Alliance HealthCare Services, Inc. Q4 2008 Earnings Call Transcript

| About: Alliance Healthcare (AIQ)

Alliance HealthCare Services, Inc. (NYSE:AIQ)

Q4 2008 Earnings Call

March 6, 2009 8:30 am ET

Executives

Eli Glovinsky - Executive Vice President, General Counsel and Secretary

Paul Viviano - Chairman of the Board and Chief Executive Officer

Howard Aihara - Executive Vice President and Chief Financial Officer

Analysts

Kevin Ellich – RBC Capital

Mark Arnold – Piper Jaffray

Whit Mayo – Robert W. Baird

Darren Lehrich – Deutsche Bank

Rob Mains – Morgan Keegan

Kyle Smith – Jefferies

[Paul Cowell] – Columbus Nova

Eli Glovinsky

Welcome ladies and gentlemen, to Alliance Healthcare Services Fourth Quarter and Full Year 2008 Earnings Conference Call. My name is Eli Glovinsky and I am the company's Executive Vice President, General Counsel and Secretary.

At this time I would like to inform you that this conference is being recorded for rebroadcast and that all lines have been placed on mute to prevent any background noise. We will open the conference up for questions and answers after the presentation.

This conference call contains forward looking statements which are based on the company's current expectations, forecasts, and assumptions. 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 include factors affecting the company's ability to stabilize its core MRI business and grow revenue and profits from PET/CT fixed-site imaging centers and radiation therapy, the company's leverage including fluctuations in interest rates, the company's ability to obtain financing, the effect of operating and financial restrictions on the company's debt instruments, the accuracy of the company's estimates regarding capital requirements, the effect of intense levels of competition in the company's industry, the effect of global and US economic conditions, changes in the healthcare, regulatory, and reimbursement environment, the company's ability to keep pace with technological development within the industry, the effect of higher energy prices, the company's ability to integrate acquisitions, the effect of natural disasters, and other risks and uncertainties, including both enumerated and described in the company's filings with the Securities and Exchange Commission, which are available on the SEC website at www.sec.gov.

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 and the company's 2009 guidance release, along with the information required by the SEC's Regulation G, may be accessed through the Financial Releases button in the Investor Relations section of the company's website located at www.AllianceHealthCareServices-US.com.

The company is offering a live webcast of today's call, which can be accessed on the company's website. Please visit our website for replay information.

I will now turn the conference over to Paul Viviano, Chairman of the Board and Chief Executive Officer of Alliance HealthCare Services.

Paul Viviano

I would like to welcome you to Alliance HealthCare Services Fourth Quarter and Full Year 2008 Earnings Call. With me today is Howard Aihara, our Executive Vice President and Chief Financial Officer. On today's call I will first review our strong 2008 results and achievements, followed by an update on trends in the healthcare services industry and a discussion of the diagnostic imaging and radiation therapy sectors. Howard will follow with the details of our fourth quarter and full year 2008 financial results. As is our practice we will accept questions after our prepared remarks.

Alliance’s performance in 2008 reflects the accomplishments of our many operational and strategic initiatives as well as the continued success of our acquisition efforts. Two thousand eight was a year of many accomplishments for Alliance and our focused and diligent efforts contributed to Alliance’s performance and growth for the year.

We are very pleased to report 2008 revenue of $496 million and adjusted EBITDA of $183 million both of which were at the high end of the company’s guidance ranges. In 2008 revenue increased 11% over 2007 levels and adjusted EBITDA increased by 10% over 2007 levels. We also generated significant operating cash flow of $128 million for 2008 an increase of $10 million over 2007.

Our most notable achievements include successfully completing the acquisition and integration of three significant transactions including six cyber knife stereotactic radiosurgery facilities and two PET/CT companies, medical outsourcing services and shared PET imaging, opening 21 fixed-site imaging centers including 12 in the fourth quarter and three radiation therapy cancer centers, continued strong organic volume growth in our PET/CT business and continued focus on operational efficiency to maintain our mobile MRI operating margins.

Combine these factors allowed us to meet expectations in 2008 and despite challenging economic times, position Alliance for continued revenue and adjusted EBITDA growth in 2009. Given this we are pleased to reaffirm our full year 2009 guidance ranges. With over $70 million of cash on hand at the end of 2008 access to an additional $50 million under our current revolving line of credit and continued strong operating cash flows we are well positioned to execute our strategic and operational plans including acquisitions without the need to access credit markets.

In light of the continued volatility of the US credit markets Alliance is in a favorable position to capitalize on opportunities to work with hospitals and other clinical partners who have been negatively impacted as they deal with significant capital constraints, higher borrowing costs and substantial investment portfolio defines.

The American Hospital Association recently surveyed over 600 hospitals CEOs to assess the impact of the current economic climate on hospitals and found that most US hospitals are experiencing significant capital constraints and as a result are canceling or delaying previously planned capital projects. Specifically, the AHA report noted that nine out of 10 hospitals reported that it was difficult to access tax exempt bond markets and other important sources of financing and an equal number of hospitals also reported significant declines in charitable giving as a result of the decline in world wide equity markets.

As a result of hospital funding and operating performance declines the AHA found that nearly half of the responding hospitals have put capital projects on hold and many have even stopped projects already underway. Of those suspended projects 58% relate to or involve some outpatient diagnostic service. Confirming the overall findings of the AHA survey another recent hospital report has estimated that hospital capital expenditures will likely decline between 20% to 40% during 2009.

Further illustrating the economy’s impact on hospital performance, a Thomson Reuters report released this week included that roughly half of the nations hospitals operated at a loss in the third quarter of 2008 with a median total margin falling to near zero. Commenting on the findings, Thomson Reuters Chief Healthcare Research Officer notes that hospitals may face increased economic stress in the short term as the financial climate could get worse before it gets better leading to additional bed closures, mass layoffs, a shifting payer mix and declining volumes for elective procedures.

