also cognizant of the fact that there will continue to be some near-term turbulence around the industry as ongoing health care reform takes shape and its impact starts to translate into a more open market. As we take a look at our customers, and obviously there are some wonderful hospital customer/operators out there who do a world-class job -- but it is -- you have taken a look at some of the early earnings reports and flash reports from even the best and the most notable hospital operators and nation's leading hospital groups, we're seeing that patient volumes came in a little lighter than most anticipated. And while we at Alliance are certainly impacted when our customers' volumes are lower than anticipated, the great news is that we have continued to employ our very disciplined expense management, cost controls, which, even in this market in the first half of the year, which was a little lighter than our hospital customers anticipated, still allowed us to achieve an adjusted EBITDA growth. As we work through the near-term uncertainty around the impact of health care reform, we certainly believe the fundamentals of the health care industry are stable, and we improve our position every day in driving growth as we move forward. Now in a moment, Howard will cover in more detail our success that we achieved in this most recent quarter with our debt refinancing, but I just want to share very briefly how enthused I am with the success of our recent refinancing effort. And as those of you who are close students of Alliance HealthCare, you know that the achievement we reached during the quarter provides significant implications for the long-term financial health and flexibility of the business. This is a very positive step. It allows us to continue to maximize the efficiency of our capital structure while providing the flexibility and cash flow necessary to execute upon our strategic initiatives. And we continue to have as an ongoing goal to look every day at the opportunity to continue to reduce our debt. This new debt facility will allow us to significantly reduce our interest rate and associated interest expense on an ongoing basis, which will translate into increased cash flow for the current fiscal year and beyond. This increased cash flow will allow us to continue to pay down debt, reduce our total and senior secured leverage ratios, which remains a top priority at Alliance. So in terms of wrapping up my comments, I would just touch briefly on what I call our 3 key strategic levers. These continue to be primary areas of focus. We like to keep it simple. We like to keep focused on the 3 most important things that will drive shareholder value to everyone who's invested as a stakeholder in our company. And that first objective is to grow imaging services. Not only are we having success at doing that, achieving GAAP neutral, but we are building up a pipeline which gives us a lot of confidence even in this market where our customers are facing some headwinds with patient volumes. We're confident with the implementation of the Accountable Care Act, the patients that will flow into the system and the next handful of quarters as we migrate into 2014, that even with some of this uncertainty, we're having success at building our pipeline, renewing agreements, getting close to our 90% renewal rate and adding customers both in our Imaging business and Oncology business that we're extremely proud of. If I look just briefly and comment on our Imaging services business, we continue to be a market leader. Everyone on this call knows that we are the largest and best at what we do. We're an expert at understanding the equipment requirements and bringing the latest technology to our customers and meeting their patient needs. We continue to not only have the pleasure of servicing marquee names and some of the best-in-class hospital systems throughout the country, but we're adding to those names on a regular basis. And one of the key reasons is we take care of patients in a record manner. I just would remind folks, and you may have noticed this in a recent press release, we once again were awarded and the recipient of the Avatar Award. I've noticed that some companies in the health care field -- I'll sometimes look around at what our competitors are doing in terms of trying to guarantee quality patient outcomes and satisfaction, and I'll notice maybe forms that they'll ask patients to fill out on satisfaction statements. But there's nothing more powerful than an independent source telling you that you have received an award that says you're best-in-class in the patient satisfaction that you deliver to your hospital customers. Important to clarify, not only did we receive this award for our Imaging division, but also for our Oncology division in 2012. So we continue to set the bar very high in terms of the patient outcomes and their satisfaction in the care we deliver. Recent agreements that we've reached with health care systems such as Emory and Kaiser for our Imaging services division are clearly representative of the ongoing success in expanding our existing customer relationships by offering an enhanced service proposition and employing non-traditional deal structures. So I like to reference it simply as, even in our existing accounts, this is one of the real areas of pride. As we're going in and renewing accounts, not only are we now achieving the renewal rates we had hoped to, but we're doing 3 things

[Michael J. Shea:]

Thank you, Larry, and good morning, everyone. I'd like to begin by providing an update on our current operating environment. The recent reports and commentary from other providers reinforce what we're seeing in the market

[Howard K. Aihara:]

