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Alliance Imaging Inc. (NASDAQ:AIQ)

Q1 2008 Earnings Call

May 01 2008 08:30 am ET

Executives

Eli Glovinsky, - EVP and General Counsel, Secretary

Paul Viviano - Chairman and CEO

Howard Aihara - CFO and EVP

Analyst

Darren Lehrich - Deutsche Bank Securities

Mark Arnold - Piper Jaffray

Aaron Lindberg - William Smith and Company

Henry Reukauf - Deutsche Bank

Rob Mains - Morgan, Keegan and Company, Inc.

Gary Lieberman - Stanford Group Company

Kyle Smith - Jefferies and Company

Harlan Turniak - Venner

Michael - Stephens Incorporated

Eli Glovinsky

Good morning, and welcome, ladies and gentlemen, to Alliance Imaging's First Quarter 2008 Earnings Call. My name is Eli Glovinsky, and I'm 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 revenues 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, changes in the health care, regulatory and reimbursement environment. The company's ability to keep pace with technological development within the industry, the company's ability to integrate acquisitions, the effects 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 2008 guidance release, along with the required 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.allianceimaging.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 Imaging. Please go ahead, Paul.

Paul Viviano

Thank you, Eli. I would like to welcome you to Alliance's first quarter 2008 earnings call. Joining me today is Howard Aihara, our Executive Vice president and Chief Financial Officer. On today's call, I will first briefly review our first quarter 2008 results and achievements, followed by an update of the trends in the health care services industry, and the specifics associated with the diagnostic imaging and radiation therapy sectors. I will then provide an overview of our companywide initiatives, and Howard will follow with the details of our first quarter 2008 financial performance. A question-and-answer session will follow our prepared remarks.

Yesterday, Alliance announced first quarter 2008 revenue of $119.1 million, an increase of $9.7 million, or 8.9%, from the first quarter of 2007. First quarter 2008 adjusted EBITDA was $43.6 million, compared to $41.6 million as adjusted in the first quarter of 2007, a 4.9% increase. These performance indicators reflect the continued success of our many accomplishments in 2007, which have strategically positioned us for revenue and adjusted EBITDA growth in 2008. Year-over-year volume growth in health care services continues to be relatively soft. A recent report, which tracks volume data for approximately 500 acute care hospitals, reported that for the first quarter of 2008, same store admission growth totaled approximately 1% to 2% year-over-year.

Same store growth in the acute hospital sector was positively impacted by a more aggressive flu season in 2008. However, such increased admissions do not typically translate into growth in advanced imaging procedures performed at hospitals. Relatively slow volume growth in the hospital sector had been exacerbated by the somewhat challenging general economic conditions that exist today. Specifically, the shifting of insurance plans that covered with higher deductibles continues to place pressure on the healthcare industry. From our perspective, the market conditions which have yielded flat to modest same store acute hospital volume growth will remain in place for the foreseeable future.

I highlight these industry-wide statistics, because low volume growth rates in the acute care hospital sector directly impact the company's performance. Alliance generates approximately 80% of revenues from wholesale relationships, overwhelmingly with acute care hospitals. Thus, as hospital volume growth has been negatively impacted, our scan volume has also been adversely affected. Commercial insurers are continuing their efforts to manage utilization of high-cost, advanced imaging services, given continuing increases in costs.

The retention of radiology benefit managers is now widespread, which continues to be a contributing factor to modest volume growth. Strategies that health plans are implementing to control utilization include requirements for prior authorization, credentialing of all providers and clinical-based education for ordering physicians. These initiatives place undue hardship on patients and those providing services in order to cut cost, and negatively impact volumes. In addition, referring physicians continue to operate imaging technology in their private practice setting. Although the trend of adding advanced imaging to the medical group office practice setting appears to have recently slowed, this element of the imaging sector continues to be a major cause of excess supply of advanced imaging systems in many markets. This practice exists primarily due to the physician in-office ancillary services exemption under the Stark Law.

Once medical groups add these services to their practice setting, referrals which previously went to the hospital and the broader imaging community are no longer available. Numerous studies have concluded that physicians incorporating advanced imaging in their office setting leads to over-utilization, which hurts the entire industry, including Alliance. Excess supply in the market exacerbates over-utilization, both of which, in turn, generally drive pricing down. Payers reduce reimbursement to counter the rising volume of advanced imaging procedures as a way to constrain costs. This additional pricing pressure causes physicians to order even more scans to offset the decline in reimbursement per procedure. Payers often respond with additional pricing reductions, and pressure is thus further heightened. The physician in-office exemption is an important and ongoing challenge for our industry, with no immediate resolution in the near term expected.

In 2007, our retail business was impacted due to the DRA reimbursement reductions. We believe that the impact of the DRA is just beginning to be felt in the imaging industry, and we will not see the full effect until late in 2008. These changes have started to force some providers to exit the market through sale or closure of operations, and others to withdraw plans to expand or upgrade their services. Due to our business model and financial strength, we are well positioned to capitalize on these events, which are anticipated to intensify consolidation in the imaging industry.

As part of this hospital outpatient prospective payment system, or HOPPS, reimbursement update for 2008, the Centers for Medicare Services announced reductions in PET/CT and MRI technical reimbursements of 20% and 3% respectively. In addition to these announced 2008 Medicare reimbursement reductions, there continues to be significant legislative activity in Washington, D.C., regarding federal reimbursement for all providers. These discussions relate to a further delay of the significant physician professional component reductions required in July 2008, under the provisions of the SGR legislation, and possible funding sources for expansion of the State Children's Health Insurance Program, or SCHIP.

The Medicare extenders package delayed the January 2008 physician reductions for six months and extended SCHIP funding for 18 months. These extensions were funded primarily through reductions in reimbursement to the Medicare Advantage program. While the Senate Finance Committee favors additional reductions in the Medicare Advantage program to provide funding to offset the scheduled reductions, the White House has threatened to veto legislation, which further reduces such funding. White House and congressional resistance create an uncertain legislative and regulatory environment, in which imaging services may yet again be a target to fund other health care initiatives. As a result, providers will continue their aggressive efforts to protect against additional reductions in 2008 and beyond. To that end, Alliance continues to be an active participant in lobbying efforts to endorse the benefits of the diagnostic imaging sector. Alliance and the Association of Quality Imaging have been active in promoting a plan in Washington, which advocates for no additional reductions in reimbursement, and promoting the adoption of clinical quality standards as the most appropriate policy modification.

