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Q3 2013 Earnings Call Transcript

Published: 7 Nov 2013

[Richard W. Johns:]

Good morning, and welcome, ladies and gentlemen, to the Alliance HealthCare Services' Third 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, 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 released 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, will first provide a brief overview and then turn the call over to our new CEO, Tom Tomlinson. Tom will provide his initial observations after his first 5 weeks as CEO, and will discuss his near-term areas of focus. Tom will be followed by Mike Shea, our Chief Operating Officer, who will provide an update on trends in the economy and the Healthcare Services sector. Our Chief Financial Officer, Howard Aihara, will then follow with the details of our financial results for the quarter. We will conduct the Q&A session after our prepared remarks. With that, I will turn the conference over to Larry. Larry, please go ahead.

[Larry C. Buckelew:]

Thanks so much, Rick, and good morning, everyone. I am very pleased to welcome you to Alliance HealthCare's Third Quarter Earnings Call. As always, we sure appreciate your time, your interest and participation in this event. Before we review the results of the quarter, I'm delighted to be introducing the call today in my ongoing role as Chairman of the Board for Alliance. As we've mentioned previously on our last call and as you've seen in press releases, we've now completed our leadership transition in Tom Tomlinson, who has been our CEO now since the start of October, will be leading the call today. It has been my absolute privilege and pleasure to serve as interim CEO for the last 16 months. It's certainly given me the opportunity to work with a great team of executives and to also help set the course for the long-term future. As I stated in previous calls, the Alliance team is a unique team and in many ways, they provide collectively what I would call a perfect blend of folks on our team with a deep legacy experience in Alliance. We also have some strong leaders on the team that bring unique sector knowledge. And then, again, some of our key leaders on our Alliance team bring a fresh perspective from other healthcare sectors, and so they come from the outside, and this collective leadership team and the skill sets and knowledge have really been a powerful combination for our success. When I reflect back over the last 16 months here at Alliance, and what the company is looking like as we move forward, I think the story can really be viewed as 3 different phases, or the 3 Ts, as we've coined it. The first being the turnaround phase, then the transformation phase and then finally, the traction phase. We've spent quite a bit of time and energy executing the first T, or the turnaround phase, and we've really documented it well, not only in prior earnings calls but public filings, press releases and it's something we're very proud of. I've mentioned it in previous calls that there was really a defining moment for this company in the summer of 2011, when our Board of Directors, met with management and in hindsight, really did a wonderful job of noticing that the healthcare environment was going to become choppy, it would become a bit unpredictable and we decided to take a good, hard look at our business model and fine tune it, right size it and prepare ourselves for some uncertain times. That decision became extremely important and we've coined the project as Phoenix, as you recall. And while we did a great job of streamlining the business, taking portions of our business out that -- and pruning them, that were not profitable, we began to really look at process mapping, what we do and how we do it. And so we've again documented this well before, and I think it's been one of the most successful phases in the company's history as we move through the turnaround phase. Now probably the most important thing to come out of that phase was a culture. And the culture is one where we wake up now every day as a company, with our associate highly focused on continuous improvement. Making sure that we have opportunities to improve and drive cost and waste and drive efficiencies into the business. In fact, during the most recent quarter, we were able to achieve a sixth consecutive quarter of adjusted EBITDA growth, which is an absolute testament to ongoing dedication, to the management of this business in an effective way, despite some of the uncertainties in the marketplace. Now, we find ourselves well down the road in the transformation phase. Again, in prior calls and dialogue we've had together, we've indicated that we started repositioning our field force, creating a deep presence in the marketing area, and we're making significant headway down this long road of transformation and feeling good about our progress. We've worked hard to build a strong foundation upon our offering and our hospital customers, of which we've been a major presence now for 30 years in this sector and have made significant progress in building our infrastructure to provide the services that absolutely and really differentiate our offering and our business model. Today, we're committed to becoming indispensable and more invaluable than ever to our hospital partners. And we're entering to agreements in a more consultative role. In essence, helping our customers help themselves by understanding ways to improve their operating models, their efficiencies and basically implement some of the programs that Alliance has been so successful doing. We believe this more value-added approach will help us find continued success in the future in both our Imaging and our Radiation Therapy Services divisions. We are all focused on building our offering in the near term so as to maximize these partnerships and provide the most value to our customers. The third T, or the traction phase, is where our enhanced value proposition and consultative and strategic offering will drive the results we desire. As our relationships and partnerships evolve, we absolutely believe we have an opportunity to put some exciting numbers on the board. We think hospital systems and hospitals in general, will benefit from the Affordable Care Act. That volumes will start to migrate into hospitals as we look at 2014 and 2015. And that these patient flows will continue to improve during this timetable. We will continue to find ways to create strategic relationships with the very best hospital systems, so that we can elevate our profile and translate these benefits into our longer-term outlook and our model going forward beyond 2015. We really look forward, folks, to building on this positive momentum and we feel very confident that we're heading in the right direction. So with this strategy in place and the business successfully moving forward, I am pleased to be handing the reins over to such a capable leader as Tom Tomlinson. And while I'm no longer interim CEO and have stepped back from the day-to-day management of the company, I can assure you that I remain 100% committed to the successful future of Alliance HealthCare Services, and I will remain Chairman of the Board for the foreseeable future. In closing, I'm confident that Tom's wide range of experience and track record of delivering results will be valued by our shareholders, our partners and team members alike. Tom has more than 25 years of diverse executive management and leadership experience in a variety of strategic, operational and financial roles. In Tom, we've really found a well-rounded executive with experience both in our field and the broader business world. I'll look forward to working closely with him, as we execute our strategy going forward. And with that, folks, I'd like to hand the call over to Tom.

