American Shared Hospital Services (AMS) 2010 Q2 法說會逐字稿

Good morning, everyone, and welcome to the 2010 second quarter 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 Tagwa, Chief Operating and Financial Officer, and Norm Houck, Controller of American Shared Hospital Services. Mr. Tagwa, you may begin.

Thank you, John, and thank you all for joining us for AMS's second quarter earnings conference call and webcast. 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 31, 2009, the quarterly report on Form 10-Q for the quarter ended March 31, 2010, and the definitive proxy statement for the annual meeting of shareholders held on June 2, 2010.

The Company assumes no obligation to update the information contained in this conference call. The number of procedures and revenue in our Gamma Knife business continued to trend higher in the second quarter. During the quarter, we put a new Leksell Gamma Knife Perfexion unit into service as planned at Smilow Cancer Hospital at Yale-New Haven. And we benefited from improved performance at one of our sites where volume had been sharply reduced in prior quarters due to physician turnover. In addition to the factors that helped us in the second quarter, we have yet another Perfexion device scheduled to go into service in the third quarter of this year at Methodist Hospital in San Antonio and Gamma Knife treatments at our first international site in Lima, Peru are also expected to begin late in 2010 or early in 2011.

Longer term, we anticipate placing five additional Perfexion systems over the next two years and we are optimistic about a positive outcome of additional contract negotiations in South America, Europe and the United States. Perfexion units are especially important for us. At their first full year of Perfexion operation at two of our sites, we experienced treatment increases averaging approximately 50%. We are optimistic about our Gamma Knife business and we believe the pace of growth will accelerate as additional Perfexion units are installed and our international sites commence operation. Even as we grow our Gamma Knife business, we have positioned AMS to be a major beneficiary of proton therapy, which is widely regarded as the next great growth opportunity in radiation oncology.

We currently are developing a proton therapy center in Dayton, Ohio with Kettering Medical Center, as well as treatment centers in San Francisco, Boston, Orlando and Long Beach, California and we're negotiating additional projects. We have lined up financing capability by partnering with Siebert Brandford Shank & Company LLC, one of the nation's leading underwriters of public debt to act as placement agent in connection with the debt financing of these projects. We are fully committed to bringing each of these projects to fruition and we have everything we need to move forward quickly once FDA approval for the proton devices has been received. As you know, we are working with Varian Medical Systems to provide the equipment for some of our multi-treatment room projects including the Kettering facility. Varian has already received CE Mark approval in Europe for its PBRT system. The first installation of Varian System has been treating patients for a number of months at a PBRT center in Germany.

Varian's 5-10-K application has been submitted to the FDA and we hope to hear positive news on this application this summer. As for Still River Systems, the manufacturer of a compact, cost effective proton beam system in which AMS owns a small equity interest, we continue to expect FDA approval by the end of next year. Still River has an order backlog in excess of $200 million and has three of its own sites under construction at Barnes Jewish Hospital in St. Louis, Missouri, Robert Wood Johnson University Hospital in New Brunswick, New Jersey and Oklahoma University Medical Center in Oklahoma City, Oklahoma.

We continue to expect the pace of activity in our PBRT business to pick up substantially once FDA clearance has been received. Our goal is for AMS to be the one-stop shop that hospitals and radiation oncology groups turn to first to meet their PBRT requirements, whether for a single treatment room or multi-treatment room facilities, depending on their patient volume. Now I'm going to turn the call over to Norm to review our financial results. Norm?

Thanks, Craig. For the three months ended June 30, 2010, revenue decreased to $4.155 million compared to $4.583 million for the second quarter of 2009, but increased sequentially compared to $4.088 million for the first quarter of 2010. Operating income for this year's second quarter was $164,000 compared to $264,000 for the second quarter of 2009. Pre-tax income was $195,000 and net income for the second quarter of 2010 was $3,000 or $0.00 per share. This compares to pre-tax income of $246,000 and net income of $26,000 or $0.01 per share for the second quarter of 2009.

The total number of Gamma Knife procedures performed during this year's second quarter was essentially unchanged compared to the second quarter of 2009, but increased 6% sequentially. The decrease in revenue for this year's second quarter versus prior year primarily reflected normal variation in the mix of business between sites. As Craig mentioned, volume has been especially low at one of our centers due to physician staffing issues. This issue was resolved during the second quarter and Gamma Knife procedures have resumed at this center.

