Alliance Healthcare Services' (AIQ) CEO Tom Tomlinson on Q2 2016 Results - Earnings Call Transcript

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Alliance Healthcare Services, Inc. (NYSE:AIQ-OLD) Q2 2016 Earnings Conference Call August 4, 2016 5:00 PM ET


Rick Johns - COO, Chief Legal Officer

Tom Tomlinson - CEO

Rhonda Longmore-Grund - CFO


Rick Johns

Good afternoon, ladies and gentlemen, and welcome to Alliance Healthcare Services Second Quarter 2016 Earnings Call. My name is Rick Johns and I am the Company's Chief Operating Officer and Chief Legal Officer.

This conference is being recorded for rebroadcast, and all lines have been placed on mute. As is customary, we will open up the conference up for questions and answers after the presentation.

This conference call will contain forward-looking statements which are based on the Company's current expectations, forecasts and assumptions, including statements related to our business strategy, growth opportunities, the impact of the Affordable Care Act, the 2016 Medicare Physician Fee Schedule, our guidance, our expected capital expenditures, expected cost reductions, and the Company's effective tax rate.

As most of you know, forward-looking statements involve risks and uncertainties which could cause actual outcomes and results to differ materially from the Company's expectations, forecasts and assumptions. These risks and uncertainties are described in the Risk Factors section of the Company's Annual Report on Form 10-K for the year ended December 31, 2015. The Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise.

Financial and other statistical information presented on this conference call, or information required by the SEC's Regulation G may be accessed through the Investor Relations section of the Company's website. We invite you to visit our web site for replay information of this call.

On today's call, our CEO Tom Tomlinson will provide a brief overview of our business and an update on our strategic growth initiatives. Our Chief Financial Officer, Rhonda Longmore-Grund, will follow with the details and commentary on our second quarter 2016 results.

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

Tom Tomlinson

Thanks, Rick, and good afternoon everyone. Welcome to our call. We're pleased to be sharing our second quarter 2016 results with you.

We achieved solid second quarters. Our mission at Alliance is to deliver exceptional care to each and every patient and our team continues to do exactly that. Across all our sites of service, our patient satisfaction scores are excellent. As Rhonda and I will outline today, we delivered growth in revenue, earnings and cash flow while reducing leverage. Overall I'm proud of our team's execution and very encouraged by the building momentum that's evident in our financial, operational and patient satisfaction results.

Our revenue growth of 5.7% this quarter marks the sixth consecutive quarter of growth. This strong performance across all of our businesses generated significant cash flows for the quarter, allowing us to pay down debt, reduce leverage, and strengthen our balance sheet as we move forward.

Same-store results in radiology continued to be strongly positive, while we experienced a degree of same-store headwind in Alliance oncology in the quarter. On a year-to-date basis, same-store volume is strongly positive and I remain confident in the outlook for the division.

Adjusted EBITDA of $34.4 million for the quarter was consistent with our guidance and modestly positive on a year-over-year basis. This is the third consecutive quarter of improvement. The strong sequential improvement from Q1 sets us up well for a strong finish in the back half of 2016. As we've outlined on previous calls, we expect to see stronger year-over-year comparable results as we move through the year as a result of continued strong execution and moderating comparative price change.

Investment into the business through both growth and maintenance CapEx has been somewhat frontloaded this year. Our teams delivered very strong customer retention, and we're certainly pleased with this trend. That often also requires additional investment in what we categorize as maintenance CapEx.

Overall the combination of strong new sales and retention in our core shared service radiology business has driven the increased investment. As Rhonda will note later on, our guidance for total CapEx for the year remains consistent.

Strong cash flow generation of $35.2 million, which is higher than the prior year by $8.3 million or 31%, allowed us to absorb the increased investment while also lowering debt and leverage. As a result, our total debt outstanding and leverage ratio improved sequentially by $10.3 million and 0.07 turn, respectively. As we've discussed on previous calls, this improvement is consistent with our goal to reduce leverage into the 3.5 times EBITDA range over the next few years.