We are working diligently to minimize the impact to imaging, and planning how to strengthen the industry's position, by putting a consistent face and message to HUI's efforts on Capitol Hill with MedPAC and with CMS. Current credit market conditions including the failure of the auction rate notes market, has adversely impacted many hospitals. Hospitals with auction rate debt have been burdened with rapidly increasing interest rates, which tap into cash flow and impact their ability to invest in capital projects. Additionally, many hospitals have been further impacted by poor performance in their investment portfolios, further diminishing resources available to invest in capital. For hospitals which face these challenging circumstances, we consider Alliance to be an obvious solution.

Today, there is less new capacity entering the market. Today and for the mid-term, hospitals are struggling to meet their capital constraints. This creates opportunities for new partnerships by allowing us to provide the capital, leadership, management and services to meet our customers' needs.

Alliance is distinguished in the market by our commitment to partnering with hospitals and health care systems. We believe the joint success of our hospital partners and Alliance is the key to our company's performance. Toward that end, we continue to develop our four growth initiatives; PET/CT services, the development of fixed site imaging centers, the development of radiation oncology centers, and acquisitions. We continue to experience growth in our PET/CT business, as our first quarter 2008 revenues totaled $37.3 million, a 9% increase over the first quarter of 2007. Alliance is reported to be the largest provider of PET/CT services in the nation. Our fixed site imaging center development is similarly impressive, as we now operate 88 fixed imaging centers.

The initial stage of our investment in radiation therapy has proven promising, as we now operate 18 radiation therapy centers, including six dedicated stereotactic radiosurgery facilities, which we acquired during the first quarter of 2008. We are pleased with our efforts to aggressively enter the stereotactic radiosurgery market, which is the fastest-growing sector in radiation therapy. We are adding to our Alliance Oncology development opportunity pipeline, and are also investing in the appropriate leadership infrastructure for this entity. Alliance Oncology has developed a strategic plan, which will enable us to continue to develop this growth initiative. Toward that end, we have commenced a national search for a dedicated president of Alliance Oncology, who will be part of our executive team.

With the acquisition of Bethesda in the fourth quarter of 2007, and the acquisition of six dedicated stereotactic radiosurgery facilities in the first quarter of 2008, we believe we have taken the initial steps toward achieving these oncology-related growth strategies. The pipeline of opportunities for diagnostic imaging and radiation therapy acquisitions by Alliance is strong, and we are well positioned to take advantage of these opportunities. The Alliance M&A team will continue our highly selective and disciplined approach to acquisitions. The focus will remain on attractive return on capital, and acquiring growing organizations that fall within our strategic focus.

Additionally, we are also creating comprehensive integration plans that will allow for our new additions to continue to grow within the overall framework of Alliance. We continue to generate strong cash flow, and have capacity on our balance sheet, which is intended to enable us to proactively pursue additional acquisitions. We will continue to focus on delivering strong operating results and maintaining our adjusted EBITDA margins, as well as generating strong cash flow. We also continue to expect volume growth in PET/CT to offset the pricing pressures placed on this segment of our business. Additionally, we are committed to clinical excellence, quality patient care and customer service. Combined, these factors will enable us to experience continued success throughout 2008 and beyond.

I will now turn the call over to Howard.

Howard Aihara

Thanks, Paul. Yesterday, Alliance reported first quarter 2008 results. In the first quarter of 2008, revenue totaled $119.1 million, up $9.7 million, or 8.9% for the first quarter of 2007. Last year in the first quarter of 2007, adjusted EBITDA was favorably impacted by a $2 million sale-leaseback transaction. After taking this transaction into account, first quarter 2008 adjusted EBITDA increased 4.9% to $43.6 million, compared to $41.6 million in the first quarter of 2007.

As reported, Alliance's adjusted EBITDA in both the first quarters of 2008 and 2007 totaled $43.6 million. In the first quarter of 2008, total MRI revenue increased 4.1% to $68.2 million, compared to $65.5 million in the first quarter of 2007. The Company reduced the average number of scan-based systems to 250 systems in the first quarter of 2008, compared to 257 systems a year ago. Total scan-based MRI volume was 159,000 scans in the first quarter of 2008, compared to 163,000 scans in the first quarter of 2007. Scans per system per day were flat at 9.1 in the first quarters of 2008 and 2007. Alliance's average MRI price per scan in the first quarter of 2008 was $383, compared to $361 in the first quarter of 2007.

PET/CT revenue increased 9.4% to $37.3 million in the first quarter of 2008, compared to $34.2 million in the first quarter of 2007. In the first quarter of 2008, PET/CT scan volume increased 12% to 31,000 scans from 27,700 a year ago. The average price per PET/CT scan decreased 2% to $1,199 in the first quarter of 2008 from $1,221 in the same quarter last year. PET/CT scans per system per day were 6.1 in the first quarter of 2008, compared to 6.3 a year ago.

Total revenue from Alliance's fixed site increased 34% to $24.3 million in the first quarter of 2008, from $18.1 million in the first quarter a year ago. Depreciation expense totaled $21.4 million in the first quarter of 2008, and totaled $20.8 million in the first quarter of 2007. Amortization expense increased to $1.9 million in the first quarter of 2008, compared to $1.2 million in the first quarter of 2007. This increase was primarily due to incremental amortization expense of intangible assets related to acquisitions completed in the fourth quarter of 2007. Alliance's net interest expense increased $1.7 million to $11.8 million in the first quarter of 2008, compared to $10.1 million in the same quarter of last year. This increase 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.