Thanks, Mike. Today, I will review the highlights of our second quarter financial performance, then I'll discuss the post-2014 CMS reimbursement fee schedule changes, which are not material to Alliance, and then confirm our 2013 guidance ranges. So once again, I am pleased to report organic growth in adjusted EBITDA this second quarter after adjusting for the sale/leaseback transaction. We also experienced sequential volume increases in both Imaging and Oncology in Q2 over Q1 levels. We turned profitable by generating positive pro-forma EPS in the second quarter, and we continue to report strong free cash flow generation which is the focus of our business. So following the highlights from our second quarter, revenue in the second quarter of 2013 totaled $114.4 million compared to $120.7 million in the second quarter of 2012. $4 million of this $6.3 million decrease, or 3%, was driven by actions taken in 2012 to prune our portfolio of unprofitable business. The remaining $2.3 million organic revenue decrease, or 2%, was due to continued year-over-year industry-wide weakness in outpatient health care services' volumes. However, this was an improvement from the 4% organic decrease that we experienced in the first quarter of this year as we saw sequential volume improvement across the board in both our Imaging and Oncology divisions. For the fifth consecutive quarter, we generated year-over-year adjusted EBITDA growth. Second quarter adjusted EBITDA totaled $38.6 million. Reducing the second quarter's adjusted EBITDA was $2 million, or 5%, related to the sale/leaseback transaction we've completed in the fourth quarter of last year. Pro forma for this transaction, adjusted EBITDA increased 3% to $40.6 million compared to $39.4 million a year ago. Pro forma for the sale/leaseback, Alliance's adjusted EBITDA margin as a percentage of revenue increased 280 basis points to 35.5% for the second quarter of 2013 compared to 32.7% a year ago. This improvement in our adjusted EBITDA margin is due to our focus on generating profitable revenue and and a continued focus on operating efficiencies. Last quarter, we reported that we expected to sell our professional radiology services business in the mid-year time frame. This sale is moving forward as we indicated and is now targeted to be completed at the end of the third quarter or early fourth quarter. So now I'll provide some second quarter highlights for both of our divisions. For our imaging division, I am pleased to report that our new sales and renewal activities continue to show significant improvement as illustrated by our revenue GAAP. Our total revenue GAAP was a positive $2 million for the second quarter and was neutral for the LTM period ended in June. This is a milestone for Alliance, and is an indicator of revenue stability and a pathway to growth in the future. Second quarter imaging division revenue totaled $94.6 million compared to $98.2 million a year ago. The decisions we made to prune unprofitable business in 2012 reduced imaging revenue by $1.3 million in the second quarter or 1.4%. After adjusting for this pruning and given the continued pressure on industry-wide healthcare sector volumes, our imaging division revenue decreased 2.2% organically. Alliance's radiation oncology revenue totaled $19.8 million in the second quarter of 2013 compared to $22.5 million a year ago. We divested 8 centers during 2012 and 1 center during the first quarter of 2013. This pruning impacted second quarter oncology revenue by $2.7 million, accounting for all the revenue decrease year-over-year. Currently, Alliance operates 28 radiation therapy centers, including 17 stereotactic radiosurgery facilities. Another highlight of the second quarter is our return to bottom line profitability. Pro forma diluted EPS was a profit of $0.23 in the second quarter of 2013 compared to breakeven EPS last year. And as reported, diluted EPS for the second quarter was a $1.22 loss, an $0.08 loss a year ago. Included in the as-reported diluted EPS was a $0.92 charge in the second quarter of 2013 due to the loss on an extinguishment of debt related to our term loan refinancing, a $0.26 charge related to the impairment of intangible assets related to our professional radiology services business and a $0.27 charge related to restructuring charges, severance and related costs and differences in the GAAP income tax rate from our historical rate of 42.5%. Second quarter of 2012 included an $0.08 charge for these items. In terms of our CapEx efficiency, we