Clearly we're excited with the trajectory of our business and the accelerating pace of execution against our long-term growth strategy. Across each of our businesses we've taken proactive steps to enhance the value proposition we provide our customers, and our improved competitive positioning has been a key element of our strong performance in retaining existing customers, securing new customers, and scoring a number of competitive wins.

Let me comment further on the growth we saw on each of our business segments. First, radiology.

Our radiology business revenue totaled $87.5 million for the quarter, an increase of 3% over the prior-year period. This growth was primarily driven by same-store volume growth with an increase for MRI and PET/CT of 2% and 5.8%, respectively. This represents our ninth consecutive quarter of growth for MRI and sixth consecutive quarter of growth in PET/CT.

Our strong same-store results were further supported by robust customer retention and new contracts performance in the core shared service business. Growth in both our core as well as the RAD360 fixed-site and service-line management initiatives allowed us to grow net revenue again this quarter. The recent acquisition of radiology assets from American Health Centers in Portsmouth, New Hampshire in April of 2016 added to our solid sales results.

It's worth noting that small tuck-in asset acquisitions such as this are equivalent economics to adding new de novo customers in the core shared service radiology business, and as such, are highly attractive. The improvements in our radiology business are the result of a number of specific actions our team has been focused on over the last two years.

Some examples, hospital-focused sales. We've rebuilt the sales leadership and sales team that's focused on selling into the hospital segment for our core shared service business. This team is now fully in place and we're seeing results in terms of improved customer retention and higher new contract revenue.

Referring physician sales. We've augmented this team and improved focus and training. The result is evident in the strong same-store volume performance we've delivered the past two years.

Operational excellence. Our focus in operations has been to improve service to our customers and create a culture that delivers ongoing cost savings. The improvement we've seen in customer retention is driven by the combination of improved service and stronger sales leadership, as I mentioned earlier. From a cost perspective, we're on track to deliver the $5 million of savings mentioned when we first outlined our 2016 guidance.

These are just a few of the key initiatives our team is executing on to drive the business forward successfully. We remain focused on strengthening our market leadership position in the radiology business through smart investments, targeted pricing actions, and a continued focus on delighting our customers. The momentum in this business is a testament to our hospital sales team's efforts to improve customer retention, acquire new business, and aggressively capture market share from weaker competitors.

Now I'll turn to oncology. We delivered solid performance in our oncology business as revenues increased 2% for the second quarter to $25.8 million. This quarterly revenue growth was driven by our partnership with Pacific Cancer Institute in Maui, Hawaii, partially offset by two factors. First, we had a moderate decline year over year in Q2 same-store volume for stereotactic radio surgery and linear accelerator treatments. It's important to note, however, that our year-to-date same-store volume growth remained strong in both areas at 4.2% for stereotactic and 2.2% for Linac. Second, as we communicated last year, we were negatively impacted by a $1 million decrease in year-over-year revenue related to the Joplin, Missouri oncology site that we shut down.

Our expectations for Alliance Oncology are to drive a higher rate of growth than we achieved in Q2. The business development pipeline continues to be robust but the consistency of delivering, attract new projects, has been less than ideal. Our team recently made some changes to address this issue and I remain confident that we will deliver one or two additional projects in the second half of 2016.

Our continued focus on clinical excellence, patient service and quality, and clinical best practice sharing across all locations, as well as demand generation through marketing and referring physician outreach programs, enable us to be confident in our outlook for continued solid same-store performance.

An important success the team delivered during the quarter in our oncology business is the previously announced new partnership agreement with St. Peter's University CyberKnife Center in New Brunswick, New Jersey. This partnership is a great addition to our network of cancer care centers in the New Jersey and Pennsylvania area. We're delighted to partner with a strong health system and outstanding physicians. This partnership is further validation of our strategy and our value proposition as the outsourced provider of choice for hospitals.