Diluted EPS, adjusted for the $0.02 per share impact of the sale-leaseback transaction in the first quarter of last year, was $0.07 per share in the first quarter of 2008, compared to $0.09 in the first quarter of 2007. Weighted average diluted shares outstanding for the first quarter of 2008 were 52 million shares. Alliance's effective income tax rate as a percentage of pre-tax income was 44% for the first quarter of 2008.

For the first quarter of 2008, Alliance generated $28.3 million in cash flow from operating activities, compared to $24.7 million in 2007. Days revenue outstanding on accounts receivable were 49 days in both the first quarters of 2008 and 2007. Capital expenditures totaled $17 million in the first quarter of 2008, compared to $24.8 million a year ago. In the first quarter of 2008, the company purchased three PET/CT systems and eight MRI systems. Alliance opened two fixed site imaging centers in the first quarter of 2008. As of March 2008, the Company operated a total of 88 fixed site imaging centers, five of which are in unconsolidated joint ventures. As of March 2008, Alliance operated a total of 18 radiation therapy centers and radiosurgery facilities, of which two radiation therapy centers are in unconsolidated joint ventures.

Alliance's total long-term debt was $657 million at March 2008 and $670.8 million at December of 2007. Cash and cash equivalents was $107.2 million at March 2008, and at $120.9 million at year-end 2007. Including $64 million available in the company's line of credit, Alliance had total liquidity of approximately $171 million at March 2008. The company entered into interest rate swap agreements to hedge the future cash interest payments on approximately $185 million of Alliance's variable rate bank debt in January 2008. After taking into account these interest rate swaps, Alliance's fixed rate debt totaled approximately $491 million, or 75% of the company's total debt, with approximately $166 million, or 25%, subject to variable interest rates.

Alliance's net debt, defined as total debt plus cash and cash equivalents, was approximately $550 million at March 2008 and December 2007. The company continues to generate significant free cash flow, defined as the change in net debt before investments and acquisitions. In the first quarter of 2008, Alliance generated $10.9 million of free cash flow. Alliance's net leverage ratio, defined as net debt divided by LTM-adjusted EBITDA, was 3.1 times for the period ended March 2008, compared to 2.9 times for the LTM period ended March 2007. The company's total leverage ratio, defined as total debt divided by LTM-adjusted EBITDA, was 3.7 and 3.1 times for the LTM periods ended March 2008 and 2007.

Now, turning to our outlook, I will reaffirm our full-year 2008 guidance. Alliance expects revenues to range from $472 million to $484 million. Adjusted EBITDA is expected to range from $172 million to $182 million. We expect cash capital expenditures to range from $55 million to $65 million. Alliance expects to open 15 to 20 fixed site imaging centers, and three to five radiation oncology centers. Our full-year income tax rate is expected to total approximately 42% of pre-tax income. In terms of free cash flow, we expect a decrease in long-term debt, net of a change in cash and cash equivalents to approximately $38 million to $48 million. Weighted average shares outstanding on a diluted basis is expected to total approximately 53 million shares.

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

Paul Viviano

Thank you, Howard. Alliance is well positioned, given its experienced management team, financial strength, established record of successful operations and national infrastructure. We continue to have a strong commitment to clinical excellence, quality care and customer service. Our strategy of investing in PET/CT, fixed site imaging centers and radiation therapy will allow us to achieve continued growth for 2008. Further, consistent with our strategy, we will continue to proactively evaluate and selectively acquire radiation therapy centers, fixed site imaging centers and PET/CT providers.

Our goal is to be the first 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. Finally, we will operate our business in a highly efficient manner, while simultaneously meeting our criteria for return on capital. I also thank you for your interest in Alliance, and we look forward to answering your questions.

I will now turn the call over to the operator to begin the question-and-answer session.

Question-and-Answer Session

Operator

The question and answer session will now begin.

(Operator Instructions) Our first question comes from Darren Lehrich with Deutsche Bank.

Darren Lehrich - Deutsche Bank Securities

Thanks. Good morning, everyone. A few questions here. I just wanted to talk a little bit about the PET business. You guys are among the more productive in terms of scans per day, but we have seen that level off a little bit in, I guess, the last several quarters. Can you just talk about your view on scan per day growth and what the opportunities you think might be there?

Paul Viviano

Darren, this is Paul. We continue to add new systems to our PET-CT fleet and both on a mobile and a fixed basis. We're seeing the opportunities now to convert mobile customers to fixed site opportunities for PET/CT, and we're pleased with that. So, we have seen a little bit of pressure in terms of the numbers of scans per system per day. We anticipate that that volume will continue to return to a growth trajectory. We've said that there is ongoing pricing pressure in that business, which has been anticipated, given the DRA reductions in reimbursement. And you've seen our price per scan decline in about 2% over the last four quarters. So, in terms of growth per system per scan, if we were to look at more mature systems in our fleet and fixed sites that we operate, we would continue to see strong performance on numbers of scans per system per day.

Darren Lehrich - Deutsche Bank Securities

Okay. And just the breakdown, roughly, between fixed and mobile in the PET business --?

Paul Viviano

The vast majority of ours are still mobile. And at this point in time, we only have a handful of fixed sites that are PET-CT. We anticipate that number to actually grow fairly dramatically over the course of the next year or so.

Darren Lehrich - Deutsche Bank Securities

Okay, that's helpful. And then, just a broader question I have for you. The declines in MRI have certainly been steady. I guess just more of a big picture question as we continue to see that trend. Can you talk about how you think about the route logistics, and how -- when you lose contracts, how that might impact your what seems to be a pretty efficient logistical system, and whether there could potentially be breakdowns in the logistics there with the steady declines that you're seeing?

Howard Aihara

Hey Darren, this Howard. As the mobile MRI scan volume modestly declines as, I guess, the net number of customers declines in that business, we continue to look at our mobile routes to make sure they're efficient. We've done, I think, a very admirable job of reducing the number of systems as volumes of the scans have declined. That is an ongoing process. We do that every day. We look at our routes, we look at the customers, and we look at just working on efficiencies. So, we continue that process everyday. That's part of our job here.