[Percy C. Tomlinson:]

Thanks, Larry. I am very pleased to be joining my first earnings call today as the CEO of Alliance HealthCare. As you all know, Alliance is a great company with a powerful legacy as a Healthcare Services leader. And I'm very honored to be taking this role at this time. Before I go any further, I want to say on behalf of the board and the rest of the management team here that we'd like to thank you, Larry, for your successful stewardship of Alliance over the last year, and almost 1.5 years, actually, and it's been a transformative time of change for the company and the healthcare sector overall. And Larry, your leadership and accomplishments over this period have significantly strengthened Alliance and positioned the company to thrive in today's evolving marketplace. So I look forward to working together with Larry, the rest of the board, the management team and every member of the Alliance team here, as we drive our strategy forward and achieve the potential that we have. Now that I've been on board for roughly 5 weeks, I can say with confidence that all of the potential that I saw during the interview process and historically from the outside looking in, if you will, has proven to be true. And if you want to know what excites me, there's 4 things. Number 1, we've got 1,000 existing hospital customers, which is a wealth of relationships. We've got a long and successful history of alignment with the hospital segment, in both radiology and oncology. In short, we're a trusted partner. We have a culture that delivers extraordinary care to our patients and this is key, because we're seen as an extension of the quality of care that our hospital customers provide. And finally, we're entering a time of dynamic change within healthcare, as the ACA comes into effect and we see a future where more healthcare will be delivered through hospital affiliated service providers. So I'm excited because the change in the industry plays to the historical strengths of our hospital-centric business model. And as hospitals benefit from the increase in covered lives resulting from the ACA, we too, will benefit due to our alignment with them. The team here is up for the challenge of building upon recent achievements and transforming the company into an indispensable resource to our hospital customers during this unique time in the healthcare industry. Now you've heard Larry speak about the 3 Ts, turnaround, transformation and traction, and as he addressed, we've executed very well in the turnaround phase, and are now focusing our efforts on transformation. And as we do that, our strategy remains consistent with the 3 elements you've heard us talk about over the last several quarters. We'll be growing our imaging services through our enhanced value proposition strategy and improved operational and selling competencies. We'll expand our radiation oncology services through a combination of de novo growth and better hospital relationships through providing a full radiation oncology service line. And finally, you've heard us talk about how we've developed a cultural performance improvement, related to efficiency and cost management. What -- now we're going to be expanding that focus, using some of the same cultural disciplines across all aspects of our business including sales, business development and other areas that are critical drivers of revenue growth, and we'll call this driving a performance-based culture. I'd like to unpack these 3 ideas a little bit more for you. Within our Imaging division, as you know, we've prided ourselves in our market leadership position in the hospital-centric major of our business model. Now despite the somewhat uncertain near-term growth environment that's impacting our hospital partners, and therefore, Alliance, we're strategically forming relationships and aligning ourselves with hospital systems that are positioned for long-term success in the industry. We strongly believe that our enhanced value proposition will allow us to grow together with these hospital operators. But why, you might ask. Well, it's because our unique expertise in managing a successful radiology service line will help our hospital partners find greater success. And since we're aligned with them, they will drive our success as well. In our Radiation Oncology business, we have a track record of successfully managing growth, and as you've seen over the last year, making the hard decisions to trim underperforming operations when necessary. Our leadership team there is still in its first year, I would tell you they're doing an excellent job of moving the business in the right direction, adding business development resources in order to build a pipeline of opportunities and ensuring we have operational bench strength to execute on growth. We continue to challenge ourselves to drive growth in the service line. Fortunately, the significant hospital partnerships we already have are all referenceable relationships. This is an extremely important calling card when we're looking to build new hospital partnerships in this service line. Our recent results provide evidence of the improvements we've made in our business through our performance-based culture. Importantly, we're able to achieve a sixth consecutive quarter of adjusted EBITDA growth and our pro forma margins for the quarter grew to 36%, an increase of 170 basis points over the prior year period. This coming as a result of our focus on efficiency and higher margin business. And as Howard will describe in detail a little bit later in the call, our same center volume also has moved into a positive range this quarter. Our cost-saving efforts have been a great success, and we believe will continue to generate further savings as we move forward. This cost discipline has become a key component of our strategy. I would say, it's part of our DNA now, and we'll continue to drive and expand these efforts in the future. As I mentioned earlier, we'll also aim to apply these same disciplines and process to driving revenue growth. Sales and Business Development will be a major area of focus for me going forward. I want to say to you though, trust me, we will not lose focus on being a cost-efficient organization, even as we look to grow. As we recently announced, we took additional steps to strengthen our balance sheet, through the refinancing of a portion of our debt, this allows us to improve the efficiency of our capital structure. And it's really significant to note that we've accomplished all of this against the decreasing revenue line. And as I mentioned earlier, our next area of focus is going to be driving revenue growth while maintaining discipline around costs and margins. So in closing, as I had begun to come up to speed on this new role over the last several weeks, I've visited locations across our business and met with leaders in each segment. I can tell you I'm confident that with the support of our experienced leadership team, the company will continue to grow and succeed. In coming weeks, I'll continue to visit locations around the country and talk with team members about the future of our company. Naturally, I'll also be connecting with customers, partners, investors, suppliers and other stakeholders as we solidify our plans and our outlook for 2014 and beyond. I look forward to meeting with many of our stakeholders in coming weeks and months, and I will certainly look forward to discussing our strategy, our accomplishments and performance further with all of you when we get to our year-end earnings conference call. So with that, I'd like to hand the call over to Mike Shea, our Chief Operating Officer, for some comments on the current industry and some customer relationships. I've had the opportunity to spend a fair bit of time with Mike over the last few weeks, as you might imagine, traveling together. And I'm excited to be partnering with him. He's been out with the team in the field, building trust over the last 1.5 years, and I look forward to drawing on his experience and working with him going forward. So, Mike, the floor is yours.

[Michael J. Shea:]