In addition, the capital market disruption the current economic climate is also placing strain on hospitals in the form of increased margin pressure largely driven by steep declines in investment portfolios, rising levels of uncompensated care and patient bad debt and overall lower volume and admission rates.

Adding to these economic pressures are growing physician demands for greater financial support from their hospital partners, growing state unemployment levels and related increases in Medicaid patient populations and healthcare reimbursement pressures associated with attempts by several states to bridge significant budget deficits related to declining tax revenues and increased unemployment benefit expenditures.

All of these factors will have a negative impact on hospital performance over the short to mid term and Alliance will continue to be proactive in our efforts to meet hospital needs and relieve these capital constraints and operating margin pressures. We believe we are the solution to provide assistance to hospitals in need of capital and management resources related to capital intensive radiation therapy and diagnostic imaging projects.

Due in part to these pressures, our current pipeline for radiation therapy centers, fixed-site imaging centers and PET/CT projects remain strong. For many of the same reasons our pipeline for acquisitions in radiation therapy and diagnostic imaging is also robust and we remain fiscally diligent in our efforts to pursue only opportunities which are strategically and economically attractive for Alliance.

Notwithstanding the opportunities which exist for Alliance today as a result of the difficult economic environment facing the US we are mindful of the additional challenges in the near term economic outlook including lack of consumer confidence, stock market declines and reduced access to the credit markets which may have a negative impact on Alliance’s partners and clients.

These factors therefore may also impact our revenue, EBITDA and operating margins. While our strong balance sheet will allow Alliance to withstand such potential pressures in the long run we are nonetheless vigilant in our continued efforts to reduce business costs, increase operating efficiencies and maintain a highly disciplined approach to acquisitions so that we can focus on growth businesses which provide an opportunity for attractive financial returns and cash flow generation and meet our strategic criteria.

Shifting to healthcare legislation and regulation we continue to lead industry efforts to participate in implementation of the national healthcare agenda in Washington DC as it relates to our industry. In November CMS released the final 2009 Medicare Physician Fee Schedule. In terms of reimbursement for 2009 for Alliance the average MRI reimbursement rate increased 1.5% over 2008 rates while the average PET/CT reimbursement rate decreased 1.9% over 2008 rates.

Regarding radiation therapy the blended average Medicare reimbursement rate decreased 2.4% and the cyber knife rate decreased 1.6%. The net impact to these changes is not expected to have a material impact to Alliance given the wholesale nature of our business which partially insulates us from such changes.

As discussed on previous calls MedPAC the Congressional Medicare Advisory Panel has recommended that Medicare’s formula for non-hospital MRI, CT and PET/CT reimbursement be modified to increase the equipment use factor from 50% to 90%. In late February, MedPAC released its 2009 Medicare report which included this previously announced recommendation.

In its 2009 report MedPAC acknowledged that there was no empirical evidence regarding the actual use of high cost diagnostic equipment nor had it conducted any broad based study to support its recommendation. Surprisingly it appears that MedPAC has based its recommendation on a survey limited to six urban imaging practices which are not at all reflective of the myriad of provider and territorial demographics necessary to draw such conclusions.

For this reason we will continue to lobby strongly against this change and push MedPAC to gather empirical evidence to support its recommended changes. Similar proposals by MedPAC have been introduced in the previous two years without being implemented by Congress or CMS.

It is important to note that the proposed use factor as estimated by MedPAC would reduce non-hospital outpatient imaging reimbursement by approximately 8%. However, this reduction is limited by reimbursement caps imposed under the deficit reduction act of 2006 which could substantially reduce or mitigate the negative impact on reimbursement.

Additionally, given our relatively small retail Medicare payer mix which comprises only 5% of our total revenue, this proposal would have only a slightly negative impact on our performance should these changes be incorporated in future legislation.

Last week, President Obama’s 2010 budget proposal was released including proposed changes for a number of major Medicare cost reimbursement reductions particularly in the area of Medicare Advantage programs. In terms of imaging, the budget proposal is limited to a call for radiology benefit management for high cost advanced imaging studies which is forecast to generate only $70 million of savings over five years and only $260 million of savings over 10 years.

While we will lobby in opposition to Medicare Radiology benefit management and the care rationing practices of many radiology benefit managers the limited nature of these savings forecasts suggests that radiology benefit management efforts will not be a major priority in the near term. Additionally, we believe that there are significant operational and legislative challenges related to the adoption of RVMs which will limited the near term impact of the proposal outlined in President Obama’s 2010 budget.

We do not believe that the budget proposal contains other provisions which will materially impact Alliance’s imaging or oncology businesses. We will continue our aggressive advocacy efforts in concert with other imaging and radiation oncology providers to oppose additional reimbursement reductions. We have begun to formulate and advocacy strategy to promote congressional opposition to the budget proposal.

As part of this strategy the alliance for quality imaging has decided to join the access to medical imaging coalition a broad based group of equipment manufacturers, imaging providers and clinical trade associations formed to advocate against further imaging cuts. Through these avenues we will continue to be an active participant in lobbying efforts to endorse the benefits of the diagnostic imaging sector.

Turning to current market conditions, the economy continues to be under significant pressure in the US short to mid term economic outlook is challenging. Rising unemployment rates could negatively impact our volumes as the population of uninsured and underinsured potentially increases. Additionally, the rising cost of healthcare will likely cause an increase in employee cost sharing with higher co-payments and deductibles for consumers.

As patients struggle to pay basic living expenses the portion of our clinical services which are more elective in nature, could be negatively impacted in the future. More specifically, we do not expect the PET/CT or radiation therapy volumes to be materially impacted. However, MRI studies related to elective procedures such as certain orthopedic surgeries could be postponed or not scheduled at all, this potentially impacting our volumes and revenues.

Although our volume run rates have remained steady we have seen some anecdotal reports that such factors may be impacting current hospital admission rates. Further, the healthcare services industry continues to experience pressure due to health plan initiatives to control utilization including prior authorization programs.