Darren Lehrich - Deutsche Bank Securities

Okay, thanks. I guess just a last question. Paul, you mentioned you're looking for a new president in Alliance Oncology. Just, I guess, two things there. One, can you give us a sense for timing on that and what your expectations are for that? And then, two, I think you still have a minority partner in that business. And, I don't know if there's any view on that relationship evolving in a different way over the next couple of years, but if you could just give any flavor on that? Thanks.

Paul Viviano

Thanks, Darren. Relative to the first question, we started the search process in the last four weeks, and we anticipate that a process like that for a national search would take about two additional months beyond what we currently experienced. We have a number of very interested and highly qualified candidates. I would expect that for our next call, we'll have an announcement to share with you. But that is subject to the usual gives and takes of such a recruitment process. Relative to our minority partner, as you identified, UPMC retains their 20% interest in Alliance Oncology. And at this point in time, we expect no changes in the structure or ownership of Alliance Oncology.

Darren Lehrich - Deutsche Bank Securities

Okay, great. Thanks, guys.

Paul Viviano

Thanks, Darren. Take care.

Operator

Thank you. The next question is coming from Mark Arnold with Piper Jaffray.

Mark Arnold - Piper Jaffray

Good morning, guys. Another great quarter. I guess, just to follow up on that question that was just asked on PET/CT, just remind me. When we look at your numbers, scans per system per day is obviously one number, but how are the number of implied days, you know, the number of days that you're actually operating those systems, how has that trended in the last couple of quarters? From my own kind of calculations, it would look like that's trickling up, and that's probably -- so, overall, your efficiency on those PET/CT units is actually increasing, even though your scans per day is declining. Am I looking at that correctly?

Howard Aihara

Mark, this is Howard. I guess, the number of -- basically, the capacity of our systems, we're selling on the margin more weekend days than we have in the past historically. So, the number of -- the efficiency of our systems has improved. The scans per system per day have kind of flattened out in the near term here, but our efficiency continues to improve. So, when we use our units more efficiently that obviously improves our profitability.

Mark Arnold - Piper Jaffray

And I would assume you still have -- you probably still see opportunities there to continue to sell maybe some more weekend days. So, we might see that continue, where the number of days in operation keeps increasing, but we don't necessarily see it in the scans per system per day number?

Howard Aihara

That's correct. And where I think you see it show up is the growth in scan volume, where we grew at approximately 12% in scan volume year-over-year.

Mark Arnold - Piper Jaffray

Okay. That's what I thought. I just wanted to clarify. Then on the price per scan on the PET-CT side, I was shocked at how strong that was in the quarter. Given the HOPPS changes, I guess we were looking for a number below where you came in here. And I was surprised on the sequential growth. Can you give us any color on that? Are we seeing an increase in the retail mix? And is that driving that? Or, are you just holding up your pricing that well on the wholesale business?

Howard Aihara

Well, you know, Mark, I think you mentioned that there is a number of factors in play here. It's a wholesale-retail mix. It's a commercial and Medicare mix. It has to do with when contracts come up for re-pricing. So, it's any number of factors. We do believe and continue to believe that there will be pricing pressure in PET/CT for the foreseeable future, perhaps maybe accelerating a little bit. Historically, I think we've seen about 2% to 3% price pressure in PET/CT. And perhaps that it's going to be just a tad more than that.

Mark Arnold - Piper Jaffray

Okay. Then, are you starting to see -- once again, on PET/CT -- are you starting to see a bigger demand for these services from radiation therapy centers for treatment planning purposes?

Paul Viviano

That's a good question, Mark. This is Paul. You may have seen the request from the National Oncologic PET Registry to permanently expand PET/CT coverage for certain kinds of cancer diagnoses. Currently, you have to go through a very lengthy process to submit a significant amount of data to get certain kinds of scans covered on an ongoing basis. And we believe that's likely to be approved. And we think that's also likely to experience a significant increase at cancer centers as PET/CT is more aggressively utilized to help evaluate the progress that of course, the treatment of radiation therapy offers for a patient. So, we anticipate that that could translate into an opportunity for us to serve the needs more proactively of radiation therapy centers.

Mark Arnold - Piper Jaffray

Great. And then, how much, today, are you doing in terms of myocardial PET/CT scans? And do you expect those cardiac scans to increase here going forward?

Paul Viviano

At this point in time, while the technology really is highly beneficial for certain kinds of cardiac patients, at this point in time our volume is de minimus. We had hoped that Medicare reimbursement would be significant enough to translate into this becoming a meaningful part of our PET/CT imaging related business and expand into cardiac in a big way. Unfortunately, the reimbursement levels have lagged very significantly. And given the challenging logistics associated with operating a cardiac imaging PET/CT business, it really doesn't provide for a return or any kind of operating margin. So, with increased reimbursement from Medicare, and subsequently from commercial payers, that potentially could turn into a growth vehicle for us. At the moment, it appears that that's not likely in the short-term, given what is very, very low, well below cost Medicare reimbursement for the service.

Mark Arnold - Piper Jaffray

Okay. Then, Paul, you touched on in your opening comments about the credit markets and the impact it's had on hospital spending. I guess, I would agree that Alliance is probably pretty well positioned to take advantage of that but can you maybe talk a little bit more about how you see that potentially playing out in your business? Do you expect it to maybe put less pressure on your mobile business today, or maybe even increase demand for your mobile business? Or do you think more of that interest will be as a capital partner on new fixed site imaging and radiation therapy projects?

Paul Viviano

I think it's likely to be the latter. We see the pipeline for opportunities in fixed sites and radiation therapy expanding. It may be coincidental to the credit crunch. We don't think that it is. We think they are connected. And so, we see hospitals having their net income impacted by poor performance of their investment portfolio, largely if they invest in equities, and also from increasing interest rates as a result of a variety of credit factors that the hospital industry faces, including the ARN issue that I referenced in the script. That translates -- it appears it translates in the short-term to increased opportunities for fixed sites and radiation therapy centers, and not so much extending to our mobile business.