continue to invest in solid capital projects and efficient upgrade of our assets. For the second quarter of 2013, our CapEx spend totaled $4.8 million versus $6.2 million a year ago. As I mentioned earlier, we continue to generate strong free cash flow. We define free cash flow as a change in net debt before investments and acquisitions, debt financing fees and the sale/leaseback transaction. We generated free cash flow by focusing on organic growth and adjusted EBITDA along with efficient CapEx spending. This focus has resulted in Alliance generating $14.3 million of free cash flow this quarter. We generated $48.3 million of free cash flow for the LTM period ended in June compared to $40.3 million last year. This strong free cash flow generation continues to strengthen our balance sheet and provides us with the resources to continue to voluntarily pay down debt. As previously announced, Alliance completed a refinancing of our term loan debt in June, which is saving the company $12 million in cash interest expense annually, with $7 million of these savings impacting 2013. The new credit agreement decreases our interest rate by 300 basis points to LIBOR plus 3.25% with a 1% LIBOR floor, representing an annualized cash interest savings of $9 million. Additionally, due to the significant demand for our new term loan, we were able to upsize this loan by $80 million from $340 million to $420 million. We use these funds to call $80 million of our 8% senior notes or bonds, further reducing our annualized cash interest expense by $3 million. At the end of the quarter, Alliance had cash balances of $47 million. Long-term debt totaled $559 million and net debt was $512 million. As a result of our strong free cash flow generation, we have paid down $126 million of debt and consistently lowered our total leverage and net leverage ratios over the past 7 quarters. As of the end of June, Alliance's total leverage ratio was 3.70x and net leverage ratio was 3.39x. Our total senior leverage ratio was 2.45x and pro forma for the $80 million upsize in our term loan was 2.98x. Now I'll make a few comments on the proposed 2014 Medicare Physician Fee Schedule, which was published by CMS in early July. Alliance is largely shielded from proposed reductions in the Medicare Physician Fee Schedule due to the vast majority of our revenue that was generated from hospital relationships. Only 6% of our total revenue is directly reimbursed by Medicare. The proposed 2014 Medicare reimbursement changes make the assumption that Congress waives implementation of their proposed 27% reduction related to the SGR formula. The proposed 2014 Medicare Physician Fee Schedule reimbursement changes would decrease our MRI revenue by $700,000 or 20%. The 2014 CMS proposed Physician Fee Schedule does not address PET/CT services. PET/CT reimbursement is proposed to be governed by the individual Medicare intermediaries and no impact is anticipated. Additionally, Medicare Physician Fee Schedule reimbursement related to our linear accelerator revenue is proposed to be reduced by 9%. This proposed reduction in reimbursement is expected to impact us by $1.1 million. We built our stereotactic radiosurgery business under arrangement with our hospital joint venture partners or under a traditional wholesale arrangement. Under CMS's proposal, our analysis indicates that there is a 3% proposed increase under HOPPS, which will translate into a $200,000 increase in reimbursement. The proposal net impact for imaging and radiation oncology is expected to total $1.7 million or just over 1% of our 2013 adjusted EBITDA guidance range. These proposed changes, if enacted, are manageable. Now I will confirm our full year 2013 guidance ranges. Alliance expects revenue to range from $450 million to $475 million. Adjusted EBITDA guidance range also remains unchanged and is $140 million to $160 million. The sale/leaseback transaction reduces 2013 adjusted EBITDA by $8 million by adding incremental rent expense. Our capital expenditure guidance range is unchanged and is expected to range from $45 million to $55 million. We will continue to allocate sufficient resources through targeted investments designed to support long-term growth. As previously announced, as a result of the decrease in interest rates under the new senior secured term loan, Alliance increased our free cash flow guidance range by $7 million to $32 million to $42 million. Thanks again for your interest in Alliance, and I'll now turn the call over to Larry.