These factors contributed to reported weakness in same store admission volumes of less then 1% in the acute care hospital sector during 2008. For full year 2009 we expect these trends to continue and that hospital admissions will continue to reflect very low to negative rates of growth.

Despite the many challenges in the healthcare services sector Alliance continues to deliver strong financial results and distinguishes itself in the market by our commitment to partnering with hospitals and healthcare systems. We believe the joint success of our hospital partners and alliance is the key to our company’s performance.

Toward that end, we are focused on operating our core imaging business efficiently and generating strong cash flow. Alliance generated free cash flow of $50 million for full year 2008 and expects to generate free cash flow of $52 to $67 million for 2009. We will also continue to pursue our four strategic initiatives; development of radiation oncology centers, development of the fixed-site imaging centers, expansion of mobile and PET/CT services and acquisition of businesses which meet our strategic and financial objectives.

The goal of these strategies is to generate return on capital, generate significant free cash flow and increase our diagnostic imaging market share while at the same time diversifying our clinical service line offerings by expanding Alliance Oncology.

Contributing to the diversity of Alliance’s revenue stream, our PET/CT business continues to grow significantly. Alliance is reported to be largest provider of PET/CT services in the nation and our recent additions of both medical outsourcing services and shared PET imaging has expanded the depth and quality of our PET/CT service and provides us with resources to further expand our leadership in this clinical service.

Our fixed-site imaging center development is similarly impressive as we opened 12 new de novo fixed-site imaging centers in the fourth quarter and 21 fixed sites for the full year 2008 and operated 105 fixed-site imaging centers at the end of 2008. We expect to open 20 to 25 fixed-site imaging centers in 2009.

The initial stage of Alliance’s expansion into the radiation therapy market has been executed successfully as well. During 2008 we opened three radiation therapy centers and we operated 21 radiation therapy centers including six dedicated stereotactic radio surgery facilities as of December 31, 2008. We are pleased with our efforts to aggressively enter the stereo tactic radio surgery market which is the fasted growing sector in radiation therapy.

Our de novo centers and acquisitions have given us confidence in operating this business and represent a strong start towards achieving our oncology related growth strategies. The strength, focus and dedication of our Alliance Oncology team will enable us to expand our reach in the radiation oncology space. For 2009 we expect to open between four to six radiation therapy centers.

The Alliance leadership team will continue to refine our initiatives as we respond to opportunities and strive to meet the needs of hospital customers and partners. We are focused on operating our core imaging business efficiently and delivering strong operating results. We also continue to expect volume growth in PET/CT, to offset the pricing pressures placed on this segment of our business.

We are committed to clinical excellence, quality patient care and customer service and continue to work hard to deliver this standard of care in a cost effective manner. The continued focus on these initiatives will enable us to sustain our many successes throughout 2009 illustrated by the increased guidance ranges in 2009 over 2008.

Lastly I would like to discuss our recent announcement of our company name change to Alliance HealthCare Services. This change reflects the continued progress of our strategic plan to expand the clinical services we offer to our hospital and physician partners. Under the umbrella of Alliance HealthCare Services our dedicated team members will continue to provide outstanding clinical care through Alliance Imaging and Alliance Oncology divisions.

Additionally, we will continue to investigate other attractive services to provide our network over 1,000 hospital customers and partners. We are thrilled with this change and are excited about the direction Alliance is headed.

I will now turn the call over to Howard.

Howard Aihara

Yesterday Alliance reported fourth quarter and full year 2008 results. Alliance’s results were at the high end of the company’s full year 2008 revenue and adjusted EBITDA guidance ranges. Alliance’s full year 2008 revenue totaled $495.8 million which was at the high end of our guidance range of $486 to $96 million. Alliance’s full year 2008 adjusted EBITDA totaled $182.6 million which was also at the high end of our guidance range of $174 to $184 million. Alliance’s fourth quarter 2008 adjusted EBITDA margin increased to 35.4% compared to 34.9% in the fourth quarter 2007.

For full year 2008 revenue increased 11% to $495.8 million compared to $444.9 million a year ago. Alliance’s full year 2008 adjusted EBITDA increased 10% to $182.6 million compared to $165.6 million in 2007. Included in 2007 adjusted EBITDA were one time gains totaling $2.5 million related to a sale lease back transaction and a real estate sale. On a pro forma basis adjusted EBITDA was $182.6 million in 2008 or 36.8% of revenue compared to $163.1 million or 36.7% of revenue.

In the fourth quarter revenue totaled $125.8 million up $12.2 million or 11% from the fourth quarter 2007. Adjusted EBITDA in the fourth quarter 2008 increased 12% to $44.5 million compared to $39.7 million in the same quarter 2007.

PET/CT revenue increased 28% to $45.9 million in the fourth quarter of 2008 compared to $35.8 million last year. In the fourth quarter of 2008 PET/CT scan volume increased 31% to 39,500 scans from 30,100 scans a year ago. The average price per PET/CT scan has decreased 2% to $1,154 in the fourth quarter 2008 from $1,176 in the same quarter last year. PET/CT scans per system per day were six in the fourth quarter 2008 compared to 6.1 a year ago.

MRI revenue in the fourth quarter decreased 3.4% to $64.8 million compared to $67.1 million in the same quarter of 2007. The company increased the average number of scan based MRI system to 255 systems from 249 systems a year ago. Total scan based MRI volume was 151,000 scans in the fourth quarter of 2008 compared to 159,000 scans in the fourth quarter 2007. Scans per system per day were 9.1 in the fourth quarter of 2008 compared to 9.3 in the same quarter a year ago. Alliance’s average MRI price per scan was $382 compared to $373 in the same quarter of 2007.

Revenue from Alliance’s fixed-site imaging centers increased 23% to $27.4 million in the fourth quarter 2008 from $22.2 million a year ago. Alliance opened 12 fixed-site imaging centers in the fourth quarter. As Paul mentioned earlier we are pleased with our growth in fixed-site imaging centers and the revenue for our fixed sites.