In interventional services, we're pleased with the continued positive momentum in the business with $11.4 million in revenue in the second quarter. This represents an increase of nearly 40% over the second quarter of last year as we continued to make smart investments through strategic partnerships and acquisitions. Our partnership with The Pain Center of Arizona continues to grow, together with PRC Associates, our new partnership in Florida.

Along with revenue growth, margins improved 350 basis points year over year. We continue to work through the integration of this new division into Alliance and the building of a robust divisional leadership team that's prepared for the high-growth opportunity in front of us. I'm pleased to see the margin improvement in the business resulting largely from success in our provider recruitment efforts.

We continue to be excited about the growth opportunities to expand our footprint in this service line, as well as its role in enhancing our value proposition to our hospital customers through our integrated value-added business model. This business is a natural complement to our diagnostic radiology business and aligns with our vision to provide multiple service lines to a single hospital customer.

We're pleased to have the support and the leadership of the Thai Hot team. As we've mentioned previously, their majority interest in Alliance is strongly aligned with the interest of all shareholders. I would encourage all investors to read the stencil agreement that was negotiated between the Company and Thai Hot, which clearly spells out how all shareholders will benefit from the support of the new majority shareholders.

Thai Hot understands and is fully supportive of the growth strategy we're executing in the U.S. business. Also as we previously communicated, we're working closely with them to leverage their international experience as we evaluate opportunities to enter the market in China. In consultation with all Board members, this strategy would entail an asset-light, low-capital investment approach to entering this market. We anticipate having more to share on this front in the coming quarters.

Overall we remain excited about our future. Alliance has successfully transformed from a mobile diagnostic imaging company to a full-service outsourced radiology, oncology and interventional healthcare provider, with significant future growth opportunities in each of our business segments. Our integrated value-added business model, coupled with sharp execution of our growth strategy has positioned us to drive sustainable customer and shareholder value.

Our market positions in radiology and oncology remained very strong, and we look to continue expanding our footprint in the interventional services space. Based on our results to date, the evident positive momentum in our business, in our pipeline of opportunities, we're expecting a second consecutive year of revenue growth as well as growth in adjusted EBITDA throughout the remainder of 2016.

Lastly, I want to take a moment to thank our Alliance team members across the entire organization for their commitment to our patients and customers and to our goals in driving the long-term success of our Company. The team is working hard to build upon the confidence and momentum we've generated across our business.

Now I'll hand the call over to Rhonda who'll provide financial details and an overview of our second quarter 2016 results. Rhonda?

Rhonda Longmore-Grund

Thank you, Tom, and good afternoon. As Tom mentioned, I will now review the highlights of our second quarter 2016 performance.

Revenue totaled $125.3 million in this year's second quarter, representing an increase of 6% or $6.8 million over the same quarter last year. As Tom mentioned, we are pleased to report our sixth consecutive quarter of year-over-year revenue growth.

Overall, organic growth contributed $3.1 million of the revenue increase before the impact of pricing pressure. We saw strong same-store volume growth in MRI of 2% and PET/CT of 5.8%, representing our ninth consecutive quarter of growth for MRI and sixth consecutive growth in PET/CT.

We saw some minimal year-over-year decline in Q2 same-store volume of negative 0.2% for stereotactic radiosurgery and 1.1% for linear accelerator treatments. It's important to note, however, that our year-to-date same-store volume growth remained strong in both areas at 4.2% for stereotactic radiosurgery treatments and 2.2% for linear accelerator treatments.

On the business development side, $8.5 million of year-over-year revenue increase was largely related to the addition of key partnerships over the last 12 months. These included PRC Associates across Central Florida and the Palm Coast in October 2015, as well as an additional site in Jupiter, Florida in January of 2016; Pacific Cancer Institute in Maui, Hawaii in December 2015; St. Peter's University CyberKnife Center in New Brunswick, New Jersey in June 2016; and finally our increased equity interest in Alliance H&I, LLC, our longtime radiology joint venture in Michigan, this was previously unconsolidated prior to August 2015.