Thank you, Tom. I've enjoyed spending time with you as well, Tom, over the past few weeks, and I'm really looking forward to working together to create value for our constituencies. So let me begin by providing an update on our current operating environment. We're excited, indeed, we're confident in our long-term growth plan which will continue to align with that of the hospital market, but we're also cognizant of the fact that there will continue to be some near-term turbulence in the industry, as ongoing healthcare reform takes shape and its impact starts to translate into the open market. As we work through the near-term uncertainty around the impact of healthcare reform, we certainly believe the fundamentals of the healthcare industry are stable, and will improve and drive growth as we move forward. Despite the lower than expected patient flows reported by the nation's leading hospital groups, we believe there will be an increase in elective procedures as the economy gains momentum, and there will be an increase in patients needing our services as healthcare reform takes effect. With over 1,000 hospital customers, we are in the best position to take advantage of the positive shifts and improved hospital growth rates. With our key hospital partners -- while our key hospital partners and our competitors face pricing pressure, this reality also creates a perfect timing opportunity for our enhanced value proposition. More often, we found the enhanced value proposition changes the commodity conversation to one of a partnership conversation, allowing us to sell additional services and increase our contract terms beyond what we normally see. You'll recall we recently announced the opening of our second multi-modality center with Emory Healthcare in McDonough, Georgia, less than a year after opening our first center in a nearby community. This expansion of our partnership with one of the premier university hospital systems in the country, clearly demonstrates what we believe will be a trend. It demonstrates a hospital or a systems need for our expertise and our experience to help them execute their strategic goals. This is the prime example of the value we bring in the spirit of partnership, and the important role we play in a traditional equipment -- excuse me, beyond the traditional equipment leasing function. Now beginning a partnership with a hospital system as sophisticated and as large as Emory Healthcare requires exceptional coordination and teamwork, and our partners at Emory have shown their confidence in our ability to execute. We believe hospitals will always be at the hub of healthcare delivery in the communities that they serve, and our enhanced value proposition, as evidenced in our Emory relationship, solidifies our position at the center of the over 1,000 hospital communities we serve. Another added benefit to being hospital-centric is the fact that as government pressure continues to impact imaging reimbursement, our position as the hospital's partner of choice, provides us cover unlike other imaging companies who are reliant on government reimbursement. Recently, Tom and I met with a key leader in New England, who is very clear in his expectation that we play a pivotal role, and as his organization includes us a valuable partner in an ACO environment. We believe that our strategic alignment affords us the opportunity to help hospitals manage expenses and provide the quantity they will need as reimbursement risk shifts. This too is an added benefit to being a strategic partner at the center of healthcare delivery at the regional and community level. With respect to Alliance Oncology, the division is dependent on the local ebb and flow of cancer treatment, and there are trends towards fewer fractions and more accuracy, both in radiation therapy and in radiosurgery. That being said, we continue to see a robust, early-stage pipeline, which we attribute to our investment in new business development resources. There also seems to be more activity from hospital systems in search of a partner to help them capitalize equipment and operate and manage their day-to-day radiation therapy centers. We remain optimistic in our ability to apply financial models designed to address the local and regional needs of hospitals and physicians, as they create the best treatment options for the communities they serve. I should also mention that our stereotactic de novo sites in Louisville and St. Louis, completed their first full year of operation, creating significant revenue and EBITDA for the division. I remember as a young executive, driving from Boston to Hartford, with one of the most senior executives at Baxter, as he spoke about the ever-changing healthcare delivery dynamics at that time. He said, in times of change, great companies evolve before they're forced to evolve. They lead. As healthcare delivery dynamics continue to evolve, we will be at the forefront, helping our hospital partners navigate the changes and providing the experience and expertise they cannot find within their own organizations. Hospitals are our business. And the climate is right for our transformational evolution to a strategic, value-added partner. So with that, thank you very much and I'm going to turn it over to Howard for our financial update. Howard?

[Howard K. Aihara:]

