Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Alliance Imaging, Inc. (NASDAQ:AIQ)

Q2 2008 Earnings Call Transcript

August 1, 2008 8:30 am ET

Executives

Eli Glovinsky – EVP, General Counsel and Secretary

Paul Viviano – Chairman and CEO

Howard Aihara – EVP and CFO

Analysts

Mark Arnold – Piper Jaffray

Darren Lehrich – Deutsche Bank

Whit Mayo – Stephens, Inc.

Aaron Lindberg – WM Smith & Co.

Rob Mains – Morgan Keegan

Gary Lieberman – Stanford Group Company

Brian Schinderle – Wolf Point Capital

Mike Scarangella – Merrill Lynch

Harlan Cherniak – Venner Capital Management

Eli Glovinsky

Good morning, and welcome, ladies and gentlemen, to Alliance Imaging's second quarter 2008 earnings conference call. My name is Eli Glovinsky and I am the company's Executive Vice President, General Counsel and Secretary. At this time, I would like to inform you that this conference is being recorded for rebroadcast and that all lines have been placed on mute to prevent any background noise. We'll 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 and assumptions. These risks and uncertainties include factors affecting the company's ability to stabilize its core MRI business and grow revenue and profits from PET/CT fixed-site imaging centers and radiation therapy; the company's leverage, including fluctuations in interest rates; the company's ability to obtain financing; the effect of operating and financial restrictions on the company's debt instruments; the accuracy of the company's estimates regarding capital requirements; the effect of intense levels of competition in the company's industry; changes in the healthcare, regulatory, and reimbursement environment; the company's ability to keep pace with technological development within the industry; the effect of higher energy prices; the company's ability to integrate acquisitions; the 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 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's 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 second 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 second quarter 2008 results and achievements, followed by an update of the diagnostic imaging and radiation therapy sectors, and an update on trends in the healthcare services industry. I will then provide an overview of our company-wide initiatives, and Howard will follow with the details of our second quarter 2008 financial performance and an update to our full-year 2008 guidance ranges. A question-and-answer session will follow our prepared remarks.

Yesterday, Alliance announced second quarter 2008 revenue of $122.8 million, an increase of $11 million, or 10% from the second quarter of 2007. Sequentially, second quarter 2008 revenue increased 3% over first quarter 2008 revenue of $119.1 million.

Second quarter 2008 adjusted EBITDA was $46.6 million compared to $42 million in the second quarter of 2007, an 11% increase. Sequentially, second quarter 2008 adjusted EBITDA increased 7% over the first quarter 2008 adjusted EBITDA of $43.6 million.

These performance indicators reflect the success of our many operational and strategic initiatives, which have positioned us for revenue and adjusted EBITDA growth in 2008. We are pleased that Alliance's first half 2008 results have put us in the position to raise our full-year financial guidance, which I will ask Howard to walk through in detail in a moment.

As noted on previous earnings calls, the pipeline of opportunities for diagnostic imaging and radiation therapy acquisitions by Alliance remains strong and we are well positioned to take advantage of these opportunities. We are enthusiastic regarding the Medical Outsourcing Services acquisition announced earlier this week and look forward to combining the resources and experience of our two organizations over the next six to nine months. We expect the MOS team to seamlessly merge into our business. The synergies, which will be realized over the next 12 months, will complement the high quality and superior value offered to our patients and customers as the nation's largest provider of PET/CT services. We expect this acquisition to be accretive in 2008.

The Alliance team will continue our highly-disciplined approach to acquisitions. The focus will remain on attractive returns on capital and a focus on growing organizations, which meet our strategic criteria, including fixed-site imaging providers in CON states; PET/CT providers, both mobile and fixed; and radiation therapy centers. We have been successful at integrating all of the acquisitions we completed in 2007 and 2008, and are refining comprehensive integration plans, which will allow our new additions to continue to grow within the overall framework of Alliance.

During 2008, we have continued to see significant legislative and regulatory healthcare activity in Washington, D.C. On July 15, Congress passed the Medicare Improvements for Patients and Providers Act, which included updates to the 2008 Medicare Physician Fee Schedule and also mandates that – number one, the 10% physician professional component reductions slated for the second half of 2008 be replaced with a 0.5% increase retroactive to July 1, 2008. Number two, all imaging facilities and providers be accredited as of January 1, 2012. Number three, CMS to design an accreditation process by January 1, 2010, a positive for Alliance and a provision we have long advocated for. Number four, CMS to establish a two-year demonstration project to assess the appropriate use of advanced diagnostic imaging services to be implemented by January 1, 2010, which Alliance plans to fully participate in. And number five, CMS to evaluate the current reimbursement formula.

On June 30, 2008, CMS posted the proposed Medicare Physician Fee Schedule rules for 2009, which is open for comment through the end of August. In terms of reimbursement for next year, CMS has proposed a slight increase in 2009 MRI rates, while maintaining 2008 PET/CT reimbursement levels through next year. We view this as a positive for the industry and also believe that CMS’ proposed initiative to expand IDTF quality standards to all imagining services provider on an out-patient basis in physician offices will benefit imaging companies overall.

In addition, a recent report by the Government Accountability Office with respect to Medicare imaging utilization highlights the growth in self-referral scan volumes, especially by specialty physicians, and indicates that this growth has significantly contributed to the trajectory of spending on advanced diagnostic imaging by Medicare.

While prospective reimbursement reductions appear to be modest in 2009, we will continue our aggressive advocacy efforts, along with other providers, on behalf of imaging, to oppose additional reimbursement reductions. 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, or AQI, 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 modifications. We are working diligently to minimize the potential for negative impact to imaging and further working to strengthen the industry's position by putting a consistent face and message to AQI's efforts on Capitol Hill with MedPAC and with CMS.

Turning to what we see as an opportunity in the market, current credit market conditions have placed hospitals under pressure. Hospitals with auction rate debt have been burdened with increased interest rates, which tap into cash flow and impact their ability to invest in capital projects. In a recent survey of hospital finance executives, 80% noted that municipal bonds and auction rate securities have become a problem and have caused hospitals to be more cautious with long-term capital plans. Additionally, many hospitals have been further impacted by poor performance in their investment portfolios, further diminishing resources available to invest. For hospitals which face these challenging circumstances, we consider Alliance to be an obvious solution to address their capital constraints. This creates opportunities for new partnerships by allowing us to provide the capital, management, and services to meet our customers' needs.

The healthcare services industry continues to experience pressure due to the somewhat challenging general economic conditions that exist today, including, shifting of insurance plans to coverage of higher deductibles; health plan initiatives to control utilization , including requirements for prior authorization; the acceleration of referring physicians adding ancillary services to their private practice setting; and the general economic conditions, which may continue to place pressure on healthcare services providers. These factors continue to contribute to soft volume growth in the acute care hospital sector, totaling approximately 1% to 2% year over year.