In total we saw $11.5 million of revenue increase from both organic measures before pricing impacts, as well as from partnership additions.

With respect to pricing, those increases were offset by $1.4 million of competitive pricing reductions in MRI and PET/CT renewals. As discussed during previous earnings calls, we began taking competitive pricing actions in the core mobile radiology marketplace to maintain as well as grow market share. This has proven to be a strategic move as are now driving growth again in radiology.

In addition to the radiology pricing actions, we also recognized approximately $1.1 million of negotiated one-time oncology contract adjustments and $1.2 million of in-quarter price reductions with three of our hospital partners. This decrease of $2.3 million in revenue was offset by approximately $2.2 million of favorable rate increases in our oncology business based on changes in our payor and treatment mix across all of our main partners and sites. The net impact year over year as a result was a decrease of $100,000 in the current quarter.

Lastly, we also saw a $1 million decrease in year-over-year revenue relating to the shutdown of our oncology treatment center in Joplin, Missouri in mid-2015. As we communicated last year, this center was shut down as our business shifted towards the newly-built medical centers that reopened in 2015 after being crippled by the tornadoes of 2011.

With respect to EBITDA, second quarter adjusted EBITDA totaled $34.4 million, a year-over-year increase of $427,000 or 1%. The key drivers of the increase were organic growth, which generated $2.1 million in year-over-year adjusted EBITDA before contract pricing decreases. Note that this $2.1 million increase is net of $700,000 of new year-over-year investment in general and administrative, to support additional workforce, integration of new entities, and key system initiatives.

On the business development side, the new partnerships and acquisitions that I referenced in the revenue discussion contribute $2.4 million of incremental adjusted EBITDA over the same quarter last year. In addition to adjusted EBITDA, we also received economic benefit through management fees from our JV relationships. Although these eliminate in our consolidated earnings, they do provide an offset to a portion of minority interest expense that we incur.

These organic and business development increases of $4.5 million in adjusted EBITDA were offset by $1.4 million of MRI and PET/CT competitive price reductions, $1.1 million of negotiated one-time oncology contract adjustments, and $1.2 million of in-quarter price adjustments with our oncology hospital partners. As I mentioned before, the vast majority of the oncology price reductions were offset by favorable rate changes based on payor and treatment mix in other areas.

And lastly, we recognized a decrease in the quarter of approximately $400,000 in adjusted EBITDA related to the shutdown of our Joplin, Missouri oncology site in 2015, as previously discussed.

In terms of our operating segment and the contribution of revenue and income, Alliance Radiology revenues totaled $87.5 million this quarter, representing 70% of total Company revenue for the period. Radiology generated $28.8 million of income this quarter, representing a 33% margin, consistent with prior year. Radiology year-over-year earnings growth is 1% for the quarter.

Alliance Oncology revenue totaled $25.8 million for this quarter, representing 21% of total Company revenue in the period. Oncology generated $12.6 million of income this quarter and $20.7 million year to date, representing 49% margin.

Margin declined slightly from 50% in the second quarter of the prior year due to a combination of one-time contract adjustments, price reductions, as well as strategic investments in business development resources, which will enable us to take advantage of the growth opportunities within this sector. Although oncology earnings slightly declined in Q2 over last year due to certain contractual price adjustments, year-to-date earnings have increased by 2% over the prior year.

Interventional services revenue totaled $11.4 million in the second quarter, representing a 9% of total revenue in the period. Interventional services generated $1.8 million of income in the second quarter, representing a 6% margin -- 16% -- excuse me -- 16% margin. Margin has improved from 12% in the prior year.

We continue to work through the integration of this new division into Alliance with an expectation for continued improvement in margins. Interventional services year-over-year earnings growth is 81% for the quarter.

Lastly, corporate and net other spend incurred was $8.7 million, which represents an increase of $700,000 over the prior year, largely due to organizational investments to support a larger workforce, new entities, and key system initiatives which I mentioned earlier.