Thanks, Mike, and good morning. Today I'll review the highlights of our third quarter financial performance, including our Imaging division, MRI and PET/CT same-store volume metric, which we plan on publishing on a quarterly basis. I will then discuss the impact of the proposed 2014 CMS reimbursement fee schedule changes, which are not material to Alliance. I'll then confirm our full year 2013 revenue and adjusted EBITDA guidance ranges. For the sixth consecutive quarter, I am pleased to report organic growth in adjusted EBITDA. In addition, we are profitable for the second consecutive quarter this year by generating positive pro forma EPS in the third quarter. Our organic revenue was virtually flat this quarter, seeing us up to turn the corner on organic revenue growth. And we continue to report strong free cash flow generation. So what are highlights from our third quarter? Again for the sixth consecutive quarter, we generated year-over-year adjusted EBITDA growth. Third quarter adjusted EBITDA totaled $38.6 million. Reducing this quarter's adjusted EBITDA, was $2 million or 5% related to the sale leaseback transaction we completed in the fourth quarter of last year. Also impacting last year's adjusted EBITDA was a positive $2.2 million gain on a litigation settlement. Pro forma for these transactions, adjusted EBITDA increased 3% to $40.6 million compared to $39.5 million a year ago. Pro forma for these transactions, Alliance's adjusted EBITDA margin as a percentage of revenue increased 170 basis points to 35.8% in this third quarter, compared to 34.1% a year ago. On a sequential quarter basis, our margin improved 30 basis points from Q2 to Q3. This improvement in our adjusted EBITDA margin is due to our focus on operating efficiently, and continued implementation of our cost savings initiatives. We implemented $9 million of new cost savings on an annualized basis beginning in the third quarter. Revenue in the third quarter of 2013 totaled $113.4 million compared to $116 million last year. Almost all the decrease in revenue, $2.2 million of this $2.6 million decrease, or 2% was driven by actions taken in 2012 to prune our portfolio of unprofitable business. Our organic revenue was virtually flat this quarter, decreasing only $400,000. Last quarter we reported a milestone, where Alliance neutralized its Imaging division revenue gap. We've talked about deemphasizing this metric going forward, and as Tom talked about in his remarks, we are partnering with hospitals in a strategically different way through enhanced value proposition, which makes the revenue gap less relevant going forward. We are now replacing this metric with the Imaging division, MRI PET/CT same-store volumes, which is a metric that is commonly followed in the hospital industry. In the third quarter, on a same-store basis, MRI volumes were a positive 1.2%, and PET/CT volumes were a positive 1.6%. These same-store metrics exclude volumes associated with the pruning of unprofitable customers. On Page 13 of our earnings release, you can find our MRI and PET/CT same-store volumes for each of the 3 quarters of 2013. Our third quarter MRI and PET/CT same-store volume growth was slightly ahead of the growth in hospital outpatient visits. Hospital outpatient visit same-store growth has been reported at one tenth of 1% this quarter. I want to provide you an update on the status of the sale of our Professional Radiology Services business. As previously announced, we expected to sell this business at the end of the third quarter or early fourth quarter. This sale is moving forward as