Alliance is distinguished in the market by our commitment to partnering with hospitals and healthcare systems. We believe the joint success of our hospital partners and Alliance is the key to our company's performance. Toward that end, we're focused on operating our core imaging business efficiently and generating strong cash flow, as well as continuing to develop our four growth initiatives – expanding PET/CT services; the development of de novo fixed-site imaging centers; the development of radiation oncology centers; and acquisitions.

We continue to pursue strategies, which increase our imaging market share, as well as diversify the revenue profile of our business in areas other than mobile diagnostic imaging. Importantly, for the first time more than 50% of Alliance's revenue is generated by non-mobile MRI services. This shift reflects the achievement of our strategic initiatives and we plan to continue these efforts in 2008 and 2009.

We continue to experience growth in our PET/CT business as our second quarter 2008 revenues totaled $39.1 million, an 11% increase over the second 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 89 fixed-site imaging centers. Second quarter 2008 fixed-site imaging center revenue was approximately $25 million, an increase of 34% over second quarter 2007.

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. Our de novo centers and acquisitions have given us confidence in operating this business and represent a strong start toward achieving our oncology-related growth strategies. Toward that end, we continue to take steps in developing our Alliance oncology leadership and infrastructure. We are nearing the completion of the search for a dedicated president of Alliance Oncology who will drive the strategic plan with focus and diligence and continue to develop this growth initiative.

We continue to generate very strong cash flow and have significant capacity on our balance sheet, which is intended to enable us to proactively pursue additional acquisitions. Howard will provide more details regarding cash flow activity and liquidity in a few moments. Alliance remains focused on operating our core imaging business efficiently, delivering strong operating results, and maintaining our adjusted EBITDA margins. We also continue to expect volume growth in PET/CT to offset the pricing pressures placed on this segment of our business. We are also committed to clinical excellence, quality patient care, and customer service and continue to work hard to deliver the standard of care in a cost-effective manner. The continued focus on these initiatives will enable us to sustain our success throughout 2008 and beyond. I will now turn over the call to Howard.

Howard Aihara

Thanks, Paul. Yesterday, Alliance reported second quarter 2008 results. Revenue totaled $122.78 million, up $11 million, or 9.9% from the first quarter of 2007. Second quarter 2008 adjusted EBITDA increased 11% to $46.6 million compared to $42 million in the second quarter of 2007.

PET/CT revenue increased to 10.9% $39.1 million in the second quarter of 2008 compared to $35.2 million in the second quarter of 2007. In the second quarter of 2008, PET/CT scan volume increased 14.1% to 33,200 scans from 29,200 a year ago. The average price per PET/CT scan decreased 3% to $1,166 dollars in the second quarter of 2008 from $1,200 in the same quarter last year. PET/CT scans per system per day were 6.25 in the second quarter of 2008 compared to 6.35 (inaudible).

MRI revenue in the second quarter increased 2.7% to $68.7 million compared to $66.9 million in the same quarter of 2007. The company increased the average number of scan-based MRI systems to 256 systems from 254 systems a year ago. Total scan-based MRI volume was 163,000 scans compared to 164,000 scans in the second quarter of 2007. Scans per system per day held steady at 9.3 in the second quarters of 2008 and 2007. Alliance's average MRI price per scan was $379 compared to $362 in the same quarter of 2007.

Revenue from Alliance's fixed-sites increased 34% to $24.9 million in the same quarter of 2008 from $18.6 million a year ago.

Depreciation expense totaled $21.7 million in the second quarter of 2008 compared to $20.8 million in the second quarter a year ago. Amortization expense increased $1.9 million in the second quarter of 2008 compared to $1.2 million in the second 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 $900,000 to $11.3 million compared to $10.4 million in the second 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, partially offset by lower interest rates related to Alliance's term loan facility.

Diluted EPS was $0.10 per share in the second quarter of 2008 compared to $0.09 in the second quarter of 2007. For the first half of 2008 diluted EPS, computed in accordance with GAAP, totaled $0.16 per share compared to $0.20 a year ago. Diluted EPS in the first half of 2007 was increased by $0.03 per share related to a gain on a sale/leaseback transaction and a gain on a real estate sale. On a pro forma basis, diluted EPS for the first half of 2008 was $0.16 compared to $0.17 a year ago.

The impact of the increase in net interest expense related to the $150 million senior subordinated note offering completed in the fourth quarter of 2007, partially offset by lower interest rates on our term loan facilities, decreased diluted EPS by $0.03 per share in the first half of 2008.

Weighted average diluted shares outstanding for the second quarter and first half of 2008 were 52 million shares.

Alliance's effective income tax rate as a percentage of pretax income was 45% in the quarter.

Alliance had strong collections in the second quarter. Days revenue outstanding on accounts receivable decreased five days to 46 days in the second quarter of 2008 compared to 51 days in the second quarter of 2007.

In the first six months of 2008, capital expenditures totaled $26.6 million compared to $34.9 million in the first six months of 2007. In the first half of 2008 the company purchased five PET/CT systems and nine MRI systems. Alliance opened six fixed-site imaging centers in the first half of 2008. As of the end of June, the company operated a total of 89 fixed-site imaging centers, five of which are in unconsolidated joint ventures. As of June 30, 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 $652.9 million at June 30, 2008 and $670.8 million at December 31, 2007. In the second quarter of 2008, the company retired the remaining step downs of $3.5 million under its 10 3/8% senior sub notes, the vast majority of which were previously retired in late 2004.

Cash and cash equivalents was $116.8 million at June 30, 2008 and $120.9 million at year-end 2007. Including $65 million available under the company's line of credit, Alliance had a total liquidity of approximately $167 million at the end of June.

In the first quarter of 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. After taking into account these interest rate swaps, Alliance's fixed rate debt totaled approximately $487 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 less cash and cash equivalents, was approximately $536 million at June 30, 2008 and $550 million at December 31, 2007.

In terms of cash flow, in the second quarter of 2008 Alliance generated $24.3 million in cash flow from operating activities compared to $19.1 million in the same quarter last year. On an LTM basis, the company's cash flow from operating activities increased $15.2 million to $126.4 million for the LTM period ended June 2008 compared to $111.2 million in the LTM period ended June 2007. The company continues to generate significant free cash flow, defined as a change in net debt before investments and acquisitions. In the first half of 2008, Alliance generated $24.5 million of free cash flow compared to $18.6 million in the first half of 2007. On an LTM basis, the company's free cash flow increased $8.4 million to $60.3 million for the LTM period ended June 2008 compared to $51.9 million for the LTM period ended June 2007.