In terms of earnings per share, as reported, diluted EPS for the second quarter was $0.23 of earnings per share, representing a $0.41 increase over the prior year, which was reported at an $0.18 loss per share. Year to date our as-reported diluted EPS for fiscal year 2016 was $0.12 of earnings per share, representing a $0.14 increase over the prior year which was reported at $0.02 loss per share in the prior year.

Adjusted diluted EPS for the second quarter of 2016 was $0.37, compared to $0.34 a year ago. The $0.03 year-over-year increase in adjusted diluted EPS for the second quarter is due largely to the following. Adjusted EBITDA after minority interest increased by $1.6 million year over year to $30.7 million. Depreciation and amortization expense, however, increased by $1.7 million to $16.2 million in the second quarter of 2016 due to the year-over-year increase in the number of units in our fleet since the second quarter of last year.

We closed the current quarter with 621 systems, which include 426 MRI and PET/CT systems and 54 radiation therapy systems. In the second quarter 2015, we closed with 518 systems, which included 381 MRI and PET/CT systems and 49 radiation therapy systems. Since Q2 2015, we have added 45 MRI and PET/CT systems and 5 radiation therapy systems.

Interest expense increased by $2 million to $8.9 million in the second quarter of 2016, as compared to the first quarter of 2015, largely due to increases in the amortization of deferred financing fees in connection with the third amendment to our credit agreement, which was related to the Thai Hot transaction executed on March 29, 2016.

As a reminder, this deferred financing increase from the third amendment was a non-cash event for the company as it was paid for by both the buyer and the seller. Due to the unique nature of this transaction underlying the amendment, we have excluded this charge from our adjusted earnings per share calculation. Excluding this charge, the year-over-year increase in interest expense was $134,000.

In the second quarter of 2016, total CapEx investments, including equipment deposits and capital leases, totaled $27.2 million, compared to $26.9 million last year. We invested $6.6 million in growth CapEx and $20.6 million in maintenance CapEx for the current quarter.

A large percent of our CapEx investment in the second quarter 2016 was for the acquisition of 17 new MRI and PET/CT systems to service new as well as renewing customers, maintenance investments in our mobile tractor and trailer fleet, one new radiation therapy system, and IT investments supporting new business systems to enhance operational efficiency across the radiology platform. As I mentioned earlier, we ended the quarter with 621 total systems, which included 426 MRI, PET/CT, and 54 radiation therapy systems.

Year to date, total CapEx investments, including deposits and capital leases, totaled $49.3 million, compared to $37.6 million last year. Year to date we've invested $11.2 million in growth CapEx and $38.1 million in maintenance CapEx.

We have previously provided guidance on annual CapEx of between $80 million to $90 million, which consisted of $35 million of maintenance capital and between $45 million to $55 million of growth capital. We anticipate total spend to be within $75 million to $90 million. We, however, expect a shift between categories, as we see higher-than-anticipated customer retention during renewal process, driving higher-than-planned maintenance investments. We've also made some additional maintenance investments in mobile tractor and trailer fleet in Q2, as well as in IT in support of new operating platforms in radiology to support operational efficiency.

These increases in maintenance are however offset by shift in timing for planned growth investments in both oncology and radiology. We expect maintenance capital to run between $45 million and $55 million and growth capital between $30 million to $35 million.

At the end of the second quarter 2016, Alliance had cash balances of $24.3 million and debt of $572 million excluding the impact of deferred financing costs. In the current quarter we reduced debt levels by $10 million as compared to Q1 fiscal year 2016 debt of $582 million, and $6 million as compared to Q4 fiscal year 2015 of $578 million. Our leverage ratio was 4.15 times, representing a reduction from the first quarter 2015 of 4.2 times.

We will continue to focus our efforts throughout the remainder of the year on managing our margins and operating cash flows to reduce leverage and expand our liquidity. We will, however, potentially utilize this additional debt capacity going forward should a compelling acquisition opportunity arise.

