Alliance Healthcare Services Management Discusses Q4 2012 Results - Earnings Call Transcript

Mar.14.13 | About: Alliance Healthcare (AIQ)

Alliance Healthcare Services (NYSE:AIQ)

Q4 2012 Earnings Call

March 14, 2013 8:30 am ET


Richard W. Johns - Executive Vice President, General Counsel and Secretary

Larry C. Buckelew - Chairman, Interim Chief Executive Officer, Co-Chairman of Strategic Planning & Finance Committee, Member of Audit Committee and Member of Compensation Committee

Michael J. Shea - Chief Operating Officer

Howard K. Aihara - Chief Financial Officer and Executive Vice President


Henry Reukauf - Deutsche Bank AG, Research Division

Jason Adler

Elie Radinsky - Cantor Fitzgerald & Co.

Richard W. Johns

Good morning, and welcome ladies and gentlemen to the Alliance HealthCare Services Fourth Quarter and Full Year 2012 Earnings and 2013 Guidance Conference 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]

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 reduction, the company's effective tax rate and the weighted average number of shares outstanding.

As most of you know, forward-looking statements involve risks and uncertainties, which could cause actual outcomes and results to differ materially from the company’s expectations, forecasts and assumptions. These risks and uncertainties are described in the 2013 guidance release under the heading Forward-looking Statements, as well as in the Risk Factors section of the company’s annual audit report on Form 10-K for the year ended December 31, 2011, 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 in the company’s 2013 guidance release or information required by the SEC’s Regulation G may be accessed through the Investor Relations section of the company’s website. Please visit our website for replay information of this call.

On today's call, Larry Buckelew, our Chairman and CEO, will first provide an overview of our business and 2012 results and achievements; followed by Mike Shae, our Chief Operating Officer, providing an update on trends in the economy and the HealthCare Services sector. Our Chief Financial Officer, Howard Aihara, will follow with the details of our financial results, as well as our 2013 guidance. We will conduct a Q&A session after our prepared remarks.

With that, I will now turn the conference over to Larry Buckelew. Larry, please go ahead.

Larry C. Buckelew

Thanks so much, Rick, and good morning, everyone. I'm very pleased to welcome you to the Alliance fourth quarter and full year earnings call. We appreciate your time, your interest and your participation in this event.

The fourth quarter for 2012 was a strong end to an important year in the history of our company. And in addition to it being a strong into a really solid year, we now know that it's providing us some positive momentum as we continue to execute against our strategic growth plans as we're heading into 2013.

Some of the more significant accomplishments in 2012 include many key areas that we're proud of. I think a lot of companies will set some goals and they may stumble on some, but let me share with you some highlights because we feel like every goal that we set up for the year we knocked it down and achieved what we said we would.

Let me give you a few examples. During 2012, we returned Alliance to a path of growth. We did this through some diligent and disciplined expense management, but we also achieved a real success story in terms of reducing our revenue GAAP, showing that we have the ability to grow our business and do it during a time when we were going through some rapid restructuring of our business. So with all that going on, many companies will stumble, we did not.

In 2012, we delivered adjusted EBITDA of $154 million, and we did this while pruning our portfolio of some unprofitable customers, so this achievement represented approximately a 3% growth over 2011 and it was just about at the midpoint of our guidance that we highlighted for the year. So a lot happened in 2012, a lot of pruning, a lot of cost reduction, making sure we are rightsizing our business, but in spite of that, we achieved the growth that we promised.

Another key area we're excited about is the Alliance Imaging area. We talked about stabilizing that business. It was going through some turmoil. Later on here in the call, I'll give some additional examples of some success we're having, but I think one of the more exciting areas that we announced publicly near the end of the year was the new relationship that we have with Emory Healthcare, where we've demonstrated not only our ability to deliver our traditional model, but we're finding ways to work with them closely in an expanded value proposition, and this is one of many customer accounts where we're finding success and migrating to a broader offering and becoming the partner of choice for hospitals and health care groups as we deliver our expanded value proposition in imaging services.

Another key area I would simply highlight, a goal we set, we knocked it down and delivered it, was a continued focus on migrating our services in the Alliance Oncology segment of our business, driving more focus towards our stereotactic radiosurgery products, our SRS platforms. And worth mentioning and reminding you that during the year, we wrapped up the year with our AO division with now 29 total centers in operation, with 17 of those now dedicated as SRS sites.

Another key area that I would simply highlight that was very important -- we did this proactively, this was not a requirement, but we decided with the success we were having in generating cash, restructuring our business, holding expenses tightly, but also having some growth success, we would take some of our cash flow and deploy it in a way where we would reduce our debt.

And so again, while we said we were committed to managing our balance sheet, another one goal set and knocked down. We reduced our overall debt by 12% by paying down $75 million of our term loan and successfully negotiating an amendment to our term loan facility, which provided Alliance with greater flexibility under our financial management covenants.

I think another important milestone, which we spoke to and made comments about throughout the year, was an interest in potentially navigating over to the NASDAQ exchange. We thought it would be appropriate and make our stock of more interest to a broader range of potential investors if we executed a reverse stock split and moved to the NASDAQ exchange. I'm proud to say that we achieved that goal and wrapped up the success of now being listed on the NASDAQ in February. And again, we think this move makes Alliance more attractive as worth noting that today, if you look at listed companies, about 70% of all health care companies now trade on the NASDAQ exchange, and so we believe this makes us a more attractive company to our investors and, again, another milestone that we talked about and delivered.

And then finally, I think as we reflect back on the year just finished, we really focused on 3 key areas: One was stabilizing our Imaging business; one was looking at our Oncology business, trying to figure out where we should prune and create a culture of growth; and then finally, making sure that we implemented our Project Phoenix savings programs. Again, every goal we talked about, we focused on it, delivered it and knock it down.

So with that said, out of our year, let me take just a few moments here to give you a few key highlights. I'm going to focus on 3 areas for 2013 that we have as a primary focus area before I turn it over to Mike Shea and allow him to share some insights he has in terms of our industry.

As we know, the imaging portion of our business still represents the majority of what we do. We are really proud of our 30-year history of being a hospital centric organization. Our goal is not to compete with our hospitals. It's to work with them, bring them the technology they need, bring the technical support they need and help them be the best they can be in the radiology area.

However, as I mentioned in the last call, in this environment we're in, we're finding hospital partners more interested than they've ever been before in having Alliance HealthCare provide an expanded value proposition that would go beyond our traditional model offering, and so we've continued to test the water in that and continue to find a high level of interest and success.

And so as we now migrate into 2013 from last year, that interest level continues to grow. I'll tell you that I've been in the field traveling, seeing hospitals, getting into C-Suites, talking to regional hospitals, hospital campuses and systems and I would tell you that in terms of batting average, batting a thousand in terms of the interest level that C-Suites have in having a company like Alliance help them drive success in this very key important area of radiology care. So again, this is going to continue to be a key area.

I mentioned to you late last year and will just reemphasized it as I've been in the field and traveling with our field reps, visiting accounts, I think it was one of the best decisions we've ever made at this crossroads for the industry and for our company to divide our field force into 2 different focused field forces, where we now have that field force divided, where half of our field force wakes up everyday focused on finding new customers and the other half of our field force focused on retaining the -- our existing customers as they come up for renewal.

And the key element that we're seeing really deliver traction is getting in very early in the renewal process, again, particularly since many of our hospitals find themselves under operating pressure and financial pressure. Getting in there early, being a partner with them, reminding them of the value that we've delivered, but also being good listeners and allowing them to understand we're prepared to help them deliver more success in this area of radiology. Again, important to remember that if you look at the 5 outpatient service lines and the contribution profit that most hospitals have, there's nothing that comes close to the radiology area. On average, we've got hospitals across the country, if you add it up, it's over $24 billion in contribution profit that hospitals generate from the radiology area. A lot of talk about cardiology, primary care, orthopedics. They're a fraction of the radiology area.

The next one to radiology, which is nearly 40% is cardiology at 12%; primary care at 11%; orthopedics at 5%. So when we go into the C-Suite, we let them know this is the way it stacks up, and our goal is to help them understand that we're the best at what we do and we think it's important they realize that they should view us as being an indispensable partner in helping them manage and grow this very important part of their hospital business.

So again, we're excited about this. This will continue to be a key focus. This divided field force is really allowing us to get the focus we need and the discipline we need all with the goal of becoming for every one of our customers, a partner where there's clearly a win-win between Alliance and our customers. And so again, that will continue to be a key focus.

In the past, especially during the turbulent times when we weren't well organized, we had our retention rates drop to somewhere in kind of the mid-70s. We've migrated those up to the low 80s. We are now migrating those up into the higher 80s. I will let you know that we're internally here setting a goal that we would retain our renewal rates in this new year 2013 at approximately 90%. That's an extraordinary rate, but I'll tell you we're optimistic that we can do it because now as we go to these customers, we get there early, we present our expanded value proposition and we help them see how much we can provide value. So again, I think our goal at the end of every one of these meetings, we make it clear that they should view us as being an indispensable partner.

So that's our goal for 2013. For the imaging business is to retain 90% of our business. We think if we do that, we'll achieve the financial success we're looking for.

The second key area we'll continue to focus on is expanding the radiation oncology services business. We call this our AO. So AO division. So Alliance Oncology is really now a key platform for our future.

For those of you who have followed us for a while, you know that we wandered into this area many years ago and began to acquire businesses that were somewhat freestanding, often times LINAC into our standalone LINAC sites. Important strategic step because it got us into this business. We now have what we call a very well-thought-out platform for AO, where we now have a continuum of care of products that range anywhere from the more basic LINAC to the most sophisticated stereotactic radiosurgery product, SRS. And we're delighted here as we enter this new year that our goal of bringing this business together following the acquisition of U.S. radiosurgery in 2011.

As we were looking at last year, our goal was to take the cultures of these 2 businesses and bring the best of both together and create a unified division that was highly functioning. Delighted to tell you that we have promoted a gentleman by the name of Greg Spurlock. He's the new President of our AO division. Greg's track record of success in building businesses, managing growth mean that we have the right person in place to now deliver on our aggressive growth plans through this now broader continuum of care strategy. So really pleased to have that team functioning at a high level, with a strong leader who's well suited for this next chapter of growth and success in our AO division.

And again, I think the key here is as we look at our AO division, our goal is not only to bring technology, bring technical support and the products necessary, but we are -- as we are in the Imaging business, we are finding many hospitals now saying that with this broader offering, would you consider coming onto our campus and potentially adding a broader array of services where you would potentially help us discover pinchpoint inefficient areas of operation and be a partner on the operating side. And we hope to, as we go throughout 2013, be able to share with you some success stories, where we've been given the opportunity to go in and be a much bigger partner with hospital systems in our AO division than folks had ever imagined in the past.

So more to follow there, but we're excited about what's going on and the success in AO, and it will continue to be a key focus area for us in 2013.

And finally, our third key area of focus will simply be, what I call, continuous improvement on the cost and savings, driving an efficiency side. Very, very proud of our Project Phoenix. We've spoken about it. Drove $36 million of expense and cost out of this business, focused on all kinds of key areas. We've highlighted those in the past, where we've restructured our mobile fleet roots. Where it was appropriate, we retired some systems that we thought needed to be replaced. We took a hard look at aligning staff levels and our utilization levels. We also went back to our suppliers and optimized our sourcing capabilities, and we weren't shy as we looked at our business about eliminating unprofitable business and focusing on our business partners, where we think we have the most powerful relationships and can achieve our success.

So I'll tell you, as recently as the last couple weeks, we pulled together a key team. And just to show you how committed we are to continuous improvement, not only did we achieve the $36 million that we have shared with you before, we're so committed to continuous improvement we now have a team meeting on a regular basis looking for driving out additional waste, additional efficiencies and I think what you'll see about the timely close 2013 is we'll be reporting additional millions of savings as we look for efficiencies and areas to save money and make sure we're best-in-class at driving an efficient operation here in this segment of health care that we work in.

So folks, that's a quick overview of the highlights that were achieved. We're proud of the year, we're proud of our finish. Those highlights give you a key areas of -- 3 particular areas of focus for the new year.

With that, what I'd love to do here is have Mike Shea join me. And he's certainly been out in the field visiting key customers, doing a lot of traveling, working with our field force. I would like Mike to just share a few thoughts in terms of a little bit of industry overview and why he thinks Alliance is poised to thrive in the current industry environment. Mike, please. Go ahead.

Michael J. Shea

Thank you, Larry, and good morning, everyone. I'd like to begin by providing some insight into our current operating environment.

On the legislative front, the CMS, Medicare Physician Fee Schedule for 2013 was released in late 2012, and Howard will discuss the potential impacts and more detail later on in his discussion. But the bottom line is that the changes will have minor impact for Alliance even in a worst-case scenario given our hospital-centric model.

So what's it like out there? Well, we continue to see the economy struggle with unemployment stock at about 8%. People have higher deductibles and copayments and declines in physician office visits and physician self referral trends persist and the entire market is seeing flat volumes as more patients decide to delay or even deny care as out-of-pocket costs increase. We believe patient volumes will increase as Obamacare gains traction with some of its programs and more lives are added to the health care delivery system. Hospital partners and competitors will continue to face pricing pressure. But this reality creates a perfect timing opportunity for our expanded value proposition in addition to our traditional mobile and fixed-site offerings.

As hospital partners pick -- or excuse me, hospitals pick their partners to help them deal with some of the pressures they're facing, we are uniquely positioned as a well-known and highly respected company, with a history rooted in building strong hospital relationships.

Indeed just recently, I was meeting with a hospital systems CEO and we were talking about the current climate and the difficulties that patients have in accessing care and they can sometimes get lost in the system and he said, "Mike, we are picking our partners, and we are picking wisely. And that's exactly why you're sitting at the table." So that's just a testament to the fact that hospitals are facing challenges. They need people to -- companies and people quite frankly, we are people as opposed to company and when we deal with our hospital partners, they want someone to sit on the same side of the table with them shoulder to shoulder to help them face some of the changes that are occurring. Indeed, the hospitals are asking us to help them navigate the turbulent waters because it's very, very clear that the CMS -- or CMS is focused on cost and quality outcomes. They're becoming more and more important.

While many in our industry quite frankly decided to compete with hospitals, we remained hospital-centric, which is proven to be a good strategy. Hospitals are the gateway and the hub of health care delivery in every community. I feel as though I've been saying that for the last 30 years. Indeed, when you think about it, it's always been that way, hasn't it? And the ACL model illustrates this pendulum swing. And as I said earlier, CMS has been very clear in their desire to support hospital physician and other provider relationships that reward quality and the appropriate utilization of services.

Ultimately, Alliance is adapting well, and we're focused on helping our hospital partners overcome the challenges they face. We believe that we are the most well-positioned company in our industry to maximize on the current and future health care delivery dynamics. From our perspective, the future is very bright.

So with that, I'll turn it over to Howard for the financial results.

Howard K. Aihara

Thanks, Mike. Today, I'm going to cover a couple of topics with you. First, I'll review the highlights of our fourth quarter and full year 2012 performance. Second, I'm going to review the impact of the most recent Medicare price reductions or sequestration, which will not have a significant impact on Alliance. And lastly, I will discuss our full year 2013 guidance.

Onto the first topic. Alliance's fourth quarter and full year 2012 results. I'm pleased to report growth and adjusted EBITDA for both the fourth quarter and full year 2012 as we continue to focus on generating profitable revenue and executing our cost savings initiatives. I'm also pleased to report strong free cash flow generation, which continues to be a hallmark of our business.

Let me first provide you with highlights of the fourth quarter and full year 2012. Alliance's full year 2012 revenue totaled $472.3 million, and adjusted EBITDA totaled $154.4 million, both of which were well within our 2012 guidance ranges. Adjusted EBITDA for 2012 represents 3% growth over 2011, which was $149.3 million.

Revenue in the fourth quarter of 2012 totaled $114.8 million, compared to $120.7 million in the fourth quarter of 2011. This decrease was entirely due to trimming our portfolio of $20 million of annualized unprofitable business in the last 12 months.

I'm pleased to report year-over-year adjusted EBITDA growth in the fourth quarter. Adjusted EBITDA in the fourth quarter of 2012 totaled $35.6 million, compared to $35.4 million a year ago. Included in our fourth quarter 2012 adjusted EBITDA results was $1.3 million of operating lease expense related to the sale leaseback transaction we executed in November. Excluding this transaction, adjusted EBITDA increased 3.6% to $36.8 million.

As I mentioned earlier, we're focused on generating profitable revenue, which means we have been making tough decisions to improve profitability in both of our divisions this year.

In our Radiation Oncology division, we divested 8 centers during 2012, 3 of which occurred in the fourth quarter. This impacted fourth quarter revenue by $2.9 million. Excluding these divestitures, Radiation Oncology revenue grew organically by 16%.

Overall, Alliance's Radiation Oncology revenue totaled $20.8 million in the fourth quarter of 2012, compared to $20.4 million a year ago. For full year 2012, Radiation Oncology revenue increased 11% to $83.2 million from $75.2 million last year. Excluding the divestitures, Radiation Oncology revenue grew 18%.

Currently, Alliance operates 29 radiation therapy centers, including 17 dedicated stereotactic radiosurgery facilities. Alliance opened 3 SRS facilities during 2012.

For our Imaging division, I'm pleased to report that our new sales and renewal efforts are continuing to show significant progress and improvement.

Our total revenue GAAP was a positive $200,000 for the fourth quarter and narrowed significantly to a negative $1.6 million for full year 2012.

Alliance's fixed-site imaging revenue was sequentially stable at $30 million in the fourth quarter. For full year 2012, fixed-site revenue totaled $120.5 million. Alliance opened 7 fixed-site imaging centers during 2012 and operated a total of 128 fixed sites at the end of the year.

Alliance continues to invest capital strategically with strong hospital partners. With our initiative of focusing on profitable revenue, the Imaging division has terminated $13.9 million of annualized revenue during 2012, which impacted the fourth quarter by $2.8 million.

Scan-based MRI Revenue was $43.1 million in the fourth quarter, a decrease of 2.9% over last year's fourth quarter and was $177.9 million for the full year 2012.

Alliance's PET/CT revenue totaled $36.6 million in the fourth quarter of 2012 and was $154.9 million for full year 2012, a decrease of 8% from last year.

Alliance's adjusted EBITDA margin as a percentage of revenue increased by 250 basis points to 32.7% for the full year 2012, compared to 30.2% a year ago. This improvement in our adjusted EBITDA margin is in large part related to our successful implementation of our Project Phoenix cost savings initiatives and focus on generating profitable revenue.

Included in our income statement are $2.7 million of restructuring costs in the fourth quarter and $6.7 million for full year 2012. The restructuring costs are included within various line items of our income statement.

Pro forma diluted EPS was a $0.22 loss in the fourth quarter and a $0.60 loss for full year 2012. All per share amounts are adjusted for the 1 to 5 stock split effective in December 2012. As reported, delivered EPS for the fourth quarter was a $0.48 loss and $1.12 loss for the full year 2012.

Included in the as reported diluted EPS was a $0.26 charge in the fourth quarter and a $0.52 charge in the full year 2012 results related to restructuring charges, severance and related costs, noncash fair value adjustments related to interest rate swaps and differences in the GAAP income tax rate from our historical rate were approximately 42.5%.

As I mentioned earlier, we continue to generate strong free cash flow. We define free cash flow as the change in net debt before investments and acquisitions, debt financing fees and the proceeds from the sale leaseback transaction. We generate free cash flow by focusing on organic growth and adjusted EBITDA along with efficient CapEx spending. This focus has resulted in Alliance generating $53.8 million of free cash flow for the full year of 2012, which is above our guidance range of $45 million to $50 million. This strong free cash flow generation continues to strengthen our balance sheet.

In terms of CapEx efficiency, we continue to invest in solid capital projects and efficient upgrade of our assets. For the full year 2012, our cash CapEx spend totaled $37.6 million, which was just above the top end of our guidance range of $32 million to $37 million.

In addition, we invested an additional $4 million in CapEx related to a capital lease obligation for an

SRS project. Total 2012 CapEx, including this capital lease, was $41.6 million.

For full year 2012, the Imaging division traded in or sold a total of 86 systems, including 45 MRIs, 10 PET/CTs and 31 other systems that were in service.

As announced in our last earnings call, during the fourth quarter, we also completed a sale/leaseback transaction for $30 million, which included a sale of 28 assets, including 19 MRIs and 9 PET/CTs.

As also announced during our third quarter call, we completed an amendment to our term loan agreement, which modified our financial covenants in order to provide greater flexibility.

Alliance used the proceeds from the sale/leaseback transaction, combined with $45 million of cash from our balance sheet, to make a total payment of $75 million or 12% of our total debt to permanently reduce borrowings outstanding under the term loan facility.

The prepayment made in connection with this amendment will satisfy all future mandatory amortization payments under the terms of the credit agreement, which matures in June 2016.

At the end of the year, Alliance have cash and cash equivalents of $40 million and long-term debt balances of $558.6 million. Alliance's net debt defined as total debt less cash and cash equivalents was $518.7 million.

As of the end of December, Alliance's total leverage ratio was 3.89x.

I'll now make a few comments regarding Medicare reimbursement. As we previously discussed on our third quarter earnings call, CMS's final ruling regarding the 2013 Medicare Physician Fee Schedule was released in November. Alliance was largely shielded from proposed reductions in the Medicare Physician Fee Schedule because the vast majority of our business is generated from hospital relationships. Only 6% of our revenue is directly reimbursed by Medicare. The 2013 impact from CMS's final ruling for imaging and radiation oncology is projected to total $2.1 million.

Additionally, the recently enacted sequestration reduction of 2% across-the-board for the Medicare program is expected to go into effect April 1. We estimate the sequestration cuts will impact our 2013 revenue by a relatively small amount or $200,000 per quarter or $600,000 for the remaining 3 quarters of 2013.

Now I will address our 2013 guidance ranges. For 2013, Alliance expects revenue to range from $460 million to $485 million. Our 2013 revenue guidance range is impacted by $12 million of revenue, which was impacted by pruning our portfolio of unprofitable Imaging and Oncology business in 2012.

For our Imaging division, both our MRI and PET/CT revenue is expected to be flat to down 5%. For our Oncology division, revenue is expected to increase to $84 million to $92 million.

As I just mentioned, these 2013 revenue guidance ranges are expected to be impacted by $12 million of pruning, $5 million of which will impact our Imaging division and $7 million will impact our Oncology division.

These revenue ranges are also impacted by the combined price reduction of $2.7 million for the final Medicare Physician Fee Schedule and the sequestration impact.

Our 2013 adjusted EBITDA guidance range is $140 million to $160 million. I'll also note that the sale/leaseback transaction we executed in connection with our term loan amendment will reduce 2013 adjusted EBITDA by $8 million for adding incremental rent expense.

Our 2013 capital expenditure guidance is expected to range from $45 million to $55 million. We will continue to allocate sufficient resources through targeted investments designed to support long-term growth.

In 2013, Alliance expects to open 20 to 25 fixed-site imaging centers and 2 to 6 radiation oncology centers.

Our free cash flow guidance is expected to range from $25 million to $35 million. The improvements we executed over the last year reflect the dedication of the entire Alliance team and our focus on improving our business development and renewal processes, our cost structure and becoming more efficient. We will continue to build upon these improvements in the coming quarters.

I'll now turn the call back over to Larry.

Larry C. Buckelew

Thanks so much, Howard. In closing, folks, we are in a unique position, as I believe it's becoming more and more clear each day, with our hospital-centric model and the success we're driving towards. Our business model is evolving in a very positive direction. These initiatives that we've described and the hard work that's been completed over the last year have set us up for success in 2013 and beyond.

We are certainly pleased with the current momentum that is apparent in the company's performance and we look forward to continuing to execute on our strategic growth initiatives that will ultimately create value for our shareholders.

Thanks, as always, for your interest in Alliance and Howard and I now look forward to answering any questions you may have. So I'll take this opportunity to return the call to the operator to begin the question-and-answer session, and we look forward to responding to any questions you may have.

Question-and-Answer Session


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

Henry Reukauf - Deutsche Bank AG, Research Division

Just, Larry, on the revenue GAAP statistics, I always find very helpful, it sounds to me with all the improvement in renewals that you're seeing with your customers, that, that statistic now is basically turning positive. I think I've heard you say that before. I'd really like to hear you just reiterate that. That, that perpetual drag that the company kind of experiences, as far as you can see right now, is pretty much behind the company.

Larry C. Buckelew

Yes, Henry, thanks for that question. You're spot on. I think we started tracking revenue GAAP many years ago and we were delighted to see us cross the positive line here in the fourth quarter. And so this is a metric we've followed. And as you can picture, Henry, even with success in taking our focused field force in going out and grabbing new business, we're not being challenged to achieve that goal. We're grabbing new business everyday. But if you don't do a good job of retaining the customers you've had over the years, you find yourself wasting a lot of time and energy because you now, you've got a big hole to fill as you go find new business and you fill it. And so we just are finding tremendous success at wrap our arms around our good customers, being good listeners, getting in there early and so, Henry, I'm confident we're going to achieve our goal of retaining approximately 90% of our customers. What we don't yet know, Henry, and this is where this metric is evolving. We're finding many of these customers saying, "We think you guys know what right looks like. You've got over 1,000 hospital contracts and customers. You certainly know what best-in-class looks like. You know who's performing well. Can you bring some of that knowledge and know-how to us and help us evaluate our Radiology department, help us evaluate our Oncology department, tell us where the pinchpoints are. We're losing referral patterns. Can you go out and analyze our competitors? Help us understand what's going on. Do some ghost shopping. Find out how we compare versus the competition in every way, shape and form." So that's what's different, Henry, is we've never taken this on before. We're doing it in a robust way. It's being embraced, but I think what you'll see, Henry, is the metric will begin to be less important simply because we're going to retain so many customers in the future.

Henry Reukauf - Deutsche Bank AG, Research Division

Okay. In the past, kind of we've seen a couple of times in, maybe say, the last 5 years, that where you've seen a basically a step down in performance, a little bit unexpected I think. I think maybe in part it was due to potentially a loss of a larger client or something like that. Are there any clients in the current year that are coming up for renewal that you could lose that would disproportionately affect your expectations?

Howard K. Aihara

Great question. We are so focused on this. We have regular weekly meetings looking at every single account, getting in there months in advance of renewal and I can tell you from my perspective, the great news is our business space is so fragmented, there isn't any one account that could frighten us in terms of losing it. But we love the little guys as well as the big guys and we worry about all of them. But the answer is, no, we're not concerned. I think that step down that you saw, Henry, that we know this business suffered from in the years past here was largely to 2 elements. One was a macro issue where we saw the entire economy suffer, we saw unemployment, we simply saw less patients flowing into hospitals. And so it's pretty tough to grow a business when patients aren't showing up because what we all learned in healthcare in the last couple of years is when the economy gets tight, there is a percentage of healthcare that becomes elective. And so I think that caught us offguard. I think -- I've certainly been in the healthcare industry for a lot of years and I don't remember ever in my history seeing such a high percentage of our population decide not to spend money to go get healthcare even though they thought they needed it because they had to make their mortgage payments and put food on the table. So what's wonderful about our performance is we're right sized for that reality. We're growing in that reality. And as you look at our ranges that we've put out in the future, we're assuming that the world stays the same. What we think is encouraging is if the market gets a little better, if unemployment rates start to improve and we start seeing patients showing up in greater numbers into the hospitals, those tides will raise our boat, and -- but we've not built that into our guidance. We're simply assuming the world will stay the same and we're going to just continue to outperform.

Henry Reukauf - Deutsche Bank AG, Research Division

Okay. With the, clearly, the positive outlook that you have, can we kind of assume, and looking at guidance here, it would be like the third year of about $150 million of EBITDA, can we assume it can probably be at least as good as this year in terms of EBITDA?

Howard K. Aihara

Henry, this is Howard. Our guidance range, as Larry just mentioned, really kind of views the world as kind of the world today as the world that's going to be going forward into 2013. The midpoint of our guidance range is $150 million, but I just want to -- as I pointed out in my script, that it's affected by the $8 million of the sale/leaseback transaction that actually drags it down by $8 million. So if you add that back, it would be -- the midpoint would be $158 million. So we'd be showing some growth and I think it speaks to the stability that we've been able to achieve through our cost savings efforts and also the -- some of the revenue stability and is related to the fact that we've really narrowed the revenue gap. And so those are I think the 2 primary drivers between about what our guidance range is for 2013. And again, I just want to point out, again, it would be -- we would show growth if the sale/leaseback transaction were normalized.

Henry Reukauf - Deutsche Bank AG, Research Division

So as the sale backs turns out $8 million and the $2.7 million, you'd be up near $160 million would be your guidance without those pressures?

Howard K. Aihara

That's correct. Yes, if you add back the Medicare reimbursement change, correct.

Henry Reukauf - Deutsche Bank AG, Research Division

So really progression is what you'd see without these headwinds.

Howard K. Aihara

That's correct.

Henry Reukauf - Deutsche Bank AG, Research Division

And then -- and just the last one, the EBIT -- the CapEx that you anticipate, the 6 -- 2 to 6 radiation centers and the additional -- just the 2 to 6 radiation centers, that's incorporated in that CapEx. Any acquisitions that you may contemplate would be on top of that, correct?

Howard K. Aihara

That's correct. We're really focused though, Henry, on organic growth and we have a large pipeline of radiation center projects, therapy center projects, in the pipeline and we're excited about the growth potential in that sector. And the CapEx guidance range does incorporate all of that range.

Henry Reukauf - Deutsche Bank AG, Research Division

And multiples on AO acquisitions?

Larry C. Buckelew

I'll tell you, what we're doing, Henry, is -- the great news is our pipeline is really coming from de novos in going on hospital campuses and creating joint ventures. So the cool thing about this model that we've evolved, this approach in the past of chasing down deals and trying to figure out multiples, we find that less interesting now than partnering with hospitals and doing joint ventures. So when you see this CapEx number, these are committed dollars to us kicking in our portion of the dollars in joint venture programs highly integrated with hospital campuses and customers. So that's really the biggest change, Henry, in our strategic direction in AO, is we are determined to win with hospital partners as opposed to freestanding facilities.

Henry Reukauf - Deutsche Bank AG, Research Division

So if I'm correct, I'm hearing you say organic growth, not really acquisition spending and additional debt to finance those. It's more organic when you talk about all the growth that's occurring in AO?

Larry C. Buckelew

Clearly, Henry, that clearly is our strategy. I think you hit it on the head. We are focused on our organic growth and generating free cash flow, strengthening our balance sheet and using that cash flow to continue to delever.


Your next question comes from Jason Adler with GMP Securities.

Jason Adler

My first question is looking at PET/CT pricing in the fourth quarter, I was little surprised the trend seems to have reversed and you've got a little increase in price. Can you talk a little bit about what was driving that in terms of pruning customers or are you getting beneficial pricing in new contracts and how should we think about pricing for 2013?

Howard K. Aihara

Jason, thanks for that question. I really view the pricing sequentially, as we thought pricing stability, may have been a little bit of mix change between some customers that caused that. And historically, we've seen pricing pressure in PET/CT in the ballpark of 3% to 5%. And I kind of think that going into 2013, we're kind of looking at probably that sort of pricing pressure for 2013 as well. But again, we're seeing that -- we're seeing stability in the business in terms of us getting our revenue gap to be much more neutral.

Jason Adler

Okay, great. And then my other question was just on the expanded services that hospitals have been requesting from you. It sounds like most of those are in more of a consulting-type role. Is that true or is it possible that you might be expanding into other types of imaging services in building out the Radiation department to be positive [ph] . And how is that, either the consulting or additional services, factored into your 2013 guidance?

Larry C. Buckelew

Yes, Larry here. Thanks for that question. You're right on several fronts, but let me clarify. What we have, for example, when we renew a customer account, what we've been usually operating under is what we call our traditional model where we provided them with imaging equipment for our AI division. We provided them with technical know-how and support, and we've been a good partner in helping them operate that equipment and making sure we get the throughput they're looking for. What we've often relied on the hospital partner to do is run the business of the Radiology department. And if you'll look at the complexities of how do you do that, how do you manage referral patterns, how do you manage this process of admissions and scheduling, how efficient is the department run. What we've learned, and we just see it everyday, is hospitals are by nature, not as good as they ought to be, frankly, at looking out at their catchment area and understanding if they're losing referrals or if they're losing patients or they're not growing the number of scans each month or year. They're not able to really tell you why and they don't have people dedicated to do those analytics. So step one as we migrate towards a renewal is we get in there and we ask a lot of questions. We get in the C-Suite and we say, "Do you have folks dedicated to study your patient experience? How long does it take to get scheduled? Does it take 4 days or 1 day? What's the typical out-of-pocket expense for a patient? What are the pinchpoints that make it not work effectively? Where are you not efficient?" And as we talk to these hospitals, we find that they say, "Oh my gosh, you guys know a lot about this, could you come and help us?" Not unusual for us now to begin to do studies where we might do a 30-, 60-, 90-day study and help them create a strategic plan to drive more scans up in a year. Once we build that plan, we've now made ourselves more valuable to this customer and we begin to see either personnel, where they need to think about upgrading some personnel, driving some efficiency, process mapping, how they map a patient through their process and driving out some waste and efficiencies. We can actually show them where they can take out hundreds of thousands of dollars and cost and expense, drop it to the bottom line and then use our marketing forces to go out in this catchment area and begin to market what we do and how we do it. So that's a long winded response, but it gives you a real sense of the need and this perfect opportunity we now have to pivot towards being really a consulting strategic partner. And so now, think about what it means as you now go renew this contract next time. You're now renewing with yourself. You are the customer because you're now so deeply embedded in their success story, you become part of what they are. And so that's what they're asking us to do and that's what we're doing and frankly, we're having some fun doing it.

Jason Adler

Just so I understand, it sounds like that this range of services you provide is part of a more sophisticated selling process. It's not necessarily an add-on incremental revenue stream. It will bolster your ability to add customers and retain customers in the future, is that accurate?

Larry C. Buckelew

That is accurate, but I would add one other dimension. We're finding surprisingly a large increasing number of accounts who say, "Would you be prepared to come in and give us dedicated people to run some key elements of our process?" So you actually become an on-the-ground consulting person or operating person for them. And so I'll tell you that we've been asked to do it. We've been doing it. We're not prepared yet to give you a large enough numbers that we want to break it out and say here's our operating consulting segment, but I'll tell you that the value of what we're doing is valuable enough -- typical consulting firms will take the cost of a consultant, mark it up 30%. We're not wedded to a markup of a certain percent, but I'll tell you, we intend to make money on our advisory consulting services.

Jason Adler

And if you have -- just one last question...

Howard K. Aihara

This is Howard. And to add on to that, and Larry mentioned in his prepared remarks about us driving toward a 90% retention rate in imaging. And a big part of that is, again, providing these services that is providing value to our hospital customers that makes us more sticky to those customers. And again, I think you hit the nail in the head, this is a way to help us drive the renewal process.


Your next question comes from Michael Kenner [ph] with Angelo Gordon [ph].

Unknown Analyst

Just the one question I have I guess you haven't covered yet. Can you discuss -- I guess, I'm reading you've divested or trimmed out 8 of your Alliance Oncology Centers during 2012, which I guess is 8, you're left with 29 year end. So it's a fairly high percentage. Where are those centers from? Are they from the recent acquisitions? And sort of what was -- in more detail, what was behind those cuts?

Howard K. Aihara

Well, thanks, Michael, for the question. In terms of the divestitures, most of them came from some prior acquisitions that we've done that were done back in the 2007, 2008 timeframe. And they are smaller centers, by and large, that were kind of geographically dispersed and difficult to manage, not large volume centers. And I think we took a hard look at the market. We've actually seen a lot of out-migration of patients from actually living in those markets, going to more urban areas. So in the end, we just decided the best place to -- the best thing to was to find better homes for them. So that's what we did during 2012.

Unknown Analyst

So what is the approximate percentage of revenue within the AO division? Was it, let's say, 20-ish percent in number, but substantially less in revenue?

Howard K. Aihara

Yes, it was substantially less in revenue. You can call it in the ballpark of $7 million to $8 million.


Your last question comes from Elie Radinsky with Cantor Fitzgerald.

Elie Radinsky - Cantor Fitzgerald & Co.

The major question I have, I just want to confirm something. When you talk about your consulting or your competitive intelligence segment that you have, it's not really a segment, I just want to confirm that you're getting paid separately for that and that's not just getting paid out of say, a per click or for the profitability of only the MRI center that you're operating in conjunction with the hospital?

Larry C. Buckelew

Great question. One of the things that we have been delighted to do is we decided that many of our customers were looking for a broader range of consulting services, doing market studies and so on. Because we're the biggest at what we do, there's no one close to what Alliance does in terms of being hospital-centric and offering our services coast-to-coast with over 1,000 hospitals. What we started finding is that there are a number of regional consulting companies that we could strategically align with that would go in when we would request their assistance and go in on our behalf and actually contract with the hospitals, do these consulting agreements, do market intelligence, do catchment area assessments, do ghost shopping, help create strategic plans, these strategic partners are coming in with us on our behalf and they're charging for their services to do that. They then tee the ball up perfectly for us to come in and execute our models, bring in equipment, bring in capital, bring in people and personnel to help them run this. So it's been a bit of a tag team as we have migrated quickly in this direction. We think that longer-term, we will enjoy these strategic relationships because they bring to the customer some real comfort that there's an independent specialized consultant who's able to do this. And these consultants have been specializing in Radiology department, some of them for as long as a decade and have been renewed again and again and again, and do what they do well and they're very credible. But we are in the process of building an in-house program where, for those hospitals who know us and know us well and would like us to do it ourselves, we would do it ourselves. And so we're in the process of building that model so that we would do more of those services ourselves. But right now, many of those services are being part of a strategic presentation where we have partners doing it and they're charging for it and getting paid.

Elie Radinsky - Cantor Fitzgerald & Co.

And directionally, when you do re-up with a hospital joint venture and moving it the 90% level, is your remuneration just directionally, are you getting paid more, are you getting paid less or you're basically flat when in the negotiations with the hospital?

Larry C. Buckelew

Each one is a unique and customized case and so that the model is evolving. I'll tell you what I think my instincts are, is that I think we're going to need to be sensitive to pricing and be prepared in some areas to reduce our pricing because we don't intend to lose any market share on price. And so we're going to be great listeners, but I'll tell you, I think we're good enough and smart enough that if we have to reduce our price in order to be market competitive, we're going to put the right resources on the ground to help ourselves and our hospital partner, make sure that we grow the number of scans they do in 1 month. And again, I mean it's powerful. The math is there. We take them through it. You take a hospital system and you increase their scans for 1 day, they're going to drop $1 million to the bottom line in contribution margin, that pays for a lot of stuff. And so one of the things we're doing is we think when we have to make some concessions on price, we'll do it. But before we sign that contract, we're going to be pretty certain we're going to hold our own in terms of margin and we'll make up with some additional revenue and maybe some expanded services. And so that's the goal. But directionally, I think we would be naive to think we were going to be able to hold price all the time everywhere.

Elie Radinsky - Cantor Fitzgerald & Co.

This past year, you clearly did a large sale/leaseback transaction. And then when you're looking at this budgeting cycle and you have guidance for your CapEx spend, how do you view it now spending cash for systems and machines as opposed to leasing those systems and machines? And what percentage of spending do you expect will be on a sale/leaseback basis? And clearly, I think that the CapEx is, that you mentioned, is on a cash basis?

Howard K. Aihara

Elie, this is Howard. In terms of our CapEx spend, our guidance range of $45 million to $55 million does incorporate a few capital leases as we anticipate doing some radiation oncology projects with joint venture partners that -- with the joint venture they typically like to lease the equipment, they don't want to put the capital in for the asset upfront. So we've incorporated that in the total CapEx guidance range for 2013. In terms of the sale/leaseback, that was kind of a special situation in which we decided that we would execute that transaction to raise the amount of proceeds that we could use to make a large pay down of our term loan. So we don't anticipate doing another one of those types of transactions in 2013.


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

Larry C. Buckelew

Thank you, so much, folks, for your interest in Alliance. We certainly look forward to speaking with you, again, to discuss Alliance's first quarter 2013 results in May. And again, we know your days are busy. We are really appreciative of you interrupting your day to listen to our story. Thanks for your ongoing support and have a great day.


Ladies and gentlemen, 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 now.

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