American Shared Hospital Services (AMS) 2007 Q3 法說會逐字稿

Good afternoon everyone and welcome to the third-quarter 2007 conference call for American Shared Hospital Services. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Dr. Ernest Bates, Chairman and Chief Executive Officer; Craig Tagawa, Chief Operating and Financial Officer and Norm Houck, Controller of American Shared Hospital Services. Mr. Tagawa, you may begin.

Thank you, Ellen, and thank you all for joining us for AMS' third quarter 2007 earnings conference call and web cast. We will be glad to and your questions after our prepared remarks. I'm going to ask Norm to begin with a review of the financial results, then I will have additional comments prior to the q-and-a. Norm?

Thanks, Craig. Please note that various marks 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 the 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 and 10-KA for the year ended December 31, 2006, Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007, and the definitive proxy statement for the annual meeting of shareholders held on June 14, 2007.

The Company assumes no obligation to update the information contained in this conference call.

For the three months ended September 30, 2007, revenue decreased 11.2% to $4.652 million compared to $5.238 million for the third quarter of 2006 as the total number of procedures declined to 575 for this year's third quarter from 664 last year. The decrease in procedures was partially due to down time associated with the planned upgrade of one of our clinical partner sites from the Gamma Knife to the new Leksell Gamma Knife Perfexion system, which took the center off-line for about six weeks.

The decline in third quarter procedures also reflected generally lower volume at some of the Company's other Gamma Knife sites. Reflecting the reduced Gamma Knife patient volume, gross margin declined to 46.3% compared to 50.6% for the third quarter of 2006. The Company's new contract to provide certain additional radiation therapy and related equipment, including Intensity Modulated Radiation Therapy, or IMRT; Image Guided Radiation Therapy, or IGRT; and a CT simulator to the radiation therapy department at an existing Gamma Knife site began operation in September, and this new modality contributed approximately $86,000 in revenue.

Selling and administrative expense decreased to $1.038 million for the third quarter of 2007, compared to $1.109 million a year earlier primarily because of lower business development costs and legal fees, partially offset by increased accounting fees and building rent. Operating income for this year's third quarter was $684,000 compared to $1 million for the same period of 2006. Net income for the third quarter of 2007 was $268,000, or $0.05 per diluted share, reflecting a 47% effective income tax rate. This compares to net income for the third quarter of 2006 of $425,000, or $0.08 per diluted share, reflecting a 40% effective income tax rate.

For the nine months ended September 30 2007, revenue decreased to $14.311 million compared to $15.592 million for the first nine months of 2006. Gross margin was 47.7%, compared to 49.4% from the same period of last year. Operating income for this year's first nine months was $2.053 million compared to $2.942 million a year ago. Net income for the first nine months of 2007 was $773,000, or $0.15 per diluted share, reflecting a 47% effective income tax rate.

For the first nine months of 2006, net income was $1.309 million, or $0.26 per diluted share, reflecting a 39.5% effective income tax rate.

As we have reported to you on previous calls, we continue to expect the effective income tax rate for 2007 as a whole to be higher than the 42% rate recorded for 2006. Cash flow for the first nine months of 2007 as measured by earnings before interest, taxes, depreciation and amortization, was $7.002 million, compared to $8.034 million for the first nine months of 2006.

At September 30, 2007, AMS reported cash, cash equivalents and short and long-term securities of $9.341 million. In comparison, at December 31, 2006, AMS report cash, cash equivalents and short and long-term securities of $8.906 million. Shareholders equity at September 30, 2007 rose $19.357 million, or $3.85 per outstanding share. This compares to shareholders equity at December 31, 2006 of $19.9 million, or $3.78 per outstanding share.

Three additional notes. First, as we have reported in our 10-K and first and second quarter 10-Q, let me remind you that one of our existing Gamma Knife contracts terminated in third quarter at the end of its terms, and another is scheduled to terminate early in 2008 at the end of its term.

Second, during the third quarter, AMS increased its equity interest in privately owned Still River Systems, Inc., developer of the Monarch 250 which was formerly the Clinatron 250 Proton Beam Radiation Therapy device with the purchase of additional $617,000 of Still River convertible preferred stock. AMS currently owns an approximately 7.6% equity interest in Still River.

Third, I also want to reiterate a comment I made last quarter concerning working capital. The decrease in working capital on our September 30, 2007 balance sheet compared to December 31, 2006 is primarily related to the new Leksell Gamma Knife Perfexion systems we ordered from Elekta AG last October. During this year second quarter, we received a deposit and advance payment of approximately $3 million from a customer toward the purchase of one of these Perfexion systems. This amount is reflected on our balance sheet as a current liability. However, the corresponding asset for the progress payments we have made is not reflected in current assets, hence the change in working capital. Craig?

Thanks, Norm. As you all know, during the third quarter, our Board of Directors decided to suspend the cash dividend. It is important that you understand the logic behind this decision.

As Norm just mentioned, AMS' cash flow is solid and our cash position remained substantial, so the issue is not one of being able to afford the cash payout, the issue really revolved around where we could get the highest return for our money and our commitment to the long-term growth strategy that we've been talking about for sometime. By freeing up an additional $1 million a year, which is what we were spending on the dividend, our decision adds significantly to the financial resources we can put to work to take full advantage of the many attractive investment opportunities in PBRT, IGRT, the Leksell Gamma Knife Perfexion and other new technologies for radiation, oncology and radiosurgery delivery now coming onto the market. These new technologies have the potential to significantly improve patient outcomes in the treatment of many formerly intractable cancers and other life-threatening conditions.

