American Shared Hospital Services (AMS) 2006 Q4 法說會逐字稿

Good afternoon, everyone, and welcome to the fourth quarter and 2006 conference call for American Shared Hospital Services. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session where you can press star one on your phone to enter the queue. I would like to turn the call over to Dr. Ernest Bates, Chairman and Chief Executive Officer, Craig Tagawa,Chief Operating and Financial Operator, and Norm [Hauk], Controller of American Shared Hospital Services. Mr. Tagawa, you may begin.

Thank you, Lindsey, and thank you all for joining us for AMS's fourth quarter and 2006 earnings conference call and web cast. We'll open the call for questions after Norm Hawk, and I review the financial results we announced this morning. I want to begin by having Norm review the financial results and then I will have additional comments about our progress this past year.

Yes, thanks, Craig.

Please note, that various remarks that we may make on this conference call about future expectations, plans and prospects for the company, constitute forward-looking statements for the purposes of Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Actual results may vary materially from those indicated by these forward-looking statements, as a result of various important factors, including those discussed in the company's filings with the Securities and Exchange Commission, including the company's annual report on Form 10-K for the year ended December 31st, 2005, the Form 10-Q for the quarters ended March 31st, June 30th, and September 30, 2006 and the definitive proxy statement for the annual meeting of shareholders held on June 28th, 2006. The company assumes no obligation to update the information contained in this conference call.

Turning to the results, for the 3 months ended December 31st, 2006, revenue increased to $4,793,000 from $4,650,000 for the fourth quarter of 2005. The number of procedures performed during the fourth quarter of 2006 was 596, consistent with the 602 procedures performed in the fourth quarter of 2005. Gross margin declined slightly to 48% for the fourth quarter of 2006 from 51% for the fourth quarter of 2005, reflecting a higher percentage of revenue and operating expenses from retail sites. Additionally, our two newest sites passed their warranty period requiring repair and maintenance contract expense. Selling and administration expense decreased to $894,000 for the fourth quarter of 2006 from $965,000 for the same period of the prior year, primarily because of lower business development costs.

Operating income increased to $922,000 for the 2006 fourth quarter from $914,000 a year earlier, the 24th consecutive year-over-year gain in this important financial measure. Pretax income increased to $696,000 for the fourth quarter of 2006 from $685,000 for the fourth quarter of 2005. Net income for the fourth quarter of 2006 decreased to $347,000 or %0.07 per diluted share compared to $479,000 or $0.09 per diluted share for the fourth quarter of 2005, the results of an increase in the effective income tax rate to 50% from 30% a year earlier. The higher rate in the 2006 fourth quarter resulted from truing up the provision to the income tax returns for 2005 and a slightly higher than anticipated annual effective income tax rate in 2006. As I have said on prior calls, we anticipate that the effective income tax rate will increase and we now estimate it will be about 44% in 2007.

For the 12 months ended December 31st, 2006, revenue increased 12% to $20,385,000 from $18,231,000 for 2005. Operating income increased 11% to $3,864,000 from $3,471,000 and pretax income increased 12% to $2,858,000 from $2,547,000 for the prior year. Net income for 2006 decreased to $1,656,000 or $0.33 per diluted share, reflecting a 42% effective income tax rate. This compares to net income for 2005 of $1,767,000 or $0.35 per diluted share, reflecting a 31% effective income tax rate. The 31% rate last year was primarily due to benefits received from the exercise of stock options previously granted to the company's Chairman and Chief Executive Officer.

For 2006, there were approximately 5 million basic and 5.2 million fully-diluted shares outstanding. Cash flow for 2006, as measured by earnings before interest taxes, depreciation, and amortization, increased to $10,672,000 compared to $9,923,000 for 2005. At December 31st, 2006, AMS reported cash, cash equivalence, and short-term securities of $5,526,000 and long-term securities of $3,380,000. At December 31st, 2005, cash equivalence and short-term securities were $5,835,000 and long-term securities were $2,797,000. Shareholders equity at December 31st, 2006 increased $19,009,000 compared to $18,320,000 at December 31st, 2005.

Craig?

Thank you, Norm.