[Larry C. Buckelew:]

Yes, thanks, Howard. In closing, the entire Alliance team is dedicated and engaged in implementing and executing against our strategic objectives. We're certainly delighted with our ongoing success in doing that. Ultimately, our goal is to be more indispensable to our hospital customers and align more closely with them every day and partner with them as they face some challenges so that we, in fact, not only help them win, but we win and create a really strong strategic relationship. So that's what motivates us. That's who we've been, and we'll continue to thrive with that strategic approach. We're pleased with the current momentum, that's apparent in the company's performance. Look forward to continuing to execute on our strategic growth initiatives, and we'll ultimately create additional value to our shareholders. Again, folks, thanks for your interest in Alliance. Howard and I look forward to answering your questions. We've wrapped up in pretty timely fashion here, so we are delighted now to turn this call back over to the operator to begin -- to respond to any questions that you may have. So operator, if you could assist in that regard.

[Operator:]

[Operator Instructions] Your first question comes from the line of Henry Reukauf with Deutsche Bank.

[Henry Reukauf:]

Just a couple of questions. First, on the pruning that you've done, is this part of the pruning that was done earlier in the year? Or is this an ongoing effort?

[Larry C. Buckelew:]

Thanks for your question and I'm delighted to be able to comment on our strategic direction and pruning. What we have is some carryover from pruning that was done in the past. We're really winding down the pruning process. That's working through quarter-by-quarter. The only real material pruning, Howard, that I can think of that will kind of wrap it up for us in terms of that portion of our strategic direction would be the pruning of our professional services business. But Howard, if you could add to that?

[Howard K. Aihara:]

Thanks, Larry. And thanks, Henry, for your question. And Henry, the comments that Larry made are absolutely correct. The pruning that we did in 2012 does have a carryover effect into 2013. So the numbers that I cited earlier in my prepared remarks relate to the pruning that we did in 2012. So -- and as Larry mentioned, we expect the sale of the professional radiology services business to occur late in the third quarter or early fourth quarter of 2013. So that will be the remaining pruning that we're going to be doing in 2013.

[Henry Reukauf:]

Okay, that's terrific. You talked a little bit about the ACA and how it could help the business. Have you done any kind of study or estimate on how much of a positive that could be to you guys in '14 as it begins to roll in?

[Larry C. Buckelew:]

We have. What we've decided to do is be cautious about it, though. That certainly served us well in 2013. I think most of the industries, the larger hospital systems, as they try to forecast what would happen in 2013, ended up being a little more bullish than they probably should have. They were hoping the economy would create a little bit of lift, a little more consumer confidence. And as we know, that hasn't quite come to fruition as much as folks had hoped. But we do think that these programs that are being put in place by the government, that will bring new patients into the system, will make a big differences. Those get finalized in the last quarter of this year. And even if we take the most conservative government estimates for 2014, patient volumes coming in, and we look at it year-by-year, even if you cut them by 1/3 or 1/2, it's material to helping the entire hospital industry and, certainly, our business grow on an organic, same-store growth basis. And so, I think what we'll see with ACA as it goes into 2014 is I suspect the larger hospital systems, which will oftentimes reflect kind of our organic growth numbers, I wouldn't be surprised to see them kind of beginning to move from slightly negative, which they've had the first half of this year, more neutral towards the back half of this year and then move to a positive, maybe 2% to 3%, next year is what I would suspect.

[Henry Reukauf:]

Okay. Just a question on the Physician Fee Schedule versus the HOPPS schedule. I know you're reimbursed under the HOPPS schedule. If the cuts for MRI and CT were to go through, where would that leave the HOPPS schedule in relation to the Physician Fee Schedule? Would it be above it by some percent?

[Howard K. Aihara:]

Yes, Henry. I think you're right. In terms of the HOPPS schedule versus the Physician Fee Schedule, I think that currently, the difference is -- the ballpark is around 10%. So I think that difference will continue to grow a little bit into 2014 if what is enacted was proposed by CMS actually go through as proposed.

[Henry Reukauf:]

Are your -- have you talked with your hospital partners? I mean, they must be aware that this is a profitable segment for them. Is there any worry on their part or your part that there could be a cut there? Or where do you see that standing in terms of a -- kind of a -- on the radar of CMS?

[Larry C. Buckelew:]

What's great is we continue to see this overarching theme where, while CMS is certainly focused on some cuts and they're focused a lot of it in the freestanding areas as we all know, they're trying to also help hospitals move from this fee for service to more of a perspective payment. They want hospitals to be putting the care of patients more in buckets. And so they're simply trying to organize hospitals to move in that direction and be accountable for better patient outcomes. And so, what we're finding is that the net of everything for hospitals is you still end up with an overall market basket increase for hospitals that's about 1.8%. So is it as much as hospitals would like? No. But they're talking about overall increases where freestanders have taken significant cuts. So what we do is we go in and show them in our 2 areas of specialty, imaging and radiation therapy, how we can help them drive out inefficiencies, waste, we create dashboards, metrics to follow, strategic plan and show them how confident they should be in their ability to make this an important part -- in the growth part of their business. And so, just -- again, just to underscore this, there could never be a better time than today for Alliance to have embraced this approach, because we get into the C-Suites and have what I just described, we have that quality of discussion with C-Suites and Mike Shea said it earlier. I mean, we literally are batting 1,000. We -- any C-Suite we call, and we just sketch out what it is we'd like to talk to, we get a meeting and they are all ears and we get traction. So long-winded response, but it's some color that I think helps to just underscore. This is a new reality, and hospital CEOs, as they consolidate, I mean, we just saw Committee Health System acquire HMA. The great news is we're a great partner with both of those systems, and they want to talk to us. How do we help them come together, figure out how to make something like this even more successful on a combined basis. So we're at the right place at the right time.

[Henry Reukauf:]

Okay. And just the last one, congratulations on the refinancing of the bank debt down to a much more normalized rate. The bond, the 8% bond, actually pretty hefty in today's market, particularly given your leverage statistics and cash flow metrics and actually cash in the balance sheet. It's callable in December. It makes a lot of sense, I think, to either use your accordion or do a small bond deal at a lower rate or something along that line. So what are your plans for the kind of the stub bond at this point, since you probably could have a nice amount of savings on some sort of refinance there?

[Howard K. Aihara:]

Well, thanks, Henry, for that question. And one thing -- the primary focus of our business is to generate free cash flow, and we're being very successful at that. So we have a lot of -- and that allows us a lot of flexibility in terms of how we use our free cash flow. And we spoke about in our prepared remarks that our desire is to kind of just to continue to de-lever. So I think that, after making our regular normal amortization payments under our term loan, that we would look at using some of those -- some of that free cash flow to perhaps call some of the bonds and have that optionality as the call steps down as you said in December to 102. So that's a primary focus of Alliance, and I think that's something that you should look for here in the next couple of months that we use some of our free cash flow to pay back or call some of those bonds. We have some baskets within our credit agreement that allow for that to happen.

[Larry C. Buckelew:]

Yes, and I would just underscore -- thanks, again, for the question because -- I mean you follow our company closely. You've watched our debt and I think you're one of the more outspoken folks that said, "You guys could really work hard and help increase shareholder value and the value of the company by looking and managing your debt closely." And I can tell you we've heard you, and we've been walking the talk.

[Operator:]

[Operator Instructions] Your next question comes from the line of Miles Highsmith with RBC.

[Miles L. Highsmith:]

Just to follow on to that, is your credit agreement capacity or RP capacity, whatever it is, at least the amount of the size of the bond tranche? Or is it a lower amount?

[Howard K. Aihara:]

Miles, this is Howard. Thanks for that question. We have $25 million of availability under our restricted payment basket, and that's a builder basket. It builds, I think, with 50% of excess cash flow per year, so that's one way we can use to retire some of the bonds. And we also have a $25 million general basket that's available, and that can also be used for bond repurchases. So those are 2 mechanisms we can use to continue to retire our bonds.

[Miles L. Highsmith:]

Okay, great. And then just going back to sort of general topics. And I just hopped off for just a second, so I apologize if this got covered. In terms of your role as more of a consultant to the hospitals and analyzing the competitive dynamics and looking potentially for ways to increase the referrals for the hospital, have you gotten to a point where you're understanding better how you're getting paid for that in terms of whether it's fee for consulting or slice of the incremental revenue from the referral? Are you able to speak to that?

[Larry C. Buckelew:]

Yes, we sure are. One of the things, when we headed down that this journey and started speaking publicly about it, number one, we knew the customers needed it. They wanted the help. And as we started formulating our menu of services, I think our first instinct was that we would likely start to gravitate to a bit of a pure consulting business, and we could potentially break that out as a separate entity and measure the profitability of it. And we still may be able to do that in time. What's interesting, though, is we've added resources, and Mike Shea can comment, not only in the marketing side, the consulting side, adding people to help us cover the analytics, do market studies and surveys. The payoff, though, is one that we'll go into renew an account, and we might have a few pieces of machines in that campus. And by letting them understand that in a renewal basis, we could take on several more pieces of equipment, enhance those pieces of equipment, do studies to evaluate throughput, referral patterns. What we're finding is when we renew, we're sometimes increasing our business volume by 20%, 30% on a renewal basis and increasing pricing by our service mix. And so it's just working out even better than we had pictured. The need is there. I do think, though, that we will eventually have a pure consulting entity that will be able to potentially be broken out and reported on a freestanding basis. And so when we've got enough critical mass of just pure consulting services, we'll break that out and show it to you. But I can tell you, we'll be proud of the EBITDA for that segment.