Given the high cost of the equipment involved, the transition to these advanced treatment modalities is a substantial undertaking for the clinical community that will take years to complete. The transition is now just beginning and we're absolutely convinced that AMS with our creative financing solutions can play a significant role in the process. This is an unprecedented long-term growth opportunity for our Company which we believe can deliver significant rewards to our shareholders, rewards that should more than offset in the long-term the sacrifice of the dividend in the short term.

We're confident that our strategy is the best way to deliver growth and value to our shareholders. As Norm mentioned, during the third quarter, we increased our investment in Still River, developer of the Monarch 250 Proton Beam Radiation Therapy system. PBRT is widely regarded as the optimal radiation treatment for a wide variety of cancers and the most significant advance in radiation oncology in many years. The Monarch 250 a single treatment room device that promises to make this advanced therapy available at an affordable price. Our equity investment in Still River is one of the ways for our shareholders to benefit.

Another way we plan to profit from PBRT is contracting to leased systems in clinical sites. As you know, we already have contracted to lease two Monarch devices at Tufts New England Medical Center and at M.D. Anderson Cancer Center, Orlando, and we are developing a number of additional PBRT contracts.

Norm also mentioned that the first of the four new Leksell Gamma Knife Perfexion systems we ordered a few months ago was installed at a clinical partner site during the third quarter. I'm pleased to announce that this new system began treating patients in October 2007 and so will begin to contribute to revenue in the fourth quarter. We expect to upgrade three additional sites with this advanced equipment over the next several quarters. In addition to its many clinical advantages, this advanced device has the capability of treating additional indications and offers higher patient throughput than the Gamma Knife, which creates the opportunity to increase revenue per center compared to what we have seen historically.

Another sign that our strategy is working, the IGRT and related equipment services AMS has contracted to supply another current Gamma Knife customer, Tufts New England Medical Center, began clinical operations late in the third quarter. Here too, we see an expansion of revenue as the body radiosurgery component of this program evolves over time. We expect revenue from these new Perfexion and IGRT contracts in the fourth quarter to partially offset the impact of the scheduled termination of one of the Company's 21 existing Gamma Knife contracts that Norm mentioned.

We're excited by the opportunity that we see ahead of us and hope to have additional contract news for you soon.

Ellen, we're now ready for the first question.

(OPERATOR INSTRUCTIONS). Mr. Tagawa, there are no questions at this time. Would you like to make your closing remarks?

Yes. Dr. Bates would like to make a few comments at this point.

I would like to point out that, even though the last two quarters, maybe three quarters, have been down quarters, we're quite excited about what we think is going to happen in the future. I know that there has been some concern that we have lost two contracts, and I want to point out why those two were lost. The first one was at the University of California in San Francisco, and we have been there since 1991. As to be expected, it has been a very successful contract and it's not unreasonable to think that that would be replaced by the hospital buying its own machine because it has been so successful.

And the other is the Hoag Hospital down in Southern California, again, a contract that we've had for about 10 years, another very successful contract, and it's not unexpected that when you have been at these places nine and 10 years and over 15 years and at some point that these hospitals would see the value of having their own. This is not unexpected. But I want to point out that those two machines that have left will probably be replaced with new contracts that are coming on. The new IGRT unit that is at a hospital in the Northeast has done very well this, its first month in operation, and we expect that to probably give us another $300,000 a quarter in additional revenues. And then, we have new Perfexions that are starting in October of '07 and one in the first quarter '08 and one in the second one of '08 and it's anticipated that those machines will do an increased volume of 20% each which has been the experience with the Perfexion in other places.

So, I want to point out that we're feeling very comfortable about our IGRT business as well as our Gamma Knife business. We're also planning a strong interest in Gamma Knifes outside of the borders of this country. We are now pursuing units in Brazil, Peru and in Argentina. The prospects there look very good. We will be going there the end of this year to look at those and we're in the process of negotiating with 10, and I mean 10 major hospitals, for proton beams. And I have visited already all 10 of those and we're quite excited about those. I think it's quite likely that those hospitals will probably go with us.

We're expecting to install our first proton beam probably around 2010, and that business we expect to do extremely well. We were just recently at a meeting in Los Angeles where we had a booth or for our proton beam and the excitement was just awesome. So we are ecstatic.

I say all of that to let you know that we think things are definitely going to get better, that there is an explanation for why we've had these down quarters, but we expect to return to where we were previously (technical difficulty). This so far the month of October has essentially returned to what we normally do. Is that correct, Norm?

Yes it is, Dr. Bates. I think so far, the fourth quarter looks like, at least so far, we will meet or exceed the number of procedures we performed last year.

So, I say all of that to say that I'm still very excited about the proton beam business. I am still excited about the Gamma Knife as it's reflected in the new Perfexion. I think that the Perfexion is going to take off. It does the things that other machines cannot do, and I think it opens up a whole new market. There are over 100 of the old-style Gamma Knifes that will eventually have to be replaced, that will become Perfexions (technical difficulty) market that we're going to go after with intensity. So, that's all want to say.

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 19802598, followed by the pound sign to access the replay. The web cast 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.