Gross margin was approximately 42% for both periods. Selling and administrative expenses for this year's second quarter increased to $1.083 million compared to $1.2 million for the second quarter of 2009 and were essentially flat sequentially. This increase was primarily to support the Company's domestic and international growth initiatives. For the six months ended June 30, 2010, revenue was $8.243 million, compared to $8.750 million for the first six months of 2009. Net income for this year's first half was $11,000 or $0.00 per diluted share. This compares to a net loss for the first six months of 2009 of $68,000 or $0.01 per share.

Cash flow as measured by earnings before interest, taxes, depreciation and amortization or EBITDA was $2.001 million for the second quarter and $3.985 million for the first six months of 2010, compared to $2.231 million for the second quarter and $4.140 million for the first six months of 2009. At June 30, 2010, AMS reported cash, cash equivalents and certificates of deposit of $9.527 million. This compares to cash and cash equivalents of $9.833 million at December 31, 2009. Shareholders' equity at June 30, 2010, was $22.915 million, or $4.98 per outstanding share. This compares to shareholders' equity at December 31, 2009, of $22.755 million, or $4.95 per outstanding share. Craig?

Thank you, Norm. Now we'd like to open the call to questions. John, we're ready for the first question.

Thank you. We will now begin the question-and-answer session. (Operator Instructions) We do have a question from Lenny Dunn from Freedom Investors. Please go ahead.

Yes, hi.

Hi, Lenny, how are you?

I'm good, Dr. Bates. We've been in this for a while and we're certainly long-term investors and may even buy more, but my question to you is this. Going back a few years ago, we could generate $0.50 a year from the Gamma Knives in earnings and I can see that -- you must correct me if I'm wrong, by the way, that we certainly could get back to that level once you get enough of these Perfexion systems up and running. And, we're certainly looking forward to seeing you -- though you're very cash flow positive, we'd like to see some serious earnings being generated and while we're waiting for the proton beam which obviously will take us to a totally different level. But is that a realistic assumption?

Well, Lenny, this is Dr. Bates. I'm very excited at what's going on with the Perfexions. We have brought five Perfexions within our fleet within the last three years and Craig and his team are putting another one in the next few months and clearly, this is a remarkable machine. The volume is projected to go up 30% on each one of these machines and we're beginning to see that happen. The start up initially was costly and I think that's somewhat reflected in the numbers that we've had for the last two years, but I think going forward you're going to see these machines give us numbers that we're all going to be very excited about. I think there clearly has been a resurgence of the Gamma Knife business.

Not only in this country, but also internationally, most recently in Turkey and we are finalizing the agreement over there that is going to be a combination of government and private partnership. That's an exciting country with a vastly fast growing GDP, with insurance very similar to what we have here and maybe Ernest R. Bates can just say a word about what he's doing in Turkey and what he's doing in Peru and what he's doing in Brazil. I really am excited about the international market and I think it will not be long before it will not rival what we are doing domestically. Ernie, could you say something about that?

Sure. Hello, Lenny. You've heard us mention over the past several calls the interest that we have in the international markets. We have been working at this for some time and as you're aware, it does take time looking at these different markets because each obviously has its own unique regulatory issues, tax, legal, et cetera. And the first market which we've already announced is Peru and so we are in the process of going through the construction plans for the [Bunker] in Lima, so we're excited about bringing this first international GK facility on line by the end of the year, the first part of next year. As Dr. Bates mentioned, we also recently went on a trip to Istanbul, Turkey and we're also very excited about this market. Population of 75 million people in one of the fastest growing countries in the world.

We see significant opportunity for us there, not only to put in Gamma Knives, but also other radio surgery devices and also radiation oncology and specifically linear accelerators. So we're working on putting together the infrastructure to help us to -- to enable us to replicate what we've done here in the United States with our Gamma Knife business. So we see a lot of potential in Turkey. We may have mentioned, also, some work that we're doing in the UK. We can't disclose specific names of the parties that we're working with there, but we are working on securing the financing to enable us to place a Gamma Knife at a very prestigious hospital in the UK and we look to replicate that in other centers as well.

Ernie, you think you could say a word about how many procedures on the average are done in the UK on a Gamma Knife?