Mark Arnold - Piper Jaffray

And if that's -- if those issues are driven more by the net income issues on the poor investment performance on those investment portfolios, then that could continue for a while, even if the auction rate securities market, or if the issues around the auction rate securities changes, get addressed by most of these hospitals in the next few months.

Paul Viviano

Right. I think they are separate. And it would appear that while the auction rate note market will improve, it doesn't appear that the portfolio or performance of many organizations in the short-term is likely to see that kind of increase in both the realized and unrealized gains for a lot of organizations that have balance sheets that are meaningful and invested in equities. That's likely to be a much longer term challenge and problem for hospitals and their resulting net income, which translates into opportunities for us to prove our value proposition to hospitals that historically have been stronger in terms of net income generators. Now, while they're under pressure, allows for us to present a more viable case to many customers and potential customers that historically didn't have the need to partner with someone like us. So, we believe these opportunities exist in the marketplace and are reflected in our pipeline of activity.

Mark Arnold - Piper Jaffray

You made the acquisition of the six CyberKnife facilities a few weeks ago. I would assume you received quite a few phone calls from current hospital customers kind of interested in adding those dedicated radiosurgery capabilities kind of after that press release went out. Can you give us a sense of what kind of buzz that's created for Alliance in the radiation oncology space?

Paul Viviano

Well, we're thrilled with the reaction of the marketplace. Our Alliance Oncology strategy has revolved in its very initial stages around helping hospitals, upgrade their existing equipment to IMRT and IGRT. And that pipeline continues to be strong and growing, partly as a result of the issues we identified in the credit market just a minute ago. We've also been successful with the acquisition of Bethesda and the acquisition of those radiation therapy centers. This latest addition to our strategy of developing dedicated stereotactic radiosurgery facilities reflects the market demand and the recognition of the great growth potential for SRS in the cancer care market. It allows us to partner with hospitals. And most of these systems are hospital-based. And the growth trajectory of SRS on a dedicated basis is quite strong.

So, we have received calls from some hospitals. We're working with a number of hospitals currently to help them find the right spot, the right location, the right infrastructure to operate these dedicated SRS systems. These are obviously in large urban and suburban markets. We anticipate that these are markets that have 750,000 to 1,000,000 as a population base, at a minimum. And there are a number of hospitals that we're in discussion with. And the strength we bring in terms of operations management, marketing, et cetera, are of potential significant advantage and part of our value proposition to a hospital as they consider adding dedicated stereotactic radiosurgery, which often is designed to augment their existing provision of radiation therapy services most of these hospitals have -- already.

Mark Arnold - Piper Jaffray

Okay. Then, just one last area. You talked about the acquisition environment and kind of the DRA really, I guess the independent imaging providers and a lot of the freestanding providers really starting to suffer here in 2008. How would you characterize the overall acquisition environment today in terms of size of the pipeline? Kind of what kind of deals are out there? And have multiple expectations become more reasonable?

Paul Viviano

The acquisition pipeline is full. It's all across the board. We've identified historically that we have an interest in fixed sites in CON states, PET/CT providers that could provide a significant amount of synergy with us, as well as in radiation therapy centers. And the pressures in each of those sectors are somewhat different. And so, we do see in the fixed site environment a lot of entities considering sale and divestiture. And many of them are retaining bankers or small brokers to help them through that process. And in that part of the market, we do see multiples and expectations associated with that under some pressure, meaning that they're slightly declining.

Given that our standards are so high and that we're focused on fixed sites and CON states, the centers and the entities that would be of interest to us are largely at the higher end of the multiple range, given that these are organizations that are operating well, that have the potential to grow and aren't distressed assets that are in need of a turnaround. There are lots of those assets for sale at very low multiples, that we're not interested in pursuing, and would not be a good fit for us. In PET/CT, given the Medicare pricing pressure, I think sellers' expectations have also declined slightly. In radiation therapy, I don't believe that the sellers' expectations have been meaningfully modified, given that they were unaffected by the DRA.

Mark Arnold - Piper Jaffray

Great. Thanks, guys. Great quarter.

Paul Viviano

Thanks, Mark.

Operator

Thank you. Our next question is coming from Whit Mayo with Stephens Incorporated.

Michael - Stephens Incorporated

Hey, guys. It's actually Michael sitting in for Whit. Just a quick question on your RT centers. I was wondering if I could get the count there alongside the amount you have in development?

Paul Viviano

Michael, we disclosed in the script we have 18 total radiation therapy centers, six of which are dedicated stereotactic radiosurgery. Two of the radiation therapy centers are unconsolidated, in unconsolidated joint ventures. In terms of the centers under development, we don't routinely disclose that until those centers actually open. We've provided guidance for the year that we would open between three and five radiation therapy centers, and that's unchanged.

Michael - Stephens Incorporated

Okay. Okay. And just one follow-up there. Of the RT centers you have, that you had to open in the last 12 months, how many of those are cash flow positive at this point?

Howard Aihara

Well, Michael, this is Howard. We don't specifically disclose on particular centers in terms of performance. But, the portfolio of centers is operating according to plan and within our expectations.

Michael - Stephens Incorporated

Okay. Maybe one other way to ask the question, what would be the typical timeline for a center to be cash flow positive?

Howard Aihara

Well, you know, it varies significantly from center to center, depending on the partner and the ramp-up. And I guess, typically, you see cash flow breakeven -- and this is, again, just a very general statement -- somewhere within the first year of operation. But, it can be much shorter than that, and it can be a little bit longer than that.

Michael - Stephens Incorporated

Okay. Okay, great. That's all my questions.

Paul Viviano

Thanks, Michael.

Michael - Stephens Incorporated

Thanks.

Operator

Thank you. Our next question is coming from Aaron Lindberg with William Smith and Company.

Aaron Lindberg - William Smith and Company

Thanks. Just a couple of quick follow-ups on these other questions. Do you continue to exclude the acquisitions from the guidance, specifically the six stereotactic facilities you acquired?

Howard Aihara

Aaron, this is Howard. The acquisitions we did not include in our guidance. The acquisition of the six stereotactic radiosurgery facilities is not that meaningful in terms of the purchase price and the revenue. We did reaffirm guidance of $472 million to $484 million of revenue for the year.

Aaron Lindberg - William Smith and Company

And that would be inclusive of the acquisition, as well, then?

Howard Aihara

That's correct.

Aaron Lindberg - William Smith and Company

Okay. And then, is the M&A team that you're developing now in place? Or, are you still building that out?

Paul Viviano

Aaron, this is Paul. We have a handful of highly capable members of our M&A team, led by an executive vice president, Chris Joyce. And we continue to add modestly to that team, given the large number of opportunities that we're currently evaluating.

Aaron Lindberg - William Smith and Company

And are there other additions that you're looking for, other than the president for Alliance Oncology, and then completing that build-out?

Paul Viviano

We have one vacancy. One of our regional executive's spot is open at this point in time, so we have recruitment underway for that. It's a replacement of an existing physician. So, there are no other new net recruitments that are underway.

Aaron Lindberg - William Smith and Company

Okay, great. Thank you.

Paul Viviano

Thank you.

Operator

Thank you. Our next question is coming from Henry Reukauf with Deutsche Bank.

Henry Reukauf - Deutsche Bank

Hey, guys. Actually, most of my questions were answered. And congratulations on a nice quarter. Actually, just a question on detail, are you going to start breaking out the radiation business separately as we go forward, since it's a growing portion of the business?

Howard Aihara

Henry, this is Howard. In terms of breaking out radiation therapy separately, at this stage, you know, we've given guidance as to the revenue of $19 million to $21 million for 2008, which we're attracted to and we're reaffirming. As our business grows, we will break that out separately at some point here in the future.

Henry Reukauf - Deutsche Bank

Okay. Thanks very much.

Paul Viviano

Thanks, Henry.

Operator

Thank you. Our next question is coming from Rob Mains with Morgan, Keegan.

Rob Mains - Morgan, Keegan and Company, Inc.

Hey, good morning. A follow-up on the radiation therapy question. I guess the comment that the Accuray deal isn't going to be that significant sort of lessens this. But, in terms of modeling that came right at the end of the quarter. Right?

Howard Aihara

Rob, this is Howard. You are correct. It was at the very end of March that we closed that deal.

Rob Mains - Morgan, Keegan and Company, Inc.

Okay. And then, the guidance for tax rate for the year, is there going to be some seasonality or something we should be looking for? Because obviously, you are above 42% in the first quarter.

Howard Aihara

Yes. Again, Rob, this is Howard. That's a very good question. The way the tax provisions work is that there is a little bit of, I don't know if I would call it seasonality. But just the way they work, in terms of -- there are a FIN 48 liability that we need to accrue or expense that occur in the first part of the year that GAAP makes us accrue. And in the latter half of the year, we start relieving those, you know, call it tax contingencies. So, I expect that our second half tax rate to be lower than the first half tax rate.

Rob Mains - Morgan, Keegan and Company, Inc.

Fair enough. And then, did I hear you correctly, Howard, that during the quarter you bought two PET/CT and eight MRI systems?

Howard Aihara

Yes, that's correct.

Rob Mains - Morgan, Keegan and Company, Inc.

Okay. And then I had just one question on kind of the initial comments about where the industry stands. On one hand, there's an issue of physician self-referral that's a challenge to you being able to achieve volumes. On the other hand, you said that one of the sort of reimbursement type headwinds you're facing is managed care organizations with credentialing and pre-authorization requirements. It would seem to me that those would work kind of counter to physicians seeking to self-referral. In the end, is that going to be a positive or a negative to you?

Paul Viviano

Rob, this is Paul. Our experience so far in this kind of evolving set of circumstances revolves around physicians adding equipment to their office practice setting. And so, while that was a very strong trend until the DRA was passed, and then we've referenced that that trend is decelerating. So, there are fewer doctors actually adding new equipment into their office practice setting today than there has been historically over the last five to seven years. That's a positive. In markets where physicians have already made an investment and operate advanced imaging in their office setting, that continues to be a negative for us. Those are scans that are lost to us and to the hospital, and any other provider in the marketplace.

And that has a life of its own, where our experience is -- and there have been lots of studies dedicated to this that all come to the same conclusion -- that physicians in that kind of setting tend to over-utilize and order unnecessary and excess numbers of scans. That does provide opportunities for radiology benefit management to focus on those scanned. That it also has an effect of driving down pricing in the market. So, it's a double-edged sword. Most of these trends, if you're in a market where doctors already have equipment in their office that has had an adverse effect on our volume and the growth of our revenues and volumes. In markets where physicians haven't done that as frequently, we continue to gain the benefit of those referrals. I'm not sure I'm addressing the full extent of your question.

Rob Mains - Morgan, Keegan and Company, Inc.

Sure.

Paul Viviano

But we'd be happy to provide more light, if you have additional types of questions.

Rob Mains - Morgan, Keegan and Company, Inc.

Yes. Let me just ask it a slightly different way. In markets where there are physicians already owning their own equipment, it would seem -- or would it seem that efforts on the part of managed care organizations to do credentialing, in particular, but also, to some degree, pre-authorization, could possibly hurt them worse than what hurt you in a position where you might be able to get some of the share back, if there's excessive pressure put on them.

Paul Viviano

I guess it's possible. Our experience is reflected in a study that United Health Plan published not long ago about their efforts to impact physician self-referral for advanced imaging. And so, this revolves around a medical group in the Midwest that they did not name, pretty significant-sized, 20 physicians. And in this case, these doctors added a CT scanner to their practice. So, historically, their use on a normalized basis was referred to in this study as 1.0. After the physicians added the equipment to their office setting, their utilization went to 4.5. So, a very significant increase in utilization. United recognized it, try to address this spike in utilization. And after a year of trying to impact the utilization, they were unsuccessful in doing so, because the physicians expended additional time in justifying the scans to the pre-authorization staff of United. The physician would get on the phone and explain why the CT was needed, and it was hard for a utilization manager to counter that argument. So, in that case, their utilization management efforts were unsuccessful. But those excess scans still occurred, because the physicians went out of their way to justify it.

Rob Mains - Morgan, Keegan and Company, Inc.

That's it. That's very helpful. Thanks.

Paul Viviano

Thanks, Rob.

Operator

Thank you. Our next question is coming from Gary Lieberman with Stanford Group.

Gary Lieberman - Stanford Group Company

Thanks. Good morning.

Paul Viviano

Good morning.

Gary Lieberman - Stanford Group Company

It looks like you guys didn't convert to many mobile sites to fixed in the quarter. But based on some of your earlier comments, it sounds like you still have a pretty robust pipeline in terms of the conversions. Is there anything in the quarter that would have caused you deliberately to slowdown the pace or anything else that was going on?

Paul Viviano

No, not at all, Gary. We have a strong pipeline of conversions from mobile to fixed, as well as new customers to us, that we're in the process of developing fixed sites. Obviously, if you look at the numbers, Howard reaffirmed the trajectory of the number of fixed sites that will open. And so, obviously, they're a little bit backend-loaded. And it's just a little bit cyclical and revolves around the construction cycles and other kinds of things that look like they were just adversely affected a little bit in the first quarter. But we don't anticipate that anything other than timing of construction projects and getting things licensed and opened.

Gary Lieberman - Stanford Group Company

Okay. And nothing along the lines of sort of, you know, as the consolidation within the industry takes place, waiting to see where specifically a site may or may not happen? Anything along those lines?

Paul Viviano

No. At this point in time, all 15 to 20 of the sites we've identified this year have signed contracts. Projects are under construction. Some are complete and awaiting licensure and final authorization by Medicare, et cetera. So, we're not in a wait-and-see mode in very few markets at this point in time. It's full speed ahead.

Gary Lieberman - Stanford Group Company

Great. Thanks a lot.

Paul Viviano

Thanks, Gary.

Operator

Thank you. Our next question is coming from Kyle Smith with Jefferies and Company.

Kyle Smith - Jefferies and Company

Good morning, gentlemen. And congratulations on a pretty solid quarter. Most of mine have been asked. I do have a few left. One, the six radiosurgery centers that you acquired at the end of March, did we see all of the cash flows associated with that acquisition in the first quarter? Or are there some additional outflows that we'll see in the second quarter?

Howard Aihara

Hi, Kyle. This is Howard. There will be, in addition to the $10.6 million that we spent in the first quarter for that acquisition, there will be a little bit more that was held in contingency that we expect to expend in the second quarter, and release that pending the conclusion of these contingencies. It is a very small amount, though.

Kyle Smith - Jefferies and Company

Under $1 million?

Howard Aihara

Approximately $1 million.

Kyle Smith - Jefferies and Company

Okay, great. And then, I wanted to get a little bit more color on the MRI pricing trend. It was flat-lined for quite some time. And then suddenly we see these $9 to $10 sequential increases. Is this some sort of new sustained up-trend, where I don't fully understand the dynamics? Some temporary factor driven by mix, or the acquisitions that you've made, a stair step to a new plateau? Just anything that you can tell me about the drivers, so I can better understand this trend.

Howard Aihara

Sure, Kyle. This is Howard. As you recall, in the fourth quarter of 2007, we acquired New England Health Enterprises, which was entirely a retail revenue MRI operation. So, you saw a partial quarter increase in pricing in MRI, due to the fact that we have a higher retail mix now, given the fact that that's 100% retail billing. So, in the first quarter of 2008, you saw the full impact of four quarters' worth of the New England Health Enterprises' operations in our numbers.

Kyle Smith - Jefferies and Company

Okay. So, it was really a stair step that happened in the middle of the fourth quarter.

Howard Aihara

That's correct.

Kyle Smith - Jefferies and Company

And there has been no change in the underlying trends in the rest of your business for MRI pricing?

Howard Aihara

No. The rest of our MRI pricing has actually been pretty stable over the last two years.

Kyle Smith - Jefferies and Company

Okay. And then, on the scans per system per day front, you've already given a lot of helpful color. There was one thing that I would be interested to know about, given that, Paul, you mentioned that there'll be a big increase in the number of fixed sites with PET/CT systems. Is there any difference that you see between your fixed and your mobile systems in the scans per system per day, and in the days utilized that would be relevant to our understanding of how these metrics might change over time?

Howard Aihara

Sure, Kyle. This is Howard. In terms of fixed site PET/CT center, typically, the volumes on a per day basis will be lower and increase throughout time. So, I would expect that as our fixed site PET/CT business increases, that would put a bit of downward pressure on our average scans per system per day. But, my expectation is that will be offset by our mobile PET/CT scans per system per day increasing.

Kyle Smith - Jefferies and Company

Okay. So, maturation on the mobile side will offset some of the pressure on the fixed site.

Howard Aihara

That's our current thinking.

Kyle Smith - Jefferies and Company

And a mature fixed site, obviously, it's a little bit early to be calling something a mature fixed site at this point. But is your expectation that a mature fixed site will have similar scans per system per day to a mature mobile site? Or is it going to be permanently lower?

Howard Aihara

Kyle, this is Howard. It could. At this stage, we have a very limited sample of fixed site PET/CT centers that have been around for a while. I think at this point, it's too early to make a conclusion. I think that we see that overall, I think our expectation is that our kind of total portfolio scans per system per day in PET/CT, both mobile and fixed, will stay either steady or slightly increase over time.

Kyle Smith - Jefferies and Company

Okay, great. That's helpful. And then, just one last question. When you conduct these mobile to fixed conversions, are there -- I'm specifically thinking of billing and collection, but there may be other areas that are relevant to this question -- do you take over that part of the operation? Or, are you strictly limiting yourself to the capital investment and the management of the systems?

Paul Viviano

Kyle, this is Paul. Typically, in a conversion kind of scenario, we would provide the technology, hardware and software. We would staff it with the technologists and a site manager. We would interface with the hospitals' RIS and PAC system. We would have all marketing, management, staffing of technologies, et cetera. The scheduling of patients can either fall to us or to the hospital via a shared information kind of a system. And it varies by site and by preference. Some prefer the center that we would operate to schedule patients, in which case we would do so, and register them, et cetera. In others, the hospital prefers to maintain the scheduling, and a schedule provided to us kind of real time. So, it does vary a little bit by customer. And as you'd expect, the financial relationship would be adjusted appropriately.

Kyle Smith - Jefferies and Company

Okay. And then, I know it continues to be a wholesale arrangement, but the mechanics of billing and collection. Are those -- is that also subject to the particular contract, like the scheduling? Or, does that typically fall on the hospital?

Paul Viviano

If it's a wholesale kind of a relationship, then they would bill and collect through their normal billing and collection department. If it's a retail joint venture site, then we would provide for that by our staff.

Kyle Smith - Jefferies and Company

Okay, great. That's very helpful. I appreciate all the color.

Paul Viviano

Thanks, Kyle.

Operator

Thank you.

Our final question is coming from [Harlan Turniak] with [Venner].

Harlan Turniak - Venner

Good morning, guys. How are you?

Paul Viviano

Morning.

Harlan Turniak - Venner

Not to belabor this point on the PET/CT utilization, but if you were to look at it on the same store basis and/or if some of your newly opened centers were operational on a mature basis, would that have increased, decreased, or been about the same?

Howard Aihara

Harlan, this Howard. I think it would have been about the same. The utilization would have been about the same. We always have a number of customers that are ramping up. We have a number of customers that are fairly mature. So, all in all, I think the number stays about the same.

Harlan Turniak - Venner

Can you provide a little bit more color regarding the impact of the deterioration in the credit markets and how that impacts local municipal hospitals that may not have access to the balance sheet power and capital that you guys do, coupled with some of the commentary that we've heard out of the OEMs on the imaging side, GE, Toshiba, what have you, regarding the decline in their sales, and how you guys can capitalize on that opportunity?

Paul Viviano

Harlan, this is Paul. We've made a few comments in reference to that this morning. And again, we think this is a real opportunity for us, as hospitals struggle through the challenges of the credit market, both their increasing interest rates and poor performance of their stock portfolio that they might have on their balance sheet. No doubt that hospital net income has been impacted as a result of those two factors. We think that the outlook is that their net income will continue to be under pressure, given the performance of their stock portfolio and the losses that they realized. That has translated into, we believe, hospitals spending less on capital equipment. That does provide an opportunity for us, because the needs of hospitals to add new advanced imaging equipment to remain state of the art, as well as to add radiation therapy equipment for the same purposes, remained in place. And our sense is, this provides us for additional opportunities today and for the foreseeable future, that the lack of capital available to spend in hospitals is an opportunity for us.

Harlan Turniak - Venner

Got you. And then, I think one of the other callers had questioned the number of centers that are currently operating at a negative cash flow basis. I'm not really curious about that level of detail. But in aggregate, can you quantify sort of how much negative EBITDA drag you are currently experiencing as a result of newly opened centers, newly acquired centers, or as a result of your growth initiatives that have occurred post your previous earnings guidance?

Howard Aihara

Harlan, this is Howard. In terms of -- I think maybe a better way to answer this is that, if you look at our fixed site business, our mobile MRI business, our PET/CT business, the margins on all of those three businesses are very, very close to each other, within, you know, call it 100 to 150 basis points of each other. So, all of those products and services that we offer are right around kind of our -- adjusted EBITDA margin of 36%, 37%.

Harlan Turniak - Venner

And, on the M&A and acquisition pipeline front, while we could certainly appreciate your savviness of accessing the capital markets in a fairly challenging market and getting access to 7%, 8% paper, it's currently a drag on net income carrying all that cash on your balance sheet. And it's been about five months. Can you give us a little bit more clarity around some of the timing of certain acquisitions, and when you sort of expect us to be able to recognize some of those additional growth opportunities?

Paul Viviano

Harlan, this is Paul. We did access the capital markets, because we perceived that the window was open and might not have been for very long. In retrospect, we're pleased that we have the liquidity on our balance sheet, and believe that physicians, as well, and has distinguished us in some processes that we're in as being a highly qualified buyer. And so, we're pleased we have the liquidity. We finished the one small acquisition in the first quarter. There are number of other deals that are in the pipeline that are in advanced stages of discussions, negotiations, due diligence, et cetera. And as you know, some of these acquisitions -- or all of them -- take on a life of their own and develop a cycle of due diligence and reviews of the quality of earnings, of billing and credit and collection and a variety of other things that need to be accomplished in order for us to feel comfortable and confident that an acquisition is the right fit for us.

So, there is a large number of opportunities that we're evaluating in all of the strategic areas that we referenced -- PET/CT, fixed sites and CON states, as well as in radiation therapy. And we anticipate that the resources that we have available on our balance sheet will be put to good use. And we'll provide details as these acquisitions close. So, there are a number that we're in, you know, that we're looking at and in meaningful discussions with currently. And hope to have news as the year evolves.

Harlan Turniak - Venner

Great. Would you guys consider, to the extent there aren't any large opportunities, buying back stock, given how attractive the valuation is currently, or on a multiple or free cash flow basis? Or would you pursue opportunities in the M&A pipeline first?

Paul Viviano

Harlan, at the moment, we'd say we'd certainly consider a stock buyback. It is our preference in the short-term to focus those resources on acquisitions to continue the growth trajectory of the company, as opposed to buying back stock. That's something we'll evaluate as we go through the process and the evolution of the year. But at the moment, our focus is on investing in de novo sites, as well as our acquisitions.

Harlan Turniak - Venner

Great. Well, congratulations on a good quarter, and keep up the good work.

Paul Viviano

Thanks, Harlan. Appreciate it.

Operator

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

Paul Viviano

We thank you for your interest in Alliance Imaging, and we look forward to speaking with you again to discuss our second quarter 2008 results, which will take place in August. Thank you very much for joining us today.

Operator

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

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Source: Alliance Imaging Inc. Q1 2008 Earnings Call Transcript
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