Cash flows provided by operating activities totaled $35.2 million in the second quarter of 2016, compared to $26.9 million in the second quarter of 2015. Year to date cash flows provided by operating activities totaled $57.9 million in the first half of 2016, compared to $47.7 million in 2015. We define free cash flow as the change in net debt before investments and acquisitions. We also look at this measure both before and after growth CapEx.

Alliance generated $4.1 million of free cash flow before growth CapEx in the second quarter of 2016. After growth CapEx, Alliance used $2.4 million of free cash flow in the quarter. Year to date we generated $9.7 million of free cash flow before growth CapEx. After growth CapEx, Alliance used $1.5 million of free cash flow year to date 2016.

Lastly, as outlined in our press release today, Alliance is confirming guidance in the following areas for full year 2016. Full year 2016 revenue is expected to range from $505 million to $535 million, increasing from $473 million in 2015. 2016 adjusted EBITDA is expected to range from $130 million to $150 million.

As mentioned earlier during the CapEx discussion, we anticipate total CapEx spend between $75 million to $90 million. We are, however, shifting investment levels between the two categories of spend. 2016 maintenance capital expenditures are expected to total $45 million to $55 million, 2016 growth CapEx is expected to be in $30 million to $35 million range.

Free cash flow before growth CapEx is expected to range from $20 million to $40 million and asset growth CapEx free cash flow is expected to range from minus $15 million to minus $25 million.

This concludes our presentation of the financial performance. We thank you for your interest in Alliance and look forward to answering your questions. I would now turn the call back over to the operator to begin the Q&A session.

Question-and-Answer Session


The question-and-answer session will begin now. [Operator Instructions]

And your first question comes from the line of Bill Sutherland [ph].

Unidentified Participant

Thanks. Hi. I wanted to just ask a couple of things. Very clear call, appreciate it.

In the oncology business, I think you've referred to a strong business pipeline. Curious if there's any way to get a sense of that and kind of how it develops into the sales cycle and so forth as far as it's developing into bookings for you. Thank you.

Tom Tomlinson

Bill, thanks for the question. You know, we haven't publicly reported any metrics specifically related to the business development pipeline in oncology. I think you can see over the last probably six quarters a pace of transaction closings, you know, the couple of them that we talked about today being examples of that. And I think as I mentioned in my comments, we are looking for one to two additional projects to deliver yet this year.

So I guess what I would point to is kind of the pace of transactions that we're able to announce. I think it gets difficult to provide additional metrics than that. I think I alluded to in my comments as well that we would like to have seen a little bit more rapid progress with projects coming out of the pipeline, you know, continue to have a great deal of confidence in the team we've built there, that's the place where we've intentionally invested adding additional talent in that area over the last couple of years, that we can see the increased pace of deals, and we expect even more in the coming year or two.


[Operator Instructions]

And your next question comes from the line of Juan Motta [ph].

Unidentified Participant

Hi. Good afternoon guys. Thanks for taking the question.

First one off is regarding the reinvestment proposals from last month and understanding you guys don't bill CMS directly, but what do you expect, if you can comment on that at this time, for 2017 if those proposals were to come through? Maybe you can address interventional as well as imaging.

Rhonda Longmore-Grund

So at this time as our divisions have been looking at the proposals and evaluating, we are seeing about a net neutral impact to the business at this point. So we don't expect any significant or material shift in terms of our results for next year based from the proposals.

Unidentified Participant

Okay. I guess that's good news.

Rhonda Longmore-Grund


Unidentified Participant

Next question is on, you mentioned you don't have anything for oncology in terms of publicly reported metrics for growth. What about radiology, have you disclosed what your target growth is there in terms of expansion?

Tom Tomlinson

We have not. So we I think talked about it, as you know, kind of the net new revenue, which is kind of the balance between customer retention, new sales in that core shared service business, and that that's been positive the last several quarters, which is a significant advancement for the business.

We have not provided any further detail on either sales pipelines or business development pipelines really in any of our divisions.