indicated, is now targeted to be completed either late November or early December. This business represents about $14 million of annualized revenue. Another highlight from this third quarter, is that this is our second consecutive quarter of bottom line profitability. Pro forma diluted EPS was a profit of $0.41 in the third quarter of 2013, compared to breakeven EPS last year. As reported, diluted EPS for the third quarter was a $0.19 loss compared to a $0.12 loss a year ago. Included in the as reported diluted EPS was a $0.50 charge in the third quarter of 2013, due to the following items

[Operator:]

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

[Henry Reukauf:]

Just a couple of quick ones. First, on the retirement of the bond. Should that be basically the same day as the call step down, or maybe a day or 2 after that, beginning of December? I know you said December. I wasn't sure when in December.

[Howard K. Aihara:]

Yes, Henry. The call will be effective. It's certainly December. I believe it's, it was somewhere around the 2nd of December. So the call, the bonds will happen the first couple of days of December and the term loan will be funded as well at the same time.

[Henry Reukauf:]

Okay. Just on -- I've kind of noticed that the number of PET and CT units that you guys have has kinded of stabilized, and actually was I think about the same, sequentially here, after you pared that down quite a bit over the last year or so with the restructuring. Should they be -- should those units, number of units now be stable, and do you think you're going to start to increase those, going forward, the number of units in operation as you grow?

[Howard K. Aihara:]

I think that, in terms of our PET/CT systems, we've been working very hard on becoming very efficient in our -- especially in our mobile routes, and we will continue to look at that. But I do expect that the number of systems to stabilize and as we continue to work through our selling efforts and business development efforts, with our enhanced value proposition, I'd expect that number perhaps to grow in the future. But we will continue to be very focused on operating very efficiently.

[Henry Reukauf:]

Should we then think about, I guess, you haven't had to buy much equipment in the last year or so. Should we think about CapEx being a bit higher next year, maybe $20 million? If we're kind of reversing the trend that we saw this year?

[Howard K. Aihara:]

Well, I'll tell you, Henry, that's a great question. CapEx, a lot of it is going to involve around new projects, and we will continue to operate very efficiently and spend our CapEx dollars wisely and efficiently upgrade a lot of our MRI and PET/CT fleet through upgrading. In Radiation Oncology, a lot of that will be new in CapEx spend, and it's very possible that CapEx may increase a little bit in the future. Depending on the projects and the size of the projects, and that's part of our enhanced value proposition. We're becoming more and more of a -- more and more indispensable to our hospital customers, and we're going to be, perhaps, spending some CapEx and broadening our scope of services within radiology as well as radiation oncology.

[Henry Reukauf:]

Okay, and then just one for Tom, quick question. In the 5 weeks you've been there, it sounds like you like what you've seen, and are going to continue on with most of the initiatives that have been started. Have you noticed anything that you'd like to add or tweak, in addition to what's been done, to kind of improve the company's performance in the time you've been there?