Alliance's net leverage ratio, defined as net debt divided by LTM adjusted EBITDA, was 3.0 times for the period ended June 2008 compared to 2.9 times for the LTM period ended June 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 June 2008 and 2007.

As Paul indicated earlier, the company is updating its full-year 2008 guidance ranges, as discussed in our second quarter earnings release. The revised guidance ranges include the expected impact of the MOS acquisition. Before I review the specifics of our updated guidance, I would like to make several comments to provide context for our revised full-year 2008 guidance. My first comment relates to the differential in service days between the first and second half 2008. Specifically, the second half of 2008 is 3.6 equivalent days, or 2.6% shorter than the first half of 2008. This difference has been incorporated into our revenue and adjusted EBITDA guidance for the full year.

Second, the source of inflationary pressure in our mobile diagnostic imaging services is a well documented increase in fuel prices. We have continued to develop programs to manage the cost of fuel, including the implementation of a more sophisticated route optimization program, which is designed to decrease the number of miles we drive to service our customers. Despite the positive impact of these efforts, diesel fuel costs have still increased. As a percentage of revenue, diesel fuel costs have increased from 1.3% of revenue in the first half of 2007 to 1.7% of revenue in the first half of 2008.

Third, with respect to the MOS acquisition, while we expect MOS to generate approximately $22 million in annualized revenue, MOS's adjusted EBITDA percentage will be lower than Alliance's overall adjusted EBITDA percentage due to MOS utilizing a number of operating leases to finance its PET/CT equipment.

Alliance's previous guidance was for revenue to range from $472 million to $484 million. The company's revised guidance is for revenue to range from $486 million to $496 million. Our previous guidance was for adjusted EBITDA to range from $172 million to $182 million. Based on the factors that I cited, Alliance's updated guidance is for adjusted EBITDA to range from $174 million to $184 million. Our implied adjusted EBITDA margin as a percentage of revenue guidance range remains virtually unchanged at 36% to 37% of revenue.

In terms of free cash flow, we now expect a decrease in long-term debt net of a change in cash equivalents approximately $40 million to $50 million for full-year 2008. The following guidance ranges remain unchanged. 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 44% of pretax income. Weighted average shares outstanding on a diluted basis is expected to total approximately 53 million shares.

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

Paul Viviano

Thanks, 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 patient care and customer service. We will continue to operate our core imaging business in a highly-efficient manner and generate strong cash flow. Further, consistent with our strategy, we will continue to focus on expanding our PET/CT business, developing de novo fixed-site imaging centers, developing radiation therapy centers, and proactively evaluating selective acquisitions.

Our goal is to be the partner of choice for healthcare providers to meet their outpatient imaging and radiation therapy needs. Alliance is committed to providing a compelling value proposition to our partners.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question comes from Mark Arnold. Please go ahead.

Mark Arnold – Piper Jaffray

Good morning, guys. Very, very nice quarter. I guess just to start with, PET/CT utilization looked really strong in the quarter. Is that sustainable in terms of the days of service and the scans per system per day, or are you guys going to have to add even more systems to meet this demand growth?

Howard Aihara

Mark, this is Howard. The PET/CT utilization or PET/CT volumes were strong in the second quarter. I think this is in part due to the fact that – and I'll let Paul comment on this – the – basically, seasonality we're seeing in healthcare services, a fact that increased patient cost sharing, meaning higher deductibles for patients, kind of pulled volumes down in the first quarter. And once those deductibles tend to burn off a bit, we see a volume increase in the second quarter and that's just generally speaking for MRI and PET services, so we saw a strong volume growth. I think that in terms of the scans per system per day, we continue to hold our – probably about double the national averages of our scan volumes from – we're well over six scans per system a day, which are about double the national average. We continue to sell – see quite a sales pipeline for new customers that we haven't serviced before, which actually also helps drive scan volumes. So in essence, we will be adding a number of systems throughout the second half of the year to satisfy this demand.

Mark Arnold – Piper Jaffray

And it looks like you guys are –

Paul Viviano

I'm sorry, Mark, just to follow on this – this is Paul – just a couple of comments about this. Howard referenced this seasonality and we do see some artificial constraints on volume and utilization and demand. In the first quarter that demand used to be constrained for a shorter period of time but as deductibles and cost share having grown so dramatically for patients, we do see a longer extension of that into the New Year. So we see anecdotally that hospital volumes and our customers reporting increases and help patient admission activity specifically beginning in the second quarter, and we saw that increase in April, which we were able to sustain through to the second quarter. And our guidance incorporates the continuation of those trends through the balance of the year. Relative specifically to PET/CT, as well, we do see a decrease of new providers entering the market, given the last couple of years of pressure from DRA and HOPPS-related pricing pressure on PET/CT specifically. So we do see fewer providers in many markets. We see almost no new entrants into many of these markets, which allows us to continue to gain market share and to grow along with the market.

Mark Arnold – Piper Jaffray

And just adding to that, I think three years ago you guys talked about your PET/CT business and particularly the days of service, and you told us that over time you thought that the number of days of service for PET/CT could approach that of MRI and the big difference there was selling Saturday service. And I'm not sure a whole lot of people believed you, and now, here in the quarter, it is pretty darn close. Is there still a little bit of upside there to being able to sell more Saturdays – Saturday service on the PET/CT side?

Howard Aihara

Mark, this is Howard. Yes, we do believe that there is a bit more of our ability to sell, not only Saturdays but also a few Sundays as well. The reason – the primary reason for that is the fact that the availability of FDG, the radiopharmaceutical used in the study, was not available in most places on weekends back a couple of years ago. And today, the availability of FDG is much more available on Saturdays and even in some cases on Sundays. So we see that expansion that there is a potential for some upside for expansion of service days.

Mark Arnold – Piper Jaffray

Great. Then just adding – continue to add on that, can you talk a little bit about the MOS acquisition and kind of what it means to Alliance? And what I mean by that is beyond just the fact that it looks like you got a pretty good deal on this one, does it create some additional opportunities for you, particularly in the upper Midwest, where your penetration hasn't been as strong as it is elsewhere in the country?

Paul Viviano

We're pleased with the MOS acquisition from a number of perspectives. This does add strength in a market where we've long worked hard to gain additional market share, so this helps us become stronger in that geographic area. This does provide for some rather significant synergies, given that we do have some overlap in a couple of these very big markets. This also sends a signal to the mobile PET/CT provider community that we do have an interest in acquiring other regional companies at a fair and reasonable price. And so we do expect to see the deal flow associated with these types of opportunities to increase, at least in terms of the numbers of opportunities that we'll look at.