Unidentified Participant

Okay. That's fine. Well, it's good progress.

And regarding -- a little bit of a high-level question, maybe if we can get your comments, it'd be wonderful. The recent trends of commercial insurance providers not wanting to -- at least publicly stating they don't want to continue with government-funded exchange programs related to the Affordable Care Act. Does that impact your business? If so, is it material? Is that something that we need to keep track of in regards to you?

Tom Tomlinson

You know, if you go back, it's really a good question, Juan [ph]. If you go back a couple of years ago, there was a lot of talk in the industry and certainly looked at it heavily in our business of where we saw -- thought we saw positive lift from the Affordable Care Act related trends playing out in the industry.

And the one place we saw what we thought was a measurable benefit was in states that elected to go with the Medicaid expansion. And in those states we thought we saw a little bit of same-store benefit because the hospitals that we're serving saw some modest increase in census. So I say all of that to say, when I see things happening now where you see commercial insurers pulling out of state exchanges, we didn't see any measurable benefit when they were getting into those exchanges. I don't really expect that we're going to see any material negative impact on the business because of some of that dynamic play out.

So I think the reality is people that have gotten their health insurance through an exchange historically will find a way to get insurance cover, even if there's fewer choices. For no other reason, that's what the law requires, that they carry coverage. So I don't really see it impacting our business in any material way.

Unidentified Participant

Okay. That's good news again.

Tom Tomlinson


Unidentified Participant

And a high-level question on oncology. In terms of all the potential treatments for cancer, where does -- if you could -- I guess it's more a qualitative question, where does Linacs and stereotactic therapy, where does that fit and what's the future for that?

Tom Tomlinson

I think there's a clear trend over time towards increased use of stereotactic radiosurgery or hypofractionation in radiation therapy treatment. I think we're positioned exceedingly well for that trend. We're the largest -- one of the largest if not the largest provider of stereotactic radiosurgery services in the United States, so we're, to a large extent, we're kind of already where the industry is trending in many respects. So we certainly see that trend continuing to play out I think over coming years as treatment planning improves because of the integration of diagnostic imaging together with treatment planning and other kinds of technical advancements like that.

So we see that as being probably, all the things being equal, probably a net positive for us, because again we're positioned very well as a stereotactic radiosurgery provider. And our clinical best practice sharing across sites allows us to propagate advanced treatment plans from site to site I think very effectively, which allows us to take more share in the markets by providing more advanced treatment plans than perhaps some competitors. So I think that's a trend that's certainly clear in the marketplace that'll roll out over the course of many, many years. But again I think that's a net positive for us given how we're already positioned.

Unidentified Participant

Okay. Very good.

And for me that's all the questions right now. Thank you very much.

Tom Tomlinson

Thanks for your questions, Juan [ph].


And your last question comes from the line of Bill Sutherland [ph].

Unidentified Participant

Hi. Didn't know I got one question at a time. That's okay.

On interventional, Tom, you all worked mostly under network contracts that you established with payors, is that how that business works?

Tom Tomlinson

That is how it works today, yes. Over time it's our expectation that that business will include a fair amount of hospital partnerships which may indicate there might be a different billing structure at some point in time. But today it's all billed directly to payors by Alliance or the Alliance affiliated physician practice.

Unidentified Participant

Is this the partnerships likely because of what hospitals are doing in terms of becoming almost blurring the lines between payor and provider, is that what you're thinking or?

Tom Tomlinson

No, we just think it's important strategically, for the same reasons we talked about in our radiology and oncology segments, to be plugged into the hospital-affiliated care network within the markets that we have, you know, that we have clinical sites. So that's why over time, in any market that we're participating in, we would look to eventually tie that business or tie that practice into some hospital relationships so that we're on the inside, if you will, of hospital affiliated networks of providers, because I think one of the effects you see going on in healthcare today, but actually predates the Affordable Care Act but certainly has been accelerated by it, is the development of alternative payment models. And I think those alternative payment models will most often have hospital affiliated networks of providers at the hub. And so that's why we think that hospital relationship over time is an important strategic driver for our business across all of our service lines.