[Miles L. Highsmith:]

Okay, great. So if I'm hearing you correctly, it sounds like in your quest to become more indispensable to the hospital customer, that this type of consulting is sort of a value-add and sort of rolled into the whole offering that you give to the hospital. Maybe rather than getting x dollars per consultant hour or x percent of the incremental referral or whatever it might be, maybe there's some of that, but it seems like the bulk of it is still kind of just an enhanced value proposition that you provide and helps with renewals, helps with incremental volume and maybe maintain pricing and things of that nature, is that a fair way to characterize it?

[Larry C. Buckelew:]

It is, and I'll ask Mike Shea to add a little color. He hid it so nicely, I think, in a comment he made earlier in the call. One of the things that's nice is -- I mean, this is an eye-popping EBITDA margin of over 35% for the quarter and what you just described is us renewing some of this business, improving our mix of services and what we do for an existing customer. And so, let me have Mike add a little more color to simply add more clarity to that.

[Michael J. Shea:]

Yes, thanks, Miles, for the question. And I think you nailed it when you said this increases our indispensability, if you will, to hospital customers. But let's not forget that, there's just a few things. One is it changes the conversation from a commodity conversation to more of a partnership at a strategic enterprise level with the hospital C-Suite. And that's one thing. And the other thing it does is it allows us to align incentives with the hospital, giving us an opportunity to share in the growth and the success of the hospital's program. And then the third thing is it allows us to extend the contract beyond the normal 36 months, so we provide that stickiness to current agreements that will get us out further into the future as a strategic partner. We're definitely morphing into being more than an equipment leasing company and more of a consultative company. We provide the success, the expertise, the experience that they sometimes just don't have within their own organization. With all that's going on, as Larry mentioned, with the consolidation in the hospital business, it's a perfect time for us to come in and be a very value-added strategic partner to the hospital customers we work with and generate new interest in Alliance at those larger systems that could use this kind of partnership.

[Larry C. Buckelew:]

And thanks, Mike. I would simply conclude that comment, too, by simply saying as we've taken this journey, what's interesting and exciting is I've never seen 2 deals that look alike. It's interesting how when you finally listen to the customer and you hear what they really need and what their hotspots are and we designed a program that meets their needs, they're all custom. And so that's what hospitals want today.

[Miles L. Highsmith:]

Great. I appreciate all that color. One final one for me, and maybe it was touched on, but just want to verify -- so outside of free cash flow, are there any additional ways that you would look to reduce dollar debt? Are there any other options out there, like more sale/leasebacks or anything that we should think about? Or is it going to be pretty much solely free cash flow?

[Howard K. Aihara:]

And thanks for that question, Miles. In terms of -- first of all, talking about our capital structure, we're pleased with the efficiency and the fact that we're able to reduce our interest rate through its most recent refinancing. And in terms of actually raising more funds through other mechanisms, we actually think that through free cash flow that, that will provide us with very sufficient resources to pay down our debt and still invest in really good capital projects for our future.

[Larry C. Buckelew:]

I'll tell you one thing, Miles, that excites us. We do a lot of internal modeling. And if you want to take a business model like ours and continue to get really excited, model what same-store growth does to a business like ours. That's how you create cash flow is you take our business, take customers and help them drive volumes through their hospitals and volumes for us on a largely fixed-cost basis, that's how you drive huge cash flow. If you simply take our business model and assume a 2% or 3% same-store growth compounded and you do that for the next few years and look at the cash that generates, that will excite you.

[Miles L. Highsmith:]

Yes, definitely agree. You can leverage the high fixed-cost nature of that business.

[Operator:]

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

[Larry C. Buckelew:]

Thanks, everybody. We're spot on for the hour. We sure appreciate you taking the time out of your busy schedule to participate. Delighted with being able to report the performance we have but again, really grateful for your interest Alliance Healthcare. Thanks for your time. Look forward to chatting with you for our next earnings call in 3 months. So thanks, again.

[Operator:]

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