For the first time in 2008 our annual fixed-site revenue exceeded $100 million totaling $102.7 million for the full year 2008. We also surpassed 100 fixed-site imaging centers for the first time finishing with a total of 105 fixed-sites at year end. As previously noted four of these sites in unconsolidated joint ventures.

In terms of our oncology development, Alliance opened three radiation oncology centers in the fourth quarter 2008 and as of year end Alliance operated a total of 21 radiation therapy centers and stereotactic radiosurgery facilities including two radiation therapy centers which are in unconsolidated joint ventures.

Depreciation expense totaled $22.8 million in the fourth quarter 2008 compared to $20.7 million last year. Amortization expense increased to $2.5 million in the fourth quarter of 2008 compared to $1.7 million in the fourth quarter of 2007. This increase was primarily due to increased amortization expense of intangible assets related to acquisitions completed in the last 12 months.

Alliance’s net interest expense was $14.6 million in the fourth quarter of 2008 compared to $11.9 million in the fourth quarter of 2007. This increase over prior year was primarily related to incremental interest expense associated with the company’s $150 million senior subordinated note offering completed in the fourth quarter of 2007 partially offset by lower interest rates related to Alliance’s term loan facility. Also included in the fourth quarter 2008 interest expense was a negative impact of a charge for a fair value adjustment of the Lehman Brothers interest rate swap totaling $3.1 million.

On a pro forma basis diluted EPS was $0.07 per share in the fourth quarter 2008 before a $0.04 per share reduction associated with the fair value adjustment for the Lehman Brothers interest rate swap compared to $0.04 in the fourth quarter 2007. As reported, diluted EPS for the fourth quarter 2008 was $0.03 per share.

For the full year 2008 pro forma diluted EPS totaled $0.35 per share before a $0.03 per share reduction associated with the fair value adjustment for the Lehman Brothers rate swap compared to pro forma diluted EPS of $0.29 per share before a $0.02 per share increase associated with one time gains on a sales lease back transaction and real estate sale for whole year 2007. As reported, diluted EPS was $0.32 per share compared to $0.31 per share a year ago.

Weighted average diluted shares outstanding for full year 2008 were 52.2 million shares. In 2008 Alliance generated $128.1 million in cash flow from operating activities compared to $118 million in 2007. Day sales outstanding on accounts receivable were 49 days at year end 2008 versus 48 days at year end 2007. Cash income taxes paid totaled $6.2 million in 2008 compared to $4.4 million in 2007. Cash capital expenditures total $66.2 million in 2008 compared to $65.3 million a year ago.

The company generated significant free cash flow in 2008. Free cash flow is defined as a change in net debt before investments and acquisitions totaled $49.6 million in 2008 at the high end of our full year guidance range of $40 to $50 million. Alliance’s total long term debt decreased $8.2 million to $662.6 million at year end from $670.8 million at December 31, 2007. Alliance’s net debt defined as total debt less cash and cash equivalents was $589.3 million at December 31, 2008, and $549.9 million at year end 2007.

Cash and cash equivalents totaled $73.3 million at December 2008 and $120.9 million at December 2007. We have $55 million available to us under our revolving line of credit agreement of which $5 million of layers of credit are outstanding including the $50 million currently available to us under our revolver Alliance had total liquidity of approximately $123 million at the end of December. We currently have no plans to draw on our line of credit.

In the first quarter 2008 the company entered into interest rate swap agreements to hedge the future cash interest payments on approximately $185 million Alliance’s variable rate bank debt. The counterparty in one of these swaps covering $93 million of the company’s debt was Lehman Brothers. As a result of the bankruptcy of Lehman Brothers Alliance recognized the change in fair value of this swap through interest expense throughout the remaining months of 2008. We were able to enter into a new swap agreement with a different counterparty in February 2009 with substantially the same terms and conditions.

Additionally, in the first quarter of 2009 the company entered into an interest rate swap agreement to hedge the future cash interest payments on approximately $57 million of Alliance’s variable rate bank debt. This agreement will be in place until November 2011. Under this arrangement the company receives three month Libor and pays a fixed rate of 2.07%.

If these hedging transactions were effective as of year end Alliance’s fixed rate debt would total approximately $554 million or 83% of the company’s total debt with approximately $109 million or 17% subject to variable interest rates.

Alliance’s net leverage ratio defined as net debt divided by LTM adjusted EBITDA was 3.0 times in 2008 compared to 3.1 times a year ago. The company’s total leverage ratio defined as total debt divided by LTM adjusted EBITDA was 3.4 and 3.7 times the years ended December 2008 and 2007. As of year end, Alliance had $24.3 million of Federal net operating loss carry forwards and $3.7 million of state NOL carry forwards to utilize in future years.

Also in the first quarter of 2009 the company entered into a diesel fuel swap agreement which hedges diesel fuel prices as determined by the national average price reported by the US Department of Energy. Under this agreement the company will pay a fixed price of $2.63 per gallon on 84,000 gallons of diesel fuel per month for a 12 month period. This arrangement will allow the company to stabilize fluctuations in diesel fuel costs whether next year due to the unpredictability of the US economy and world events.

Moving forward into 2009 I will now reaffirm our full year 2009 guidance. Alliance expects revenue to range from $536 to $551 million in 2009. Adjusted EBITDA for full year 2009 is expected to range from $187 to $202 million. Our implied adjusted EBITDA margin as a percentage of revenue is 35% to 37%.

Cash capital expenditures are expected to range from $60 to $70 million. Alliance expects to open 20 to 25 fixed-site imaging centers and four to six radiation oncology centers in 2009. Our full year income tax rate is expected to total approximately 42% to 43% of pre-tax income. Alliance’s free cash flow guidance is in the range of $52 to $67 million. Diluted weighted average shares outstanding are expected to total approximately 53 million shares.

Thank you for your interest in Alliance. I will now turn the call back over to Paul.