In 2006, we delivered continued growth from our existing portfolio of radio-surgical assets and we set the foundation for more rapid growth in the future. These are our most important goals for the year and we are pleased by what we have accomplished. We have made great strides this past year and our plan to use AMS's creative financing solutions to dramatically expand our growth potential by offering our clinical partners the latest technology solutions for radiation oncology delivery.

Our innovative agreement with Tufts New England Medical Center to provide state of the art equipment as part of a complete radiation therapy department is a model for additional agreements we hope to complete in the future. Under this agreement with Tufts NEMC, AMS will provide an image-guided radiation therapy system, a CT simulator, and related service, support and maintenance services. We expect this program to contribute to our operating results, beginning in the fall of 2007. Last month, the Commonwealth of Massachusetts issued a Determination of Need for the Clinitron 250 Proton Beam Radiation Therapy System that AMS separately agreed to provide Tufts NEMC.

We also recently announced an agreement to provide a Clinitron 250 to Orlando Regional Health Care's MD Anderson Cancer Center. Orlando Regional Health Care is one of Florida's most comprehensive private, not-for-profit healthcare networks. Subject to the receipt of FDA approval for the Clinitron 250, we anticipate commencing our lease agreements with Tufts NEMC and MD Anderson Cancer Center Orlando for the PBRT System in 2009.

Let me remind you that the CLinitron 250 is a single-treatment room PBRT System currently under development by Still River Systems that incorporates proprietary technology that Still River believes will dramatically reduce the cost of implementing proton-beam radiation therapy. In April 2006, we invested $2 million for an equity interest in Still River Systems and paid $1 million for an option to purchase two proton beam systems. We exercised this purchase option last month and have paid Still River an additional $1 million as per the terms of the option. AMS has staked out a highly-visible position in the emerging proton-beam radiation therapy market through our investment in Still River and our deals with Tufts NEMC and MD Anderson.

Interest in the exciting technology is extremely high. We have been contacted by other potential partners who want to know how they can position themselves to implement proton beam radiation therapy services. We are actively evaluating these additional PBRT opportunities and how best to solidify AMS' market position. We are increasingly excited about the potential for PBRT to be a significant growth driver for AMS in the years to come.

We also continue to pursue opportunities for current-generation radiation therapy devices. We are making progress here, as well, as evidenced by our recent IGRT contract with Tufts NEMC. Additionally, we recently announced an order for four Leksell Gamma Knife Perfexion Systems from Elekta AB for planned upgrades of clinical partner sites in the United States beginning this summer. We accomplished a great deal in 2006 and we are increasingly optimistic about our future as we expand our reach in radiation oncology.

Lindsey, we are ready for the first question.

Thank you. We'll now begin the question and answer session. [OPERATOR INSTRUCTIONS] [Lennie Dunn] from [EZStocks Inc.] is online with a question. Please go ahead.

Yes, hi. Sounds like we're in a transitional stage and that a year from now we'll be quickly through the next level and I'm encouraged by that. But as shareholders, it's been a while since you guys raised the dividend. And it would be nice that while we're waiting through this transitional stage if we got paid a little bit more while we're waiting. We'd appreciate some consideration of that at the next dividend meeting.

Okay. We'll do that. I think the board quarterly discusses those points.

Future looks bright, but we're going to go through a transition and it's a lot more pleasant to wait while we're getting paid a little better.

We'll take that under advisement and present that to the board.

Thank you.

[Laurie Dunnin] with The Manitoba Fund is online with a question. Please go ahead.

Hello, good afternoon, thanks for taking my call. I want to get a little more perspective on the technical differences between the Still River proton-based system and the Varian Medical's ACCEL-based system. Can you differentiate the two technologies?

Dr. Bates, would you like to take that or would you like me to take that?

Why don't you take it and I can make comments later.

OK. The Still River System is a very unique system, in that it's a single room system. And the Cyclotron and the treatment room are in the same room. So it's a smaller footprint than some of these other systems that are on the market.

The system that Varian has acquired the ACCEL systems actually a multiple treatment room system. And the ones that ACCEL has currently produced, I believe are 3 and 4 treatment room systems. So, much like the proton beam systems that are in the United States that are very large and over $100 million in capital costs, including both the equipment and the construction, that's currently what the Varian system is.