[Percy C. Tomlinson:]

As you've probably gathered from my comments earlier, I'm really excited about what I found in the last 5 weeks since being here. There's been a lot of positives that have been confirmatory to me. Our direction, I think, is very sound. Do we have some work to do to execute on that strategic direction? Yes, absolutely. And we will. But I'm very excited about what I've seen. Again, I think the direction we have been on, with the enhanced value proposition is the right direction to be moving in. And we will need to be building some additional strength around our selling and business development efforts. We're very focused on that. As we transition the business to being more of a strategic partner, in many instance a joint venture partner with hospitals, along the lines of the Emory relationship that Mike has described, that will require us to strengthen some operational areas of the business that haven't been as important to us before. That's just part of the evolution of our business. I think the efforts to do that are well underway, and I'm very confident that the team can execute on that direction.

[Operator:]

Your next question comes from the line of Chris Samsung [ph] with Samsung partners.

[Unknown Analyst:]

Tom, you mentioned the -- your out year expectations that you guys have modeled and that sound great. Could you maybe share with us some of the financial aspects as we look out to 2015 that you're seeing, that you're excited about?

[Percy C. Tomlinson:]

I think when we get to our year-end earnings call, at which time we'll provide guidance for the '14 year, that would be the most appropriate time to speak in any greater detail about our future expectations. We are seeing clear evidence of the customers' excitement about the enhanced value proposition, excitement about working with us in a partnering approach, to help manage their radiology service line. And so we're seeing clear evidence that tells us the track we're on strategically is the right track, and we're excited about that. But we'll be prepared to provide further detail when we talk to you again in another quarter.

[Unknown Analyst:]

Okay, and then maybe more generally, how long will the sales process does it take for you guys to establish those new relationships, like you've done with Emory, and how should we think about where you guys are, with respect to that sales cycle for the companies, start seeing those, those results in the company's results?

[Percy C. Tomlinson:]

I think being able to clearly understand and articulate, broadly speaking, the sales cycle across a whole number of projects where probably a little early to give you good information on that. I would tell you, from other experiences, I think that it varies widely. I do think we're in a very interesting window of time here, over the next year or 2, where that I've not seen before in my time in healthcare, frankly. And it's -- that the window of time I'm referring to is this, and that is that, as you see all the dynamic change underway within the hospital sector, with hospitals being acquired, combining together, I see a real bias to action or decision making on the part of hospital executives. And sometimes the biggest impediment to moving along in your dealmaking process is just trying to work with hospitals, to work through their decision-making process, which sometimes can be a little slow. Frankly, what I'm saying is that now, together with Mike and in front of some of our customers, and we'll be doing this a lot more over the coming months, as I see a real bias to action because there's a sense in the industry that ACA is now in implementation mode. Hospitals are positioning themselves, the time of cogitating about it, as a hospital executive over, is over, it's time to take action. And that encourages me greatly, because I think that will help our sales cycle as we go forward and try to reposition and transform the company in the way we have described.

[Unknown Analyst:]

And then a couple of quick ones. Howard, is there a leverage ratio that you ultimately want to get down to? And then secondly, on the CapEx, is the reduction as a result of the cancellation, or is it just something that's being pushed out to 2014?

[Howard K. Aihara:]

The answer to your first question is related to our leverage ratios, we generate a lot of free cash flow and strengthen, or continue to strengthen our balance sheet which allows us options. And one of the things that we'll do is to continue to look to lower our leverage ratio, and so I'll tell you, I'd really like to get it under 3x. We want to get there. So that's I think, one of our possibilities and targets going forward. In terms of CapEx, now generally, to any delays in projects, CapEx just varies from quarter-to-quarter and year-to-year. And I guess, as I mentioned, and one of the other answers we had to the other question, it's possible that some of the CapEx will go into 2014. So it may be timing related. But we'll have to see. We'll give you further thoughts around our CapEx range for next year on our year-end earnings call here in March.

[Operator:]

Your next question comes from the line of Quinton Mathews with QKM LLC.

[Quinton Mathews:]

Question on -- Howard, on the same-store sales comp growth. How do we look at that in regards to declining hospital volumes, is that something that is specific to your hospitals or to radiation in general, where those volumes weren't decreasing, or is it something that you guys are doing you feel to drive volumes in your particular departments of the hospital?