Paul Viviano

Alliance is well positioned given its experienced management team, significant liquidity, strong margins, established record of successful operations, successful acquisition and integration track record and national infrastructure. Additionally, Alliance has a strong track record of implementing strategic initiatives including adding new clinical services such as PET/CT and fixed-site imaging centers. This track record has given us confidence in our ability to establish new clinical services successfully and we intend to use this experience to develop a national platform of radiation oncology centers.

Our goal is to be the partner of choice for healthcare providers to meet their outpatient imaging and radiation therapy needs. Alliance is committed to providing a compelling value proposition to our partners. During this difficult era, Alliance is uniquely positioned to work with hospitals in need of a solid partner. Given our unwavering commitment to clinical excellence, quality patient care and customer service we believe we are in ideal solution to hospitals that face the challenges of today’s economy.

We will continue to operate our core imaging business in a highly efficient manner. Further consistent with our strategy we will continue to focus on investing in the development of radiation therapy centers, developing de novo fixed-site imaging centers, expanding our PET/CT business and proactively evaluating selective acquisitions.

Thank you for your interest in Alliance and we look forward to answering your questions. I will now return the call to the operator to begin the question and answer session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Kevin Ellich – RBC Capital

Kevin Ellich – RBC Capital

Can you talk about what type of economic impact you’re seeing on the business? Obviously volumes seem like they’re holding up. What have you baked into your guidance and what type of correlation do you see between hospital admissions and the scan volumes.

Paul Viviano

As we indicated in the script and as reflected in our fourth quarter numbers our volume run rates continue to be steady and consistent with prior periods and we’ve not seen, as we indicated our full year 2009 guidance call we’ve not seen the impact in our volumes as of yet other then the natural cycles and seasonality of our business.

Traditionally we’ve seen our volumes track consistently with hospital volumes. We saw in 2008 our volumes track at higher growth rates then hospital admission rates. We expect that we’ll likely continue for the short term as we indicated also in our prepared comments we are mindful that the economy is full of challenges and future challenges may impact those volume rates of growth adversely at this point in time we’ve not seen evidence that that’s occurring in our business.

Kevin Ellich – RBC Capital

On the acquisition front are you guys seeing any change in the valuations of the deals that you’re looking at and has the landscape become more competitive?

Paul Viviano

The landscape is actually becoming less competitive from our perspective. We do see a lot of pressures in the imaging industry so to the extent that you wanted to pursue acquisitions of fixed-sites in non-protected markets, non-CON markets the prices and the valuation expectations of those sellers have diminished. That’s not a strategy that we’re currently pursuing, that’s not consistent with our acquisition strategy that we’ve articulated over the last year and a half or so.

We do continue to focus on acquisitions of fixed-site imaging centers specifically in CON states, SCT providers and radiation oncology providers as well. We’ve seen the seller’s valuation expectations in radiation oncology be relatively steady over the last year or so. We’ve seen PET/CT valuation expectations, seller’s expectation slightly diminish and again in non-CON fixed-site states we’ve seen those valuations diminish rather dramatically but that’s not something that we’re currently pursuing.

Kevin Ellich – RBC Capital

On the retail side of the business I’m wondering what the reimbursement environment is like and how the negotiations with commercial payers have been trending, have you seen any change on that front?

Howard Aihara

We have not seen significant changes in the retail pricing in terms of commercial payers. The contractor rates that we’re seeing have been very consistent and been very steady in MRI and PET/CT and in radiation oncology across all of our service lines. We’ve seen a very steady environment.

Kevin Ellich – RBC Capital

I was wondering if you guys could give us an update on the mobile oncology or if there is an update on that?

Paul Viviano

There currently is no update. We continue to work to help develop and design a mobile radiation therapy unit that could be transportable. We anticipate more news as the year unfolds. At this time we have no update.

Operator

Your next question comes from Mark Arnold – Piper Jaffray

Mark Arnold – Piper Jaffray

One question about the economy and the economic impact or potential impact you guys talked about. Can you clarify when you talk about historically you’ve looked at growth in your business tracking fairly closely with inpatient admissions at your hospital customers. Can you clarify what percentage of your imaging scans that you provide to your hospital customers are actually on inpatient versus outpatient?

Paul Viviano

Our experience would track the national averages. By that I would suggest that the vast majority of MRI is probably in the 80% to 85% range are in fact outpatient whether they’re scheduled through the hospital or through a free standing imaging center. Our experience given the size of our organization and the breadth of it we would reflect those same national averages, so 80% to 85% of all MRIs performed in the US are outpatient and a much higher percentage of SET scans are done on an outpatient basis probably in the magnitude of 95%.

Mark Arnold – Piper Jaffray

Some portion of that remaining 15% or so is also coming from the ER.

Paul Viviano

ER, ICU other areas within the hospital inpatient clinical services that’d be correct.

Mark Arnold – Piper Jaffray

On MRI are you seeing any change in hospital customers views about mobile MRI services particularly here in the past few months?

Paul Viviano

Our thesis is that given the economic pressures on hospitals that we will expect to see some improvement in our lost customer metric as hospitals face uncertainty whether they will build a fixed-site and a partnership with us or whether they elect to do it on their own we expect to see more extensions and renewals that’s a conceptual thesis at this point in time. We hope it’s true for the remainder of 2009.

We’re starting to see signs that that is in fact the case but it’s a little premature to say it’s an actual trend. We would expect that given all the circumstances we described in the hospital arena. We also see, as was reflected in our numbers, record numbers of new fixed-site being constructed by us in partnership with hospitals the vast majority of which are conversion from mobile customers both these trends are positive for our business.

Mark Arnold – Piper Jaffray

PET/CT scans per system per day dropped off a bit more then I had modeled and I assume some of that is because the number of implied days of service actually increased sequentially in the fourth quarter. Can you talk about what impact the shared PET acquisition and the timing of it in December might have had on that scans per system per day metric.