Unidentified Participant

Makes sense. I just have two more. One is kind of just an approach to the business question and when you look at your key business lines and you're making investment decisions, how do you go about allocating? You think about the business lines somewhat equally or -- how do you approach that?

Tom Tomlinson

You know, our perspective on prioritization, if we think of it -- about it exclusively from the perspective of our three different principal businesses here, probably would allocate capital first to oncology, second to interventional, and third to radiology. And that's not kind of an editorial comment on the quality of those three businesses or the teams that we have that lead them. It's a very simple fact that, if you look at oncology businesses and interventional businesses today, they tend to be rewarded in the capital markets at multiples that are, you know, range from 8 to 11 times cash flow, and radiology businesses tend to be rewarded in the capital markets are multiples that are in the 5 to 7 times cash flow.

So as we think strategically about how do we allocate capital, we certainly are focused on positioning Alliance over time as a multi-service-line company. I think we've stated previously it's our intention to grow oncology at a more rapid rate than our radiology business. But all three are great businesses. All three we think bring -- the teams bring good opportunities for us to grow, but probably a short play version of it, answering your question, that's how we think about allocation amongst the three different businesses we are currently involved.

Unidentified Participant

All right. And then relative to Thai Hot and the potential of opportunities in China, I know you're - it sounds like you're still kind of early stage, but I just wanted to see if there's way to think about how it might develop and what's the process you're likely to move through, and if there's any sense of a timeline that you want investors to think about.

Tom Tomlinson

You know, there's no specific timeline we're prepared to commit to at this point. We are at a stage of having a couple of dedicated people that are evaluating the Chinese healthcare marketplace, how you attract patients, how you get paid, regulatory environments, you know, all the kinds of dynamics that you would expect we would be looking into. We're in the process of having many, many business development meetings, meetings with government leaders and others in the country. We'll come out of that process with a direction and a strategy. And the point at which that's reasonably well-clarified, certainly we'll communicate about it with investors.

I guess the one thing I would say is that, you know, we will figure out what makes sense to do in the country of China. I think we've been pretty open about the fact that part of the reason Thai Hot made the investment is that they, as an organization, are very excited about the healthcare marketplace in China and are making a number of investments into the healthcare space both in the U.S. potentially as well as in China, to take advantage of that opportunity. So in one fashion or another, you know, I expect at some point we will become involved in the China healthcare marketplace. Obviously it's our commitment to do that in a way that's financially beneficial and reasonable from a risk standpoint for all of our U.S.-based shareholders.

Unidentified Participant

So that clarifies I think what I was also wondering, which was, you know, so the process is being done by you fairly independently of Thai Hot. It's not a situation where they have an investment for an interest that aligns with your capabilities, and then you evaluate that specifically and go forward, or is that happening as well?

Tom Tomlinson

Yeah, the team that's in the process of doing the evaluation I described is an Alliance team of people. It's not a Thai Hot team of people. Obviously we're doing that in collaboration with them. There's a lot that they and many of their executives know about the Chinese marketplace, regulatory environment, political environment, business environment, that we don't know. We're certainly looking to leverage that.

One of the people we have on the Alliance team is a Chinese national who also has worked with us for seven years in the U.S. on our oncology business, so he's an individual that we know very well, we worked with for many years, but also is a Chinese national fluent in the language and culture.

And so it's a combined team that is really driven by Alliance sorting through and figuring out what's the right strategy that fits with Alliance's business model that would make sense, in consultation with executives from our new majority shareholder.

Does that answer your question, Bill [ph]?

Unidentified Participant

Yeah. That's great color. Thanks, Tom; thanks, Rhonda. Have a great evening. Thanks.


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

Tom Tomlinson

Thank you for participating today everybody. Look forward to talking to you on our next call, or feel free to give us a call at any other time if you have questions. Take care.


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

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