[Howard K. Aihara:]

In terms of our same-store growth, we saw positive growth in both MRI and PET/CT for the third quarter, and if you took a look at the number we published for the first 3 quarters of the year, you saw that we started off a bit slowly and that was true across the entire spectrum of healthcare. First quarter was extremely weak. And the second quarter was essentially slightly positive, as the hospital sector was, I think, was up 0.5% and the third quarter kind of flattened out across the entire hospital sector. We are working very hard and have spent a great deal of resources. In terms of our physician facing sales group, our marketing group, and we continue to work and target our referring physician base to generate more referrals, and we're starting -- we started to make some progress. And I think we're starting to see that, but I think that, really, we're going to see more of that, it's going to be in the future, as we gain traction. So that's the -- some commentary around our same-store growth, and we look forward to reporting that in the future as well every quarter.

[Percy C. Tomlinson:]

This is Tom, I'd like to just -- let me add a couple of comments related to Howard's response. One of the things that I have been really positively impressed by since coming on board is at the new leadership we brought into the referring physician facing sales team, and the work that's gone on in that area over the last 6 to 9 months. I think we're well down the path of fielding a, A-caliber sales team in that specific segment of the business. And as I look at the results we've seen over the last couple of quarters and the progress we've made there, I think it's clear evidence that those efforts that have been applied there are getting traction. So I think Howard's response is right on target.

[Quinton Mathews:]

Okay and so, I mean, as -- you guys are, I mean, it is what it appears that the industry volumes for the quarter were flat, and you guys were beating them. And I realize now, I just think that would be a very strong selling point as you guys are going in, driving volumes above industry averages. That's correct, correct?

[Percy C. Tomlinson:]

That's our goal.

[Quinton Mathews:]

Okay. On the -- there is a little more conversation in the prepared remarks on the idea of this kind of, moving to a consulting phase. Is that an indication that you guys are getting to a point where it's going to be a little more of a standalone revenue generator, or is it -- am I reading too much into that?

[Percy C. Tomlinson:]

I would say you're probably ahead of where we are. We think the consultative segment of the business is a great opportunity. We think it also, perhaps more importantly in the near to medium term, serves as a way to further and more deeply engage with our customers, to be able to transform our radiology business to where less of it is interim and contract, and more of it looks like this relationship that we've talked about with Emory, where we're a long-term, closely aligned partner, running an outpatient radiology strategy for a hospital or a hospital system. We think these consultative services are the intellectual capital that underpins that transformation strategy. So it's a combination of consultative and doing that in order to transform our radiology business into a broad radiology service line partner for hospitals.

[Operator:]

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

[Miles L. Highsmith:]

I think it was Larry or Tom earlier in the call, indicated the thought that there would be some incremental imaging utilization within the hospital, as we move into 2014 and understand that utilization can increase in connection with ACA. I'm wondering if there's anything you've contemplated that could mitigate that along the lines of, will patients or other constituencies, possibly look to lesser expensive settings for imaging outside of the hospital, and can that mitigate some of that utilization increase in '14 and the coming years, or is that too difficult to pin down? Just any general thoughts, I'd appreciate it.

[Percy C. Tomlinson:]

We've seen in the industry for quite some number of years now, an effect as you described, that has resulted from the transition to high deductible HSA-based healthcare plans, generally within employer-sponsored plans, as well as those that are privately purchased. So that's not a new dynamic, that's been happening in the industry for 8 to 10 years. Some survey work that I've seen in the last few years would say that for radiology, up to 50% of the patients that come to a radiology service are either the sole determiners of where they go for that service, or are highly involved in that decision making, which means price is one of the factors. So I think there has been a long-term trend. I don't think that's something that's going to be a sudden shift or something new. Do I think it's going to have some effect or continue to have some effect, as it has over the last 5 to 10 years? Certainly. In my own judgment, do I think it can offset the increase of covered lives that it will be denominated in the millions over the next several years? No, I don't think it's going to overwhelm that. Certainly, I think the hospital sector is well-positioned, and because they are and we're aligned with them, I think we're well-positioned for what's coming down the path with ACA.

[Operator:]

There are no further questions.

[Percy C. Tomlinson:]

Well, everybody, I want to tell you again, we appreciate very much the time you take to come listen to our call. We look forward to further discussions when we come back again in another quarter, and give you a full year report and an outlook for 2014. Thank you very much.

[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 disconnect now.