We also see the expansion of our ability to provide half-day service to hospitals, given the geographic coverage that we now have in the Midwest states that MOS represents. So we do see the demand in what we characterize as non-urban markets for hospitals to have a half a day of service, for us to move the unit at mid-day and then go to a second hospital location and provide those services there in the late afternoon and early evening. And this does provide, obviously, for synergies, for cost efficiency, and to drive utilization even higher. So all those things are implied opportunities, given the MOS acquisition. So we're pleased that we were able to complete the acquisition. We've spoken to virtually every one of the new customers this week since we closed the acquisition. We do think there may be some imaging-related opportunities, specifically in MRI, to expand some sales opportunities to those new customers. We added almost 100 new customers to our portfolio and all those things are beneficial to us.

Mark Arnold – Piper Jaffray

Just on that, is there anybody else out there buying or in a position to buy on the PET/CT side that has the scale that you guys do or the history of meeting the IDTF quality standards that everybody's going to have to meet here going forward?

Paul Viviano

Well, in terms of size, we continue to believe and been reported as the largest provider of PET/CT services in the country, so it would be hard to imagine someone would be better positioned to take advantage of the strong volume growth in PET/CT on a national basis. We're unaware of any other transactions being done in this space at this point in time, so that reporting is probably better left to somebody else. But we think we're in a unique and a strong position to continue to consolidate this part of the business.

Mark Arnold – Piper Jaffray

Okay. And then just on the expenses side, you guys always do a great job of managing expenses here. Is the improvement in just your general operating expenses and the SG&A here in the quarter, is that just a function of leveraging some of the infrastructure investments you made in radiation oncology and M&A last year or is there even more leverage opportunity there going forward?

Howard Aihara

Well, Mark, this is Howard. In terms of managing our SG&A costs, they're typically fairly steady, the ones – we did have a very good collection quarter, as you can tell by our decrease of five days in our DSO to 46 days, which caused our bad debt expense to be probably about $0.5 million lower than last year's quarter. So year-to-date, we're right at 1% of bad debt expense to revenue, but that's included in our SG&A expense. So I expect that those expenses to be – in terms of SG&A costs, to be fairly steady going forward this year.

Mark Arnold – Piper Jaffray

Okay. Then, last night CMS came out with its in-patient prospective payment system final rule and I haven't had a chance to read all 1,800 pages but it looks like its final policies – it finalized policies on lease arrangements and under arrangement deals, which, to me look likes they should be positive to Alliance. Paul, can you just add any commentary there in terms of what your thoughts are or have you guys had a chance to review that at all?

Paul Viviano

Mark, you're right about two things. They are voluminous and they're quite technical and so we haven't had a chance to digest them either since they were just published yesterday. It appears that those regulations, those final rules will not adversely impact our business at all. It does look like it will adversely impact some others, since we're not in the structuring of under-arrangement kinds of deals and other providers are I suppose it could turn into potentially an opportunity for us to pick up market share as others need now to restructure the relationships that they might have with physicians or under-arrangement hospital types of arrangements. So it could be an opportunity for us, too early to say, we'd be happy to give you an update on the next quarterly call, but again it does not appear to have any direct adverse impact on us, which is the good news, and there could be some opportunities for us.

Mark Arnold – Piper Jaffray

On the opportunity side, the one place that I saw a possible opportunity was you guys now have a relationship with Accuray, and they've entered into – or they have sold systems to a number of physician groups that have put in these with these under-arrangement deals with their CyberKnife with hospitals and would assume a number of those are going to need to be restructured, which could be positive on the radiosurgery side. Have you guys talked at all with them about working with them on – with some of their customers on those type of deals?

Paul Viviano

That's something that probably lies ahead of us. It's something that we'll intend to do now that these rules have been published. So we'll see if we can identify some opportunities to the extent they exist. We agree with you, it looks like they have utilized some of the types of agreements, so we'll pursue it and see what it turns into.

Mark Arnold – Piper Jaffray

Okay. I have one more and then I'll let somebody else answer – or ask some questions here, but can you just give us any update on your radiation oncology business in terms of the acquisition environment, development plans, hospitals, interest in working with you guys, et cetera?

Paul Viviano

We've talked very explicitly about our strategy revolving around several different components. We talked specifically about working with hospitals to upgrade an older radiation therapy system or unit in an existing cancer program, given the constraints that hospitals are facing from a capital formation standpoint, as we referenced in the script, that there are a number of opportunities that we're discussing with hospitals to achieve those kinds of new partnerships with us. You see that reflected in the guidance of our three to five new radiation therapy centers that we’ll open this year, most of them fall in that category. We do expect that the pipeline of opportunities will continue to provide us additional opportunities in 2009 and beyond. Relative to CON states, we do have some applications pending that could provide us the opportunity to build new cancer centers. Thirdly, we are looking at other dedicated stereotactic radiosurgery opportunities and there are a number of hospital-type deals that we're also negotiating very proactively concerning the addition of SRS to an existing hospital program. And the fourth component of that is acquisitions, which you asked about specifically, and the environment I think is probably stable in that respect. There are a number of small radiation therapy operators that may consider divestiture, given the market – credit market conditions. We see pricing somewhat under pressure over the course of the last year but stable at the moment. So we continue to look at acquisitions and that component of the opportunity pipeline as well. So we're obviously interested in continuing our significant investment in oncology. We referenced in the script the hiring of a president to help run that division in a really focused and diligent manner. So we sense there are opportunities in all four of our growth initiatives relating specifically to oncology.

Mark Arnold – Piper Jaffray

Thanks for taking the questions, guys. Great quarter.

Howard Aihara

Thank you, Mark.

Operator

Thank you. Our next question is coming from Darren Lehrich. Please go ahead.

Darren Lehrich – Deutsche Bank

Thanks, good morning, everyone. I wanted to just cover a couple of things. First, Paul, maybe if you could just discuss your experience with the fixed-site projects, I just wanted to get a brief update on how they've been ramping up, what the economics look like relative to how you pro forma them, and any commentary you might have about the pipeline in terms of fixed-site.

Paul Viviano

I'll be happy to talk about the fixed-site pipeline and kind of the complexion of that business and Howard can talk specifically about the financial implications of those centers to make sure we address your question fully. The pipeline of opportunities for fixed-sites continues to be strong. We've reported the guidance range of 15 to 20 new fixed-sites this year, which is clearly a lift from prior year and that pipeline of opportunities continue to grow again in reference specifically to my comments about hospitals and capital formation challenges that they have. We expect that that opportunity to build new fixed-sites and partnership with hospitals will continue to grow. About half of our fixed-sites this year will be conversions from mobile customers to fixed-sites. We're very pleased with that. We expect that the percentage of the fixed-sites that we build that will be conversions will continue to grow over the short-to-mid term as we continue to have good relationships with many of our customers and clients who like the service that we provide on a mobile basis, like the partnership, like the skills that we bring to their organization, and they have a capital challenge but need a full-time dedicated fixed-site relative to MR or PET/CT. We do see the fixed-site opportunities for PET/CT to be growing, and so we expect that our fixed-site portfolio relative to PET/CT will grow also going forward. That's kind of the strategic view of our strategy around fixed-sites. Howard can probably address the financial questions.