Well, in the UK there are several sites. The first is Sheffield in the northern part of the UK and this is the oldest site. In fact, it was the first Gamma Knife site established in 1985 and we understand that they are treating upwards of 600 to 700 patients a year and this is actually following the installation of a second unit which was placed there to meet the overflow requirements from the first machine. So we think we've got significant potential in terms of volume numbers, not only in the UK, but at a number of these sites, including Turkey, where there are three machines, one treating in excess of 1,000 patients again last year.

It all sounds promising. Do you think we will see some of this translated into immediate earnings rather than just the cash flow statements in the next few quarters?

Norm or Craig, do you want to answer that?

The -- I think you'll see as the first one that you will see would be the Peru Gamma Knife system that we talked about. And I think the others will ramp up as the construction is done on these and those will take a little time. So you probably won't see them in the fourth or first quarter, but you will see it as soon as the projects are done and it takes about three to six months after that before we'll go online.

Craig, would you say a word about the loosening of credit, which has been a problem for the last two years and now we're beginning to see things change and that you had -- we're just told two days ago that you are -- you have a unit that is now going to be financed?

Yes, I think all along we've been fortunate. The GK financing subsidiary is very strong, even during the crunch, the credit crunch, we were able to get financing on our projects and as Dr. Bates mentioned, we're continuing to be able to get financing on the projects that we encountered. And we don't see that that's going to change. We only see that that's going to get better over time. But for certain projects, it is difficult to get financing, but we've been fortunate so far in that we have been successful. We've never not been able to do a project that we've undertaken.

Thank you.

Our next question comes from Tony [Kayman] from Eastwood partners. Please go ahead.

Hi, guys.

Hi Tony.

Hi. Dr. Bates, if you could -- I thought it would be helpful. I know you just attended the Piper Jaffray Cancer Conference and I'd be interested if you could give us your general take on the -- whether there is awareness emerging amongst the investor community and also probably more important among the institutional community of hospitals that proton beam, which was once out of reach, is now rapidly becoming pretty real? I mean that's my take on it, but I wanted to see your view on where the industry is.

Absolutely. I was on a panel consisting of myself, the people from ProCure, the people from MD Anderson and the CEO of TomoTherapy therapy and we all were very excited about what we saw the potential for protons and it was growing rapidly. I was asked to share with a group of private investors what I thought the numbers would be for our Still River one-room machine and I'm very encouraged that those machines are going to do well. In fact, we're looking at an IRR of 35% and with a $19 million cap expenditure and that revenue we are projecting is going to be close to $9 million a year with an EBITDA of $7 million a year. That is the Still River one-room machine.

The Varian two-room machine which will be our first unit out there and that will be Kettering, that revenue is going to be roughly $20 million a year with an IRR less -- that's going to be about 23%, averaging 80 patients a day and that capital expenditure will be about $55 million and EBITDA of $16 million. And I believe these are really conservative, conservative numbers, but as the use of protons get greater, I don't think we're going to have any real difficulty meeting those numbers. The clinical papers coming out in the most recent years are showing some exciting results with cancer. So I'm very, very excited. Then the other good news that I can give you all is that I just recently received the current newsletter from Still River who is making the one-room machine which you all are aware of and we are an investor in that Company and Craig might tell you to what extent we are investing.

But what's exciting is they, in early April, they got their first 250 MeV proton beam from that system. I mean that's a remarkable achievement. By the end of June, the gantry arms and bearings were in place for that unit that's now being installed at Barnes-Jewish Hospital in St. Louis and in mid-June all the major pieces of the gantry were shipped to that facility and construction has started. And these milestones really have the people at Still River enthused and excited as we are. We think we're going to see FDA approval which we've talked about occurring in 2011 late. That may happen earlier, but the exciting thing is that this first machine is most of it in place and under construction at Barnes. A major, major hospital in this country.

I think the -- it's clear just from monitoring the news that the activity around the proton beam space is really heating up nationally, but for AMS specifically, do you think that a real catalyst that allows you to begin demonstrating real progress will be the anticipated Varian approval? Is that what really catalyzes your going forward?

Absolutely. I might tell you and Craig can add to that is that this machine is looking very exciting. They're expecting FDA approval any day now. All the data has been submitted and we have the majority of the financing in place for that machine and hopefully we'll have most of it concluded by September 30. And we're going off to look at that machine with the Kettering staff two weeