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Alliance Healthcare Services Inc. (NASDAQ:AIQ)

Q1 2014 Earnings Conference Call

May 8, 2014 05:00 a.m. ET

Executives

Rich Johns - EVP and General Counsel

Tom Tomlinson - CEO

Howard Aihara - CFO and EVP

Analysts

[No question and answer session]

Rich Johns

Good afternoon and welcome ladies and gentlemen to the Alliance Healthcare Services First Quarter 2014 Earnings Call. My name is Rich 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 business strategy, our growth opportunity, the impact of the Affordable Care Act, the 2014 Medicare physician's fee schedule, our 2014 guidance, excepted capital expenditures for 2014, expected cost reduction and the company's effective tax rate.

As most of you know, forward-looking statements involve risks and uncertainties, which could cause actual outcomes and results to differ material 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 Factor section of the company's annual report on Form 10-K for the year ended December 31, 2013, as such report may be modified in subsequent filings with the SEC.

The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Financial and other statistical information presented on this conference call, or information required by the SEC's Regulation G, maybe accessed through the Investor Relations section of the company's website.

On today's call, our CEO, Tom Tomlinson, will provide a brief overview of the business and first quarter 2014 results, and then Tom will discuss the priorities of the organization in 2014 and beyond. Our Chief Financial Officer, Howard Aihara, will follow with the details of the first quarter 2014 results and confirm our 2014 guidance. We will have a Q&A session after our prepared remarks.

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

Tom Tomlinson

Thanks, Rich, and good afternoon everyone. Welcome to Alliance's first quarter 2014 earnings call. We appreciate your time and interest. Overall, I'm pleased with our first quarter results and significantly encourage by the trends we observed in March. As we've seen with a number of healthcare providers, our first quarter was impacted by difficult winter weather throughout much of the country. And this particularly affected volumes in our Alliance Radiology Division as patients are more able to differ treatment in the service line.

In contrast, the impact on Alliance oncology was less material. MRI's center volumes in March did move in to the positive range and cut CT strengthened considerably. As Howard will discuss in greater detail revenue for the first quarter of $105.4 million and adjusted EBITDA of $33 million is consistent with the 2014 full year guidance ranges was communicated.

It's pleasing to note that our team continue to drive additional operational efficiencies which enabled us to maintain solid adjusted EBITDA margins of 31.3% for the quarter. We believe the fundamentals of the healthcare industry are stable and will only improve as Affordable Care Act enrolees begin to utilize the healthcare system in the remaining part of 2014.

Alliance is moving forward with our plan's strategic initiatives to drive the company's long-term growth and generate free cash flow. As mentioned on our last call, we're in the transformation phase of our strategic evolution and are confident that the foundation we're laying at our business today will quickly move us into the traction phase.

Our EBITDA results for the quarter included incremental expense of approximately $1 million associated with growth initiatives. Results in Alliance radiology were disappointing in January and February, but we did see strong improvement in March which is also holding in April. This trend, in addition to our internal analysis indicates that severe weather was the primary factor impacting seeing center volume results in the first two months of the quarter. Our PET/CT volume continue to trail prior year.

In addition to the weather-related impact, I've noted we also see some pressure from payers and radiology benefit managers to move patients from the PET/CT modality to CT. On a positive note, our team did a great job of securing former customers from a competitor that recently launch the business, which we expect to help drive improve performance in this modality.

In transforming Alliance Radiology, as I described in our last call, we continue to make strategic investments to build a Rad 360 competencies with a goal of becoming the outsource partner of choice for hospitals looking to enhance the performance of their radiology service lines whether in-patient or out-patient.

And to this end, we announced earlier this week that we had acquired a cloud-based technology platform from OnPoint as well as certain key team members from that company. This technology is a strong differentiator for Alliance. OnPoint also brings a nucleus of new customers to the Alliance Radiology fold.

We believe the existing OnPoint QC or quality control offering will be an attractive toolset to our a thousand hospital customers. The vision for the OnPoint offering is to enable radiology service line management to increase efficiency, improve quality control and patient safety, decrease cost and benchmark operational performance against hundreds of providers to ensure adoption of best practices.

In addition, we're honing a radiology service line value proposition to our hospital partners both current and perspective. We've recently made improvements and investments in our context centers resulting insignificant improvement in patient service. This is a critical function for driving performance in a hospital radiology service line and we're positioning ourselves to deliver world-class performance in patient scheduling and insurance verification and preauthorization management.

In addition, we launched a web-based physician ordering tool we call "e-refer" that makes it more efficient for referring physicians to send their patients to our centers. We're also refining and renegotiating our service agreements in order to support our margin performance and improve our value proposition.

We often see that we can save our hospital partners 10% to 30% on equipment acquisition and on-going maintenance cost. As I outlined on our last call, our dual goals in Alliance radiology are to drive growth in our core mobile and supplemental service imaging business through increased competitive intensity and to build a large segment of long-term hospital radiology partnerships along by this existing core.

We've added a number of new leaders to the business in support of these dual goals and will continue to build out this team in the coming quarters. We continue to have a robust pipeline of such radiology partnerships under development, and in the coming months I expect to be able to share our success with developing these partnerships.

Now switching to our Alliance oncology business, the first quarter delivered positive results in terms of same store growth in the commencement of our strategic partnership with the medical university of South Carolina or MUSC. Our Lenox Center, we're able to drive 13.7% same store volume growth and other SRS centers. We generated growth of 4.4%. We're proud of the strong oncology performance which we achieved in spite weather challenges during the quarter.

It does highlight the fact that this service line is less likely to see patients differ treatment. In addition, however, our team took extra measures to open the centers and the evenings and on weekend in order to accommodate patients who are unable to travel during the major winter storms.

I'm pleased to report that the MUSC centers are tracking in-line with expectations to the first two months of joint operation. As a reminder, this relationship was initiated on March 1st of this year. As I previously mentioned, the MUSC relationship is indicative of our core strength, which include the ability to develop and execute marketing strategies that maximize share capture our operational expertise in driving efficiency, our ability to rapidly execute on adding cutting edge clinical technology and our reputation for clinical excellence.

This value proposition is compelling and I'm confident that MUSC will be a strong referenceable relationship as is every one of our existing partners.

As I outlined on our last call, we see a fantastic remedy for growth in this business and we're investing in our team to take advantage of the market opportunity. We've added business development resources including a new VP of business development in order to build our pipeline of opportunities and are ensuring that we have operational bench strength to execute on growth.

One of the roles we added is the senior leader to drive same center volume through more effective marketing and sales to referring physicians. We've already seen the result of these investments that we've made in business development through a growing pipeline.

Year-to-date, we've seen the increase activity in the pre-LOI stage with prospective hospital partners. And not all of this will come to fruition, but it does illustrate the acceleration of deal making activity that we're looking for in this business. The significant hospital partnerships we already have are excellent references as we look to build new relationships within the oncology service line.

In summary across both divisions, we're making investments to grow revenue and operationally execute on comprehensive radiology and radiation therapy project. Alliance radiology is well-positioned to execute on our rad Rad 360 value proposition with over a thousand existing hospital customers. We're committed to becoming an indispensible partner to our customers.

Alliance oncology is growing and we're focused on developing new comprehensive radiation therapy partnerships. As I've mentioned, we have a growing pipeline of new projects and we're seeing improved same store volume performance outside of the PET/CT modality.

The changes occurring in the industry right now play to the strengths of our hospital-centric business model. We believe that hospital systems will benefit from the affordable care act with volumes continuing to migrate in the hospitals and hospital affiliated providers. And as we move to the second quarter and are putting the severe winter behind us and we'll continue to push through our transformation and make the logical investments in the business to position us the long-term success. We're encouraged by our customer's response to a recent initiative and the direction of our business.

So now I'll hand it over to Howard to provide financial details for our first quarter results.

Howard Aihara

Thank you, Tom, and good afternoon.

Today I will review the highlights of our first quarter financial performance followed by affirming our full year 2014 gain [changes] (ph). Following our highlights from our first quarter, revenue in the first quarter of 2014 a total of $105.4 million compared to $110.4 million last year.

Most of this decreased in revenue for $3.9 million of the $5 million decrease or 4% was driven by the sale of our professional radiology services business in December 2013 into a much lesser degree in our radiology division. As Tom mentioned, the remaining decrease in revenue are 1% is primarily related to severe weather and impacted radiology patient volume industry wide, processed by strong Alliance oncology performance.

In the first quarter, on a same-store basis, summary of volumes were a negative 0.6% in PET/CT volumes were in negative 6.1%. These volume trends are not surprising given severe winter weather storms experienced in the many parts of the country during January and February.

We saw MRI and PET/CT volumes improved, and also realized these increases in March volume level sequentially in April. These decreases were partially offset by strong performance in our oncology division and both same-store result as well as the commencement of our MUSC relationship during the quarter, which resulted in a 13% increase in total oncology revenue during the quarter.

Oncology division revenue totalled $20.7 million in the first quarter of 2014 compared to $18.4 million a year ago. With us here is our MUSC relationship started on March 1st with only one month of operation is reflected in our first quarter results.

On an annualized basis, revenue from MUSC is expected to total $11 million. Oncology same-store results were highlighted over the first quarter. Linear accelerator with same-store volume growth was 13.7% and stereotactic radiosurgery in facility volume growth was 4.4% in the first quarter of 2014 compared to last year.

First quarter adjusted EBITDA totalled $33 million, a 6% decrease over last year's first quarter of $35.2 million. Of this $2.2 million decrease, about 900,000 was due to the sale of radiation oncology center and a one-time gain in one of our radiology and consolidated joint venture in the first quarter of last year.

In addition, we've invested approximately $1 million year-over-year to build our consulted sales marketing and business development capabilities in our Rad 360 program. This investment was planned as we announced in our last quarter's growth and full-year 2014 guidance call.

(indiscernible) gain on sale over radiation oncology center gained in an consolidated joint venture both in the prior year, an incremental issue in the investment this year, adjusted EBITDA decreased 1%. Another highlight from the first quarter of 2014 is related to our bottom line profitability. Pro forma diluted EPS was a process of $0.28 in the first quarter of 2014 compared to a loss of $0.4 in last year's first quarter.

As reported, diluted EPS for the first quarter was a profit of $0.18 compared to a $0.23 loss a year ago. Included in the as-reported diluted EPS was a $0.10 charge in the first quarter of 2014 and a $0.19 charge in the first quarter of 2013 due to the following items, restructuring charges, severance and related costs, legal costs and differences in the GAAP income tax rate from our historical rate of 42.5%.

In terms of CapEx, we continue to invest in solid capital projects and efficient upgrade of our assets. For the first quarter of 2014, our CapEx spend totalled $5.7 million compared to $5.6 million a year ago.

We continue to generate strong free cash flow. We define pre-cash flow as a change of net debt before investments and acquisitions and debt financing fees. This focus is resulted in alliance generating $9.4 million of free cash flow in the first quarter of 2014.

The LTM period ended March 31st and generated $48.2 million of the free cash flow or $4.43 per share. The strong free cash flow generation continue to strengthen our balance sheet. As of the end of March, total leverage is 3.5 times adjusted EBITDA and net leverage is 3.3 times adjusted EBITDA.

At the end of the first quarter, Alliance had cash balances of $29.1 million. Long-term debt totalled $514.7 million and net debt was $485.6 million.

Now, I will reaffirm our 2014 guidance ranges which remain unchanged. For full year 2014, clients expects revenues will range from $437 million to $462 million. As Tom mentioned, 2014 is a foundational year for the transformation phase of Alliance.

We believe that 2014 will be a pivotal year in terms of growing our results and capabilities in a meaningful and significant way as we look out to 2015 and beyond. Our 2014 revenue guidance range also assumes a negative $15 million, almost all of which is related to the sale of our professional radiology services business in December of 2013.

Our 2014 adjusted EBITDA guidance range is $140 million to $160 million which includes incremental investments in our sales, business development and marketing teams in $5 million to grow Alliance (indiscernible) hospital partner with radiology and radiation oncology services. We will continue to maintain cost discipline throughout the organization.

Our 2014 capital expenditure guidance is $52 million to $62 million, approximately $30 million likely to be used for maintenance CapEx with remaining $22 million to $33 million for growth projects, including our Alliance oncology MUSC project and our radiology Rad 360 projects.

We will continue to allocate sufficient resources throughout targeted investment designed to support long-term growth. Depreciation expense in full year 2014 is expected to total approximately $56 million. Our free cash flow guidance is a range from $27 million to $37 million impacting our 2014 free cash flow guidance range are cash income tax payments for full year 2014 or $14 million to $17 million which increased from $2 million of cash income tax paid in 2013.

In yearend 2013, we have $22 million for federal net operating losses and $12 million of [state NOL] (ph) all of which are expected to be used during 2014 as Alliance transition to be becoming a regular cash taxpayer during 2014. We expect to pay $24 million to $25 million of cash interest expense in full year 2014.

Thank you for your trust in alliance. We look forward to answering your questions. I'll turn the call back over to the operator to begin the Q&A session.

Question-and-Answer Session

Operator

The question-and-answer session will begin now. (Operator Instructions) At this time, there are no audio questions.

Tom Tomlinson

Okay. Well, thank you again for participating in our call today and we look forward to talking to you on a future call. Thank you.

Operator

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

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