Howard Aihara

Darren, in terms of the kind of the economics of our fixed-site business, the typical capital investment is in the – for a piece of MRI equipment is typically about $1.2 million to $1.4 million and then you add on tenant improvements and sales tax you're talking about a typical investment of $1.8 million to $2 million for an MRI fixed-site. We typically get cash-on-cash payback in the – call it the three-to-four year range is what we typically see and we typically start – because our relations are almost always with hospitals, we typically get a good jumpstart on volumes and we get to break-even point pretty quickly, typically within 12 months we're well – at break-even or much better than that. So they ramp up very quickly. We're really pleased that our fixed-site business has grown substantially and that – as I think Paul mentioned in the prepared remarks, we have about – second quarter we're about $25 million of fixed-site revenues, so we're on a run rate of about $100 million right now, so we're really pleased. The profitability from that business is very much in line with the profitability of our mobile MRI business and our PET/CT business. All of those businesses operate within about 200 basis points of our company-wide margin.

Darren Lehrich – Deutsche Bank

Great. And it is fair to say then that – Paul, given your comment about the number of fixed-sites coming from mobile conversions probably increasing from here that your ability to reach break-even would accelerate a bit over the next year to two. Is that a fair comment?

Paul Viviano

I think that's fair to say that these types of deals, the conversions from mobile to fixed, are probably less risky and they probably achieve break-even and mature more quickly than the de novo site where we haven't had a relationship. So I think that's generally true and we're pleased this is now a $100 million business and we're pleased that we're in a position of five years ago. It was a good theory, it was a good strategy and we've now turned it into an important part of our business and we're probably the second or third largest fixed-site operator in the country. And I do think that that credibility that we have with the strong performance of the portfolio will allow us more and better opportunities, which will yield a cash-on-cash return in a slightly narrow – more narrow window than we have historically. So we think the success in the business, operating the business will yield more opportunities and reinforce the financial success of the division.

Darren Lehrich – Deutsche Bank

Great. And then just a couple more things. Radiation therapy revenues, can you just give us a spot number or a range where you are at this point?

Howard Aihara

You know, Darren – this is Howard. We had given guidance at the beginning of the year which implied that radiation therapy revenues would be in the 4% to 5% of revenue range and that's – actually that's where we are. We're probably closer to 5% today.

Darren Lehrich – Deutsche Bank

Okay. And then just would like to get your comment about the timeframe or the expectation you have in which to restructure some of these higher cost operating leases that came with the MOS deal. It seems like that's an opportunity, I just want to know how quickly you can restructure that.

Howard Aihara

Sure, Darren. We're going to be looking at that, again looking at the economics and you can be assured that what we'll do – we'll make decisions that are financially sound where the penalties to do so aren't – don't penalize the company too much for us to restructure those leases.

Darren Lehrich – Deutsche Bank

Okay, last thing from me then is just tax rate. Any tax strategies that you might explore that would help bring your tax rate down next year? I know the state you're domiciled in disadvantages you a little bit, but maybe just comment on where you think your tax rate could go.

Paul Viviano

Well, Darren, yes, we're looking at the various tax-saving strategies. As you referred to, our headquarters is in California, which is a very high state tax rate, and we are look at various strategies. At this point, it's – we'll see what unfolds and what can be – what can cause us to decrease our tax rate. And so at this point we feel comfortable that we'll be at about 44% for this year and then we'll advise you as we move forward in terms of our future tax rate.

Darren Lehrich – Deutsche Bank

Great. Thanks a lot.

Howard Aihara

Thanks, Darren.

Operator

Thank you. Our next question is coming from Whit Mayo. Please go ahead.

Whit Mayo – Stephens, Inc.

Thanks, good morning, guys. Just turning back to the volumes for a second, can you walk us back through sort of how the volumes trended throughout the second quarter? I heard you mention that April was a little bit stronger and can you kind of help us understand whether or not you've benefited under the Easter shift just that would be helpful.

Howard Aihara

Sure, Whit, this is Howard. Starting really in – call it late March, we started to see volumes increase and going forward into April and the full second quarter we continue to see the strength in volumes. We saw a little bit of dip related to the Easter holiday in March but that – the Easter effect is interesting because the holiday is spread across so many different weeks, primarily due to, I believe, the Easter schedule of schools and children being off from school, that actually – the effect of Easter is more spread across a couple of weeks rather than any – in the specific month that Easter occurs. So in essence, we did see stronger volumes and they continued throughout the second quarter. And the Easter effect is much more spread out so it's much less affecting any specific month in March or April.

Whit Mayo – Stephens, Inc.

That's helpful. And just turning back to MOS just for a minute – appreciate all of the color there – just can you help us understand or think about just how the throughput works for those assets, how does the scans per system per day compare to your assets, as well as kind of the pricing?

Howard Aihara

Well, I think, as Paul mentioned earlier, MOS does employ more of a half-day strategy, meaning the unit will scan in the morning at one customer and then move in the afternoon to another customer, so they operate a very efficient business. In terms of their pricing, I think that what we see is that they're in line with the pricing that we experience up in the Midwest area of the country. It is a very similar business to Alliance's business in terms of pricing and the way the contracts work, so we're just really pleased with that acquisition and I think that the MOS customers and the entire company will fit in nicely with Alliance.

Whit Mayo – Stephens, Inc.

Great. And just one more question, just on the guidance just looking at the adjusted revenue range, you raised the range by about $12 million to $14 million and the contribution from MOS appears just to be a little less than maybe $10 million to $11 million for the back half the year, so can you just help maybe flush out for where the other upside is coming from?

Howard Aihara

I think that upside also includes the fact that the increase in scan volumes, the strength of the imaging business that we saw in the second quarter and thinking that that carries forward through the rest of the year is kind of factored into our full-year guidance.

Whit Mayo – Stephens, Inc.

Okay, that's great. Thanks. Appreciate it.

Paul Viviano

Thanks, Whit.

Operator

Thank you. Our next question is coming from Aaron Lindberg. Please go ahead.

Aaron Lindberg – WM Smith & Co.

Thanks. Can you just give us a quick update on the mix between retail and wholesale revenues in the quarter and how you expect that to carry forward?

Howard Aihara

Hey, Aaron, this is Howard. I think we're still in the range of what we saw in the first quarter. We were about 80% wholesale and 20% retail and we're still in that range.

Aaron Lindberg – WM Smith & Co.

Okay, great. And then are the Q2 gross margins a good proxy for the rest of the year?

Howard Aihara

In terms of adjusted EBITDA margins, in terms of – if you look at the guidance ranges, or revised guidance ranges that we just updated, if you look at that we're projecting full-year adjusted EBITDA ranges in the 36% to 37% range, so that's what our guidance is.

Aaron Lindberg – WM Smith & Co.

Okay. And then can you provide a little bit more color on Alliance and AQI's role in helping with establishing accreditation standards?

Paul Viviano

Aaron, this is Paul. We have long been an advocate for these accreditation standards and relative to AQI specifically, we joined the organization before – it was right before 2007. We've been very actively involved among the executive committee of the organization, served as the vice chairman of the AQI board. We have several of our team members that are involved in the committee work that AQI undertakes. As a matter of fact, couple of our – couple of the committees in the AQI infrastructure are chaired by Alliance Imaging team members, so we've been very actively involved in lobbying efforts in D.C., attending meetings, leading meetings. There is a meeting with CMS today in Washington, D.C., where one of our team members is leading that effort on behalf of AQI. I'm going to be in D.C. next week, similar types of meetings. We've met with elected officials, CMS, MedPAC, various staff representatives of various congressional committees, so we've been very active. We've been involved in grassroots activities, letter writing campaigns, asking our roughly 2,500 team members across the country to become involved in various letter writing campaigns and grassroots efforts. So we've been intimately involved and actively involved with AQI in formulating the policy platform where we've advocated for accreditation and certification protocols. We've advocated for the development and refinement of appropriateness criteria for education relative to imaging procedures and for those who interpret them. We advocated for no reductions in reimbursement for imaging in 2009. So, on the surface we've had some effect and some impact on helping to organize the imaging provider community, which was really issued a concerted effort post DRA. And so we've been a part of that and we're going to try to continue to keep the pressure on and to continue to put our best foot forward in D.C., given how important those regulatory and legislative packages are for all healthcare services providers.

Aaron Lindberg – WM Smith & Co.

Yes, absolutely. It seems like you'd be in a great position to help influence what those standards actually look like over the course of the next year, year and a half before that gets finalized. Is there anything specific that you can maybe just add some detail around protocols, procedures, self-referrals, things that are particularly important that you'd like to see in those standards come the beginning of 2010?

Paul Viviano

Well, the work that goes hand-in-hand with the ACR in terms of the actual appropriateness criteria are things that we're working on. We're focused on working with Medicare, CMS, et cetera, to focus on appropriateness criteria and accreditation and quality standards as opposed to prior authorization for Medicare patients, so that's one of our critical advocacy platforms going forward. We're pleased that IDTF standards will be applied to physician offices. We're pleased that the purchase diagnostic test rule will likely be implemented as it was proposed last year and proposed again for next year. We view all of those things to be very beneficial and the thing that we're most focused on at the moment is focusing on appropriateness criteria as opposed to prior authorization.

Aaron Lindberg – WM Smith & Co.

Perfect. That's very helpful. All of the rest of my stuff has been answered. Thank you.

Operator

Our next question is coming from Rob Mains. Please go ahead.

Rob Mains – Morgan Keegan

Good morning. I've just got a couple of follow-up questions. Howard, just to clarify, I appreciate the commentary you gave about fuel costs and what not, if you exclude acquisitions though, is what you're saying that as revenues grow from volume generation you should see some margin pickup as well, kind of like holding everything else constant?

Howard Aihara

Sure, Rob, this is Howard. As you know, this is a highly fixed cost business. Basically to staff a unit, the actual payroll costs are typically a fixed cost – I consider a fixed cost, as well as the contract maintenance that we have to provide for the system and other costs associated with that. So as volumes would increase, you typically – we typically see, a higher – call it for every incremental dollar of revenue we see a significant portion of that dropping through that to EBITDA.

Rob Mains – Morgan Keegan

The full-year guidance, which translates into something a little bit lower than what you had in the second quarter, we should chalk that up to acquisitions in new units rather than –?

Howard Aihara

Yes, I think that's – it’s largely due to the acquisition and a little bit of it is due to the fact that volumes picked up in the second quarter that we expect to sustain throughout the rest of this year.

Rob Mains – Morgan Keegan

Okay. And then on MOS, I understand that they have more operating leases, are they running a similar margin to you on like the EBIT line, or asked another way, once you're able to get – do whatever you're going to do with the operating leases, would you expect the margins on their business to be similar to yours?

Howard Aihara

Rob, this is Howard again. I think that as we achieve – once those operating leases burn off over time as well as we achieve – work through the synergies that we can achieve in running that business and managing that business, that the EBITDA margins will be in line with our company-wide margins.

Rob Mains – Morgan Keegan

Fair enough. And just one numbers question. What was the share count as of June 30th, please?

Howard Aihara

It was – diluted shares outstanding were about 52 million shares.

Rob Mains – Morgan Keegan

Do you have an actual balance sheet shares?

Howard Aihara

We'll be filing our 10-Q here shortly. If you can bear with me for one second, I can look for that number.

Rob Mains – Morgan Keegan

If you don't have it handy it's –

Howard Aihara

Actually it's – in terms of actual shares outstanding, the basic shares outstanding, it was right at 51 million as of the end of June.

Rob Mains – Morgan Keegan

Okay, that's all I have. Thanks.

Paul Viviano

Thanks, Rob.

Operator

Gary Lieberman, your line is live. Please proceed with your question.

Gary Lieberman – Stanford Group Company

Thanks. Just maybe if I could follow up on the fuel cost side a little bit. Can you just remind us what percent of your – what fuel costs are as a percent of revenue?

Howard Aihara

Sure, Gary. This is Howard. In the second quarter of 2008 they were about 1.7% of revenue.

Gary Lieberman – Stanford Group Company

Okay. And is there – you've talked in the past about efficient mapping and scheduling of facilities, is there anything that you can do from – or that you do from a hedging perspective to try to lock in fuel costs ahead of time?

Howard Aihara

Gary, again, this is Howard. We are looking at various fuel management strategies, including hedging. The future curve appears to be fairly flat for the next six to nine months, so as we – we'll continue to look at that and if we do pursue some hedging strategies we'll certainly advise you on our next quarterly call.

Gary Lieberman – Stanford Group Company

Have you done any of that in the past?

Howard Aihara

No, we have not.

Gary Lieberman – Stanford Group Company

Okay. And then just on pricing a little bit – I'm not sure how much you talked about it – but there was a little bit of a sequential decrease in the price per scan, both on the MRI and on the PET/CT front. Can you just talk a little bit about what drove that?

Howard Aihara

Gary, I think in terms of the pricing, the pricing environment is fairly stable. When contracts come up for renewal, typically there's a little bit of pricing pressure and historically we've seen, call it 1% to 3% pricing pressure year over year. So it certainly wasn't anything that we saw in the second quarter that was really that noteworthy.

Gary Lieberman – Stanford Group Company

Okay, But it's primarily commercial driven, it sounds like?

Howard Aihara

Well, actually, no. It is primarily – the retail side of the business in the commercial side is actually very stable. The wholesale pricing typically when customer contracts come for renewal there's usually a bit of pressure at that time.

Gary Lieberman – Stanford Group Company

Okay, great. Thanks a lot.

Paul Viviano

Thank you.

Operator

Our next question is coming from Brian Schinderle. Please go ahead.

Brian Schinderle – Wolf Point Capital

Hey, guys, fantastic quarter.

Paul Viviano

Thank you.

Brian Schinderle – Wolf Point Capital

Couple of quick questions for you. I'm wondering if you can give a little better sort of color or breakout of the performance of the acquired businesses in the back half of 2007 versus what I'll call sort of the organic AIQ, because if you look at the numbers year on year, obviously there's some contribution from the acquired businesses. And then as part of that, I'm somewhat curious as to – as you integrated those businesses, I'm sure had you some plans to either get some synergies or some other benefits from that. I'm just sort of curious how those filter through and are some of those incorporated into the sort of back half expectations or how do you view those?

Paul Viviano

Ryan, this is Paul. Relative to the acquisitions, as we've reported, most of these are in the small-to-moderate size transactions and we don't separate the performance of those new acquisitions in our reporting given their relatively small size. So, of course, our goal is to take advantage of the synergy opportunities that they represent, allow them to continue to grow, and for us to take full advantage of the kinds of benefits that integrating with us will allow, but we're not going to separate their performance from the rest of the core business as we report it.. Now, as it's turned out, we added Accuray, we added acquisitions, we added MOS, and so you'll see a progression and to the extent it does impact our overall company outlook, as they're big enough and as the performance of our business continues to be strong, we'll advise relative to full-year guidance. But at this point in time, we're not going to separate performance of these entities.

Brian Schinderle – Wolf Point Capital

I was curious how much of the 10% revenue growth in the quarter would have been sort of the acquired revenues versus sort of organic growth or is that even the right way to look at it?

Howard Aihara

Brian, this is Howard. Maybe a way to look at this, too, is that in terms of looking at our business, in terms of our adjusted EBITDA guidance ranges and in terms of our – the implied margins that we give you in terms of our guidance ranges, that we're well within our – our performance is well within those guidance ranges and actually spot on in terms of adjusted EBITDA margin. So I think you can see that the performance of these acquisitions is really what we expected.

Brian Schinderle – Wolf Point Capital

Right. So we can do some of the back math, right. A couple of other questions. I was particularly impressed with the collection improvement. Is that the result of some added focus on your behalf or is it sustainable or how do you view that because I thought 46 days sounded very impressive to me?

Howard Aihara

Well, thank you, Brian. It's a continued effort and focus on – we are very focused on cash flow – and I think it's reported in our free cash flow and our operating cash flow and we continue to focus on the receivables collection and just staying on top of customers that – and making sure that we work with them to ensure that they stay current on their payments to us.

Brian Schinderle – Wolf Point Capital

Right. Is that – is there sort of a range that you think is your target range or sustainable range or how do you view 46 days in the context?

Howard Aihara

Well, historically, we've always been in the – call it the 45 to 50 day range. It does move around a bit from quarter to quarter. But I think that we're comfortable if you kind of look at our business, that we (inaudible) around the 50-day range or slightly lower than that is where I think it’s historically we've been able to sustain.

Brian Schinderle – Wolf Point Capital

Got it. So I want to make sure I understand the math on your MRI systems. You said you have 256 systems currently?

Howard Aihara

256 scan-based systems, right.

Brian Schinderle – Wolf Point Capital

Right. And you did mention 89 fixed-sites now, so are the remainder – if you take 256 minus 89 do you get the number of mobile?

Howard Aihara

No. There are also a number of – in the 89, there are five that are in unconsolidated joint ventures, which wouldn't be in the system count, and then there are several fixed-sites, I believe four or five that are actually PET/CT fixed-sites so you have to remove those from the numbers as well.

Brian Schinderle – Wolf Point Capital

Well, one of the thoughts I'm trying to get at is what's the – would you be willing to give the sort of the year-on-year comparison of mobile units, mobile units last year versus mobile units this year? I'm suspecting that that is continuing to go down and I'm just sort of curious kind of what that looks like right now.

Paul Viviano

Howard is looking in the blue book for the specific find to your answer.

Brian Schinderle – Wolf Point Capital

I have the right idea that over time you would expect to continue to shrink your base of mobile units?

Paul Viviano

That certainly – has certainly been the – our past history over the last five years is that we've seen a decreasing number of mobile MRI systems and we've been relatively aggressive about retiring systems and trading them in as a way to maintain the efficiency and the margins associated with our mobile business.

Howard Aihara

And that's – to Paul's point that's absolutely correct. We typically have been shrinking our MRI system probably in the ballpark of 15 to 20 per year and those would be all mobile systems. I don't have the specific numbers in front of me, Brian, but –

Brian Schinderle – Wolf Point Capital

But – as many as 15 a year coming out of the mobile base?

Paul Viviano

Yes.

Howard Aihara

That's typically correct, yes.

Brian Schinderle – Wolf Point Capital

Okay. Alright. That's very helpful.

Paul Viviano

And just coincidentally or otherwise, we're going to build between 15 and 20 fixed-sites, so our mission has been to trade in a retiring mobile unit that – obviously we choose an older unit at the end of its useful life, most likely had been fully depreciated and then trade it in on a new fixed-site on a brand new unit and so that's been very helpful from a cash CapEx management standpoint.

Brian Schinderle – Wolf Point Capital

Right. Are you – since you mentioned the CapEx side, are you seeing more aggressive pricing and the ability to cut better deals with the – with your primary vendors, GE, Siemens, et cetera, and how does that dynamic play out?

Paul Viviano

Since we've always had strong pricing capabilities relative to the OEMs, we've reported historically that the majority of our equipment is acquired from – in the imaging component of our business, from two OEMs, Siemens and GE, and we continue to generate strong pricing consideration from both of those organizations, both for service as well as for new equipment. We are surprised that we haven't seen more aggressive pricing strategies outside of our relationship with the OEMs, meaning that they haven't been as aggressive about lowering prices as we expected them to be in a post-DRA environment, but that's just an observation.

Brian Schinderle – Wolf Point Capital

Right. Last question for you. On the oncology side of the business, currently that's 4% to 5% of revenues. I'm assuming that your longer-term goal is to make that a much more meaningful percentage of revenues. Is that – it appears that you've been a little more aggressive on making PET/CT acquisitions, which of course is also a great business, but I'm sort of curious if the radiation oncology side isn't – how that fits into the sort of priority queue and I'm also curious if part of the issue is that the multiples that you would need to pay for some of – on the oncology side are a little higher and therefore it's harder to make those acquisitions be accretive in year one or sort of how you view that?

Paul Viviano

To answer the first component of your question, yes, it's still our intention to make Alliance Oncology and our radiation therapy business a more meaningful part of our business. And we expect that in 2009 – as we said over the last couple of years as we first started the ramp up of the business – that we think it'll be more meaningful in 2009, and we'll provide more color as the New Year approaches, as we give guidance for next year.

Relative to acquisitions, radiation therapy is one of the four components of our acquisition strategy that we look at proactively, as I reported just a little bit earlier. The multiples are slightly higher, relative to imaging providers for the right target. That speaks to making sure that the organization is in a position to grow and that it's well positioned in the market place relative to health plan reimbursement and physician capabilities at the radiation oncology centers. We do have a number of deals in our deal pipeline in the radiation therapy space that we'll continue to negotiate for. And acquiring radiation therapy centers will continue to be part of our acquisition strategy. We'll be just as disciplined and just as focused on IRR in those acquisitions as we are in PET/CT and in the fixed-site area as well.

Brian Schinderle – Wolf Point Capital

Thanks, guys, great quarter.

Paul Viviano

Thank you very much.

Operator

Thank you. Our next question is coming from Mike Scarangella. Please go ahead.

Mike Scarangella – Merrill Lynch

Good morning, guys. Howard, I just had one question on the leverage ratio. It looks like leverage this quarter was 3.7. Leverage in the first quarter was also 3.7, which is unusual since you paid down $4 million of debt and you grew EBITDA by 11%. Seems to be – issue seems to be in the adjusted number, which hasn't changed from first to second quarter. Could you just talk about why that is? What's in those adjustments that didn't grow in the second quarter?

Howard Aihara

Well, I think, Mike, part of the issue is we took on some additional capital leases in the second quarter, which is considered debt as well. So in the end the leverage ratio was actually – declined a bit, I think it came down to 3.65 times rounded to 3.7, so it's been very steady from – sequentially from Q1 to Q2.

Mike Scarangella – Merrill Lynch

I guess the LTM number – EBITDA number is the same. It was 177 in the first quarter, it's 177 in the second quarter, so if we were to look at EBITDA for the quarter on an adjusted basis, would you still have grown year over year?

Howard Aihara

The answer is yes.

Mike Scarangella – Merrill Lynch

Okay, I'll follow up with you. Somehow the math doesn't work there, but I'll follow up with you off line. Thanks.

Operator

Thank you. Our next question is coming from Harlan Cherniak. Please go ahead.

Harlan Cherniak – Venner Capital Management

Good morning, Paul. Good morning, Howard. How are you?

Howard Aihara

Good morning.

Paul Viviano

Fine, Harlan, how are you?

Harlan Cherniak – Venner Capital Management

Just trying to fine tune the multiple around this MOS acquisition. Using the increased guidance range and annualizing that number it sort of looks like it's wrapped around a four times purchase price multiple. Is that order of magnitude within the range of reasonableness?

Howard Aihara

Harlan, this is Howard. Yes, that is – you're right in the range.

Harlan Cherniak – Venner Capital Management

And if you use I guess the PET Scans of America transaction as precedent, what types of cost synergies, route synergies, et cetera, as a percentage of the original EBITDA, which you purchased off of, would you say you were able to recognize there?

Howard Aihara

Harlan, this is just some broad math, but typically we could – in terms of synergies, we could pick up as much as ten points in the adjusted EBITDA percentage in terms of synergies, in terms of SG&A going away and also working through some route efficiencies and rerouting and being able to save costs in terms of our kind of the operations of the business.

Harlan Cherniak – Venner Capital Management

And what, over like a 12-month period of time it typically takes you to realize that?

Howard Aihara

Yes, typically you realize the synergies right upfront. But typically, in order to integrate things well it takes about a nine to 12 month period of time to really become very efficient.

Harlan Cherniak – Venner Capital Management

Okay. And then sort of using that 4X to 5X multiple range you guys have alluded to in the past and your discipline with sort of sticking to that with all of the cash on your balance sheet, is it fair to assume over the next on a 6, 12, 18, 24 months – you tell me the time horizon – given all of the capital that's been earmarked to deploy for M&A purposes, $30 million to $35 million of incremental EBITDA?

Paul Viviano

Harlan, this is Paul. That's the way the math works out. It's hard to identify the precise timeline associated with the various transactions that we're working on. This is variable business, as you know, and deals take on a life of their own. Some are shorter and faster. Some are considerably longer just given the nature of due diligence and approval processes and in some circumstances, state approval for transferring of CONs, et cetera. So it's hard to give a precise range. We do have a range of size of deals, as well. It depends upon which ones actually come to fruition. Last year, we articulated that we evaluated about 60 transactions to get the two completed that we did finish last year. We see a similar ratio of deals that we evaluate and deals that are completed and given that the sizes of them are different, it's hard to be precise about the timeline, about when that EBITDA will be incorporated post the acquisitions that the liquidity on our balance sheet will allow us to complete. We're being very proactive, assessing a number of opportunities in all of the areas we've cited earlier. And we're going to do our best to continue to not only buy things at the right multiple, but as the conversation that you and Howard just had, integrating them effectively, taking advantage of the synergies is the second half of the equation. And so we're looking at making sure that we have the time and the capability to integrate these acquisitions effectively to make sure that we generate the kind of return that we expect for the capital that we invest and we'll be looking at how to sort of time the acquisitions that we do want to complete in order to make sure that we can continue to integrate them effectively.

Harlan Cherniak – Venner Capital Management

That's great. Please keep up the good work. It's pretty rare that you have an organic business sort of growing at the clip that you are with the free cash flow generation and a treasure chest to go out and buy acquisitions at very attractive accretive multiples, so nice work. Nice work on the quarter. Have a good weekend.

Paul Viviano

Thank you very much, Harlan. You too.

Operator

Thank you. There appear to be no further questions at this time. I'll turn the floor back over to you.

Paul Viviano

Great. Thank you so much for your interest in Alliance Imaging. We look forward to speaking with you in the not-too-distant future about our third quarter performance and again, we appreciate your interest in our company. Thank you very much.

Operator

Thank you. 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.

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

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Alliance Imaging, Inc. Q2 2008 Earnings Call Transcript
This Transcript
All Transcripts