Howard Aihara

The fourth quarter traditionally has been, we experience some seasonality in all of our services line especially in our imaging business, MRI and PET/CT, that’s part of the reason is seasonality especially related around the holidays that caused a little bit of the reduction in scans per system per day. The shared PET acquisition which we closed in December has also had some impact on both the scans per day and pricing as well as they operated slightly less then our average PET/CT scans per system per day.

Also the fact that shared PET was largely a wholesale business under wholesale arrangements rather then retail so that caused a little bit of a reduction in sequentially in our PET/CT pricing as well.

Mark Arnold – Piper Jaffray

When I think about shared PET I assume December is the weakest month in the fourth quarter for volumes because of the holidays. Did the timing of that deal happening in December disproportionately weight your results toward the December quarter and did that have a significant impact on that scans per system per day number?

Howard Aihara

Yes, I think that’s correct that it did cause part of the reduction in the scans per system per day.

Mark Arnold – Piper Jaffray

In January CMS proposed a national coverage determination for PET/CT, can you talk a little bit about what that means or could mean for Alliance in the future?

Paul Viviano

Our lobbying efforts on an industry wide basis took place over several years to get this national determination decision made. On the balance this will impact on PET scan volumes positively, we don’t expect it to have a material impact in 2009; I think there’s still a lot of bureaucracy and administrative design ahead of CMS and providers to accommodate getting used to these new determination standards.

On the balance it’s positive for the industry. We’ll gather some data in 2009 both on an industry wide basis as well as a company specific basis and we’ll bake it into our outlook in 2009. On the balance positive, we think it will have a positive effect on our specific company volumes in 2010 and going forward.

Mark Arnold – Piper Jaffray

Also in January you received CON approval to acquire a small cancer center in North Carolina. Can you confirm if that acquisition actually closed?

Howard Aihara

That acquisition actually has not closed at this point but we expect it to close sometime in the first half of this year.

Operator

Your next question comes from Whit Mayo – Robert W. Baird

Whit Mayo – Robert W. Baird

Back to the development activity in the quarter, we heard that SPI closed towards the end of the quarter but can you walk us through the timing of the opening of some of the other fixed-sites specifically the three radiation oncology centers?

Paul Viviano

Relative to the radiation oncology center opening they happened at the very end of the month of December so they had no material impact in the quarter’s performance at all.

Whit Mayo – Robert W. Baird

I’ve got to believe that with those opening up towards the end of the quarter and you’ve got another three to five at minimum right now that you’re working on just based on your guidance. Presumably there’s got to be a good amount of pre-opening expenses that you incurred within the quarter that’s got to go away at some point. Any sense about a number around that to think about?

Howard Aihara

We don’t talk specifically about specific center openings. However, there was a drag in the fourth quarter to your point in terms of pre-opening costs. Typically when you start up a radiation oncology center you experience two to three months of start up expenses associated with those as you hire staff and train and prepare the center for opening all of which gets charged to the P&L.

Those expenses did flow through the fourth quarter and as Paul stated since they opened very late in December there really was very little revenue associated with any of those centers. We’ll start to see the full impact of their operations starting in January.

Whit Mayo – Robert W. Baird

Along the same lines with the AO development the D&A stepped up in the quarter I heard you earlier talk about some of the purchase price accounting. Any good idea of a run rate going forward into ’09 it looks like maybe $103 plus may be a good number but can you confirm that?

Howard Aihara

Ballpark I think that’s a nice run rate to start with. When we report our first quarter numbers shortly probably in about another six to eight weeks you’ll see the full impact of the new centers as well as the depreciation and amortization related to the acquisition of shared PET in the fourth quarter that will flow through the first. That’s a good approximate number to start with.

Whit Mayo – Robert W. Baird

As I look at First Call EPS estimates for you guys just looking at and examining your capital structure at this point and squaring that versus your strategy it doesn’t make a lot of sense to me that you guys would be focused on paying down a lot of debt right now that you’ll never get back. When you guys actually guide to net debt reduction of let’s say $60 million for 2009 should we take that to really mean that you’re going to be repaying debt over the next 12 months or is that really more a better proxy for how we should think about the free cash flow generation of the company.

Howard Aihara

At this stage our cost of borrowing, our cost of debt, blended average is under 7%. We think that it’s much better to accumulate cash and invest that money in not only our core business but also, assuming that we find great acquisition opportunities, investment acquisitions. The term that we use in our earnings releases is dictated by the regulators. We’re not allowed to use the term free cash flow in our public filings. The term that we use a reduction in net debt is really another word for free cash flow.

Whit Mayo – Robert W. Baird

Thinking about the acquisitions you said you have roughly $120 million of liquidity going forward, a lot of that is cash and your total leverage ratio is three times net debt at this point. You’ve got a little bit of cushion relative to your covenants here but how should we think about your willingness to add additional leverage in this environment? Any comments you have how we should think about that number.

Howard Aihara

We have $73 million in cash as you referenced and we also expect to generate $52 to $67 million of free cash flow, even without tapping into the revolver. I would think that we would have in excess of $120 million to $130 million available cash during the year of 2009 to invest in acquisitions. To the extent that we use that cash that will obviously be de-leveraged to us on a total debt basis, to the extent that we would need to tap into our revolver that would actually probably increase leverage a bit.

At this point we think that we have enough resources on the balance sheet today as well the generation of free cash flow in ’09 and the revolver to execute on our acquisition strategy.

Whit Mayo – Robert W. Baird

Looking at the size of some of the opportunities that you have in your pipeline and looking at the current total leverage ratio should we anticipate that number to be going up, I’m trying to get at this another way?

Howard Aihara

To the extent that we use cash on the balance sheet and then free cash flow that we generate this year actually all of that would be de-levering. I would not expect to see our leverage ratio go up any significant way. In fact, the total debt to adjusted EBITDA leverage ratio may go down.

Whit Mayo – Robert W. Baird

Working days for the first quarter, January had a little impact you’ve got leap year so how should we think about as we model the first quarter and the sequence here.