I see and what -- can this ACCEL system, though, basically downsize and basically become a smaller system, a more efficient system over a period of time? Or is that infringing on some intellectual property that you may have?

I can't answer for really Still River and what the patents that they've filed. We are seeing that competitor systems are now coming up with more compact systems.

Okay.

And actually looking at doing fewer treatment. Because that's where we see the market, is in the 1-2 treatment room systems as opposed to the 3, 4, and 5 treatment room systems.

Okay. Also, maybe just a general question on IGRT. It's in a new product up cycle in the United States. Are you surprised with the current interest in IGRT? Is it under or over the levels that you estimated for this point in time of the cycle?

No, I think we're not really surprised by the demand for it because it clearly allows you to target better the tumor.

Right.

So we're just seeing this as a natural progression of improvement in the radiation therapy field. And we just see the proton beam as going to the next step of being able to provide an improved therapy, as well as targeting. We're really not surprised to see this and we hope to play a role in the rollout of IGRT.

Excellent. Do you see the proton therapy looking towards more advanced applications of radiation technology in the area of macular degeneration or epilepsy? I've done a little bit of research on PubMed in this regard. Is that going to be a proton-based therapy versus an IGRT-based therapy potentially in the future?

I think, Dr. Bates, you want to?

No, I think it is. I think some of the reports coming out of Europe and elsewhere is showing that there is use for proton beam in dealing with those disorders that you mentioned.

I think, Dr. Bates, you want to?

No, I think it is. I think some of the reports coming out of Europe and elsewhere is showing that there is a use for proton beam in dealing with those disorders that you mentioned.

The only comment I want to make about the Still River machine, this truly is a disruptive technology. Recall that the present machines are double rooms or multiple rooms and those machines are selling anywhere from $60 to over $100 million. And right now the Still River machine is projected to sell for about $15 million. So it really is quite exciting.

15 or 50, did you say?

$15. It's quite exciting. It's probably one of the greatest technical revolutions that we've seen in radiation therapy in the last 50-70 years.

And are you the major shareholder in the Still River? Are you the largest shareholder?

No we're not, we only own approximately 8% of that company.

I see. Who is the largest shareholder? The management?

Craig, do you know that answer?

I don't think we can give that. We're under a confidentiality agreement with Still River. So we have to really --

Okay. That's fair.

But one of the things that has proved very successful on the proton beam is the treatment of prostate cancer. And that is one of the main things where that has been -- the outcomes have really been reported and they're very, very promising.

Do you see your Elekta business taking away from Varian for the IGRT area? The Trilogy, for example? Do you see Elekta becoming more competitive in the United States over the last several months versus the prior periods?

Elekta has a competitive system, an IGR system, to the Trilogy called The Access. And we think it's a very good system. In fact, we're putting that one in at the Tufts NEMC.

Oh, really? Okay.

But we also like the Trilogy System and we're looking to hopefully do some of those, as well.

Excellent. So you see the market shares in terms of the staying about the same? Varian still --

Varian currently, obviously, has the lion's share of the market, currently.

Appreciate your time, thank you.

Thank you.

Mr. Tagawa, there are no further questions. Would you like to make your closing remarks?

I don't have any further remarks. Dr. Bates, would you like to make any remarks before we close?

No, other than to just emphasize how excited we are about the proton beam business going forward. It really is quite exciting. And we think that there's going to be eventually a large demand for this equipment in the United States and elsewhere.

There's an article that recently was written, original article coming out of Sweden, showing the number, the need for proton beam machines in Sweden and if you extrapolate those numbers to the United States, we see a market that could be as high as 300-400 machines. And that may be a conservative number. So we're quite excited about the proton beam business.

Our major efforts are going to go into that direction in the next few months. Craig and his sales staff are now in contact with over 15 major research universities and centers, discussing possible contracts, partnership contracts, for the proton beam.

I'd like to just thank everybody for joining us this afternoon. And we look forward to speaking with you on our conference call for the first quarter of 2007 that will probably take place in a couple of months.

This call will be available in digital replay immediately following today's conference. To access the system, dial 888-843-8996 and enter the pass code of 17226313 to access replay. The webcast of this call will be available at www.ASHS.com and www.earnings.com. This concludes today's teleconference. Thank you for participating, you may now disconnect.