Howard Aihara

The first quarter has about a 1.5 less scanning or equivalent days in the first quarter then the first quarter of last year largely due to leap year and also due to the timing of the calendar in terms of where the weekends fall. That 1.5 days represents about 2% less equivalent days in the first quarter of ’09 versus ’08.

Operator

Your next question comes from Darren Lehrich – Deutsche Bank

Darren Lehrich – Deutsche Bank

I want to go back to the client retention question and ask a numbers question there. You described the situation as being a little bit better in losing revenue on the MRI side from some of your clients stretching out contracts a little further. Can you give us a retention number or maybe just a turnover number net of those clients that are moving to fixed-site and what that was versus the prior year?

Paul Viviano

We’ve not disclosed retention rates per se of our contracted MRI customers. I do think it’s safe to say that we’re starting to see more extension, more renewals. While it’s a metric we track internally we don’t disclose it externally because it’s not the most important metric. If you recall our mobile MRI business has the tendency to lose really big customers and retain smaller less mature ones so the retention rate itself is not the most meaningful metric.

With that much said, as we entered into the fixed-site business about 5.5 years ago or so we started off with almost no conversions. We got to the point last year where approximately a third to a half of our fixed-site openings were conversions from mobile customers. We’ve seen a continued increase in that metric and at this point in time the majority of our fixed-site openings are conversions from mobile customers. Again, combined with what we anticipate and hope to see a slight improvement in our loss customer metric those are positive trends for the business.

Darren Lehrich – Deutsche Bank

I wanted to talk a little bit more about Alliance Oncology; I know you made some key hires in that business. Can you give us a sense for your capabilities in that organization at this point have you built out all the infrastructure you need to, to support that business or should we expect more bigger investment there? Maybe give us a sense for the scale of the organization how many units you think you could support given the current infrastructure.

Paul Viviano

We spend a lot of time internally with our budget for 2009 and we’ve been very cautious about adding overhead. We wanted a critical mass in the business before we added a president of the division which we did as you know late last year. We’ve added some medical leadership to help drive our clinical capabilities in that business. I’d say our infrastructure right now is sized to roughly the 21 centers that we operate.

We will expect that as we open more and as we have the opportunity we hope to add other organizations that we would acquire going forward as the growth occurs we will be adding additional infrastructure. It’s a relatively small company; we provided an outlook relative to revenue so we’re only adding overhead very cautiously as the organization grows. To answer your question, it’s not fully loaded at this point in time but we will very cautiously be adding additional infrastructure only as the business grows to offset that ability. We’ve made an investment; we’ll continue to invest in the business as it grows.

Howard Aihara

I expect to see a little bit of growth as a percentage of revenue and SG&A in ’09 compared to ’08 levels, primarily related to our investments in Alliance Oncology and building out that infrastructure.

Darren Lehrich – Deutsche Bank

Do think that some of the targets that you’re looking at can bring some of that infrastructure to you or what are your thoughts about growing the infrastructure a little bit internally ahead of where the pipeline is?

Paul Viviano

Our acquisitions at the moment fall into two kinds of targets within radiation therapy. There are some small operations one or two centers in an organization they probably wouldn’t bring much overhead like more site specific in terms of their ability to operate. There are some slightly larger targets that are in our pipeline that we’re evaluating that would bring some infrastructure or a small regional platform that could be expanded upon so we’re looking at both.

I’m not sure how exactly that will play out over the time horizon but could have some implications for the development of our infrastructure depending upon how they do work out.

Darren Lehrich – Deutsche Bank

The retail mix at year end

Howard Aihara

The wholesale retail mix of our revenue was 79% wholesale and 21% retail.

Operator

Your next question comes from Rob Mains – Morgan Keegan

Rob Mains – Morgan Keegan

The new swaps that you’ve got are those going to be treated as cash flow hedges or will we continue to see swap and effectiveness flow through the income statement?

Howard Aihara

Both the swaps that we entered into we’ll be treating as cash flows so hedges. Therefore any ineffectiveness of the swap would be recognized through the balance sheet and not the income statement.

Rob Mains – Morgan Keegan

The volume of start ups done during the fourth quarter was pretty high. Is there anything about the mix of them in terms of size or whether it’s completely new for hospital replacement, anything we should be looking at out of the ordinary in terms of how quickly they’ll ramp up either slower or faster then normal?

Howard Aihara

The vast majority of the centers that we opened in the fourth quarter were conversions of mobile customers to fixed. The ramp up of those centers actually will happen pretty quickly. We already service those customers and there is existing scan volume that we know already. It’ll grow from there but the scan volumes there’s a base there already where we don’t have to start up from scratch.

Rob Mains – Morgan Keegan

I know you don’t give mobile to fixed retention but when you look at the de novo that you’re adding this year in the past you said that a third to a half could be conversions from mobile is that still what you’re thinking.

Paul Viviano

I would expect that number to be significantly higher then that.

Rob Mains – Morgan Keegan

It would be mostly existing mobile customers?

Paul Viviano

The majority of our fixed-sites will be conversions from mobile customers, that’s correct.

Rob Mains – Morgan Keegan

If you were to stop and do no more acquisitions de novo for a year because I now that everyone’s going to be a little bit different in terms of how it affects your numbers. What kind of growth rate do you think we would expect to see on that scans per day metric?

Paul Viviano

Scans per day for PET or MRI?

Rob Mains – Morgan Keegan

Both.

Howard Aihara

What we see is that when you convert a mobile customers to a fixed-site you typically see initially a little bit of a decrease in scans per day because what you’re doing is you’re serving an existing scan base with more days of service then you can go from there. I’d expect to see with the number of conversions that we expect to do in 2009 perhaps a little bit of a drop particularly in the MRI scans per system per day initially and then see that grow from there.

With PET/CT I think that’s still largely a mobile service although we do think that we’ll open a few more PET/CT fixed sites then we have in the past conversion from mobile. There may be a little bit of a decrease in our PET/CT scans per day but that depends on the timing and which ones we convert.

Paul Viviano

Our outlook for the industry for 2009 would be that PET/CT volume growth would increase high single digits, low double digits and I expect our performance to be as it has been historically slightly ahead of those national trends for MRI we expect low single digits 3% to 4% ranges for MRI on a national basis. I would expect our experience would probably reflect that as well.

Rob Mains – Morgan Keegan

That would be that 3% to 4% high single low double that would be the same store type number?

Paul Viviano

On a national basis I think that’s a reasonable assumption.

Rob Mains – Morgan Keegan

We’ve talked a fair amount about reimbursement one issue that I know is pretty small for you just wanted to see if you have any feeling about it is Medicare advantage where it seems that the governments got the long knives out whether that’s a meaningful part of the business and more importantly whether changes that are being proposed do you see any kind of impact to Alliance.

Paul Viviano

From a macro perspective we don’t expect that the Medicare Advantage changes will impact our business at all, a very, very small portion of the diagnostic imaging industry is derived from Medicare Advantage revenues. We don’t track it per se we have disclosed that about 5% of our total revenues from Medicare. Medicare Advantage would be included in that. It’s a very, very small number.

Operator

Your next question comes from Kyle Smith – Jefferies

Kyle Smith – Jefferies

PET I understand that growth rates in PET volumes nationwide have slowed to a single digit pace how are you thinking about the impact of that slower growth in the overall pie on your ability to maintain your own growth rates over the next couple of years.

Paul Viviano

Our growth rate in PET/CT has consistently been significantly higher then national growth rates and we expect that to continue. We have referenced briefly this morning and so I expect PET/CT growth rates in that the high single digit range is probably closer to what our experience would indicate on a national basis and again I think our performance will slightly outstrip that.

Kyle Smith – Jefferies

Looking at radiation oncology and other segment revenues the year over year growth rates are very robust but sequentially it’s been pegged around $15 million or so a quarter of revenues. How should we be thinking about the shape of the growth curve in 2009 are we going to see a big stair step up in the first quarter or should we be expecting a more gentle sequential growth over the course of the year?

Howard Aihara

We provided a guidance range at the beginning of 2008 for radiation oncology revenue of like $22 to $25 million and we were right at the very top end of that range for 2008. For 2009 we’ve given guidance of $35 to $38 million of radiation oncology revenue. The revenue in that segment of business we expect to be growing at a very nice rate.

Kyle Smith – Jefferies

In terms of the shape is it going to be chunky or are we seeing a stair step pattern when we look at the quarterly revenues or is it a gentle slope.

Howard Aihara

I think you’ll see an increase in the first quarter revenue because of the new sites that we opened right at the end of the year in particular. From there I think it should grow at an even pace from there.

Kyle Smith – Jefferies

I know its very, very early in the process of reacting to the President’s budget but when you think about opposition to the RBM proposals are you expecting that this is going to be an imaging industry only advocacy effort or do you expect to have support from some of the larger lobbying organizations that might be concerned about the precedent that would be established for utilization control.

Paul Viviano

We’re certainly hoping of the later. Our advocacy efforts currently are reaching out to those larger organizations such as AARP and others to advise them that we think this is a dangerous precedent that’s been introduced in the President’s budget and that to date there are no utilization efforts underway for straight Medicare beneficiaries and this would be the start of that utilization management effort. We think that we could gain support from broader lobbying organizations.

As I indicated in the script the savings that are projected in this budget are very, very small so I don’t expect that the White House is expecting this to gain very much traction. We’ll be seeking support from others to lobby against utilization management for Medicare beneficiaries for radiology services and we’ll see if we’re successful in gaining that support. We’re certainly going to on an industry specific basis lobby very hard against this provision.

Kyle Smith – Jefferies

Your overviews in these conference calls on the hospital sector are always invaluable, are you seeing any significant bifurcation in where some of these pressures on your hospital customers are falling out. I’m talking in terms of not for profit versus for profits, urban versus rural, different geographic areas of the country. Are you seeing big differences?

Paul Viviano

In a word, no. We’re seeing pressures in virtually every market size, shape, non profit, for profit, literally across the board.

Operator

Your next question comes from [Paul Cowell] – Columbus Nova

[Paul Cowell] – Columbus Nova

On page 10 of your 10-K you reported your year ended adjusted EBITDA at $182.6 million the on page 11 you adjusted up $11.7 million to $194.3 million is that due to the pro forma acquisitions or are there any other factors in that increase. Also, is that higher number the one that’s used for your credit agreement covenant calculation?

Howard Aihara

In terms of the difference in the numbers our credit agreements allows us to when we do an acquisition to basically we do an LTM calculation of adjusted EBITDA so it basically allows us to go back and add the estimated adjusted EBIDTA for an LTM period and compare that to our total debt that is the reason for the different.

Operator

Your last question comes from Kevin Ellich – RBC Capital

Kevin Ellich – RBC Capital

On the cost side, you talked about this before, I missed some of the numbers, can you talk about the fuel swap and what other opportunities you see on the cost reduction to keep things down side?

Howard Aihara

In terms of the diesel fuel swap we hedged against the volatility in diesel fuel costs going forward considering the potential volatility of fuel prices in the future given world events. There are other cost savings initiatives that we continue to work on. As an organization we are very, very disciplined, our operations people are very, very disciplined about taking a look at our mobile business and continue to restructure routes.

We also are very disciplined about making sure that we use our labor dollars wisely. There are any number of initiatives going on related to logistics and transportation to manage those costs outside of the diesel fuel swap. Taking a look at the routes that we drive in making sure their efficient and also we always look to take advantage of our size in terms of looking at sourcing opportunities.

All those sorts of things go on and its part of our culture, part of our DNA and we continue to look at all those things.

Operator

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

Paul Viviano

We thank you again for your interest in Alliance I’ll look forward to speaking with you again to discuss our first quarter 2009 results which will occur in early May. Thank you again for joining us this morning.

Operator

This concludes the Alliance HealthCare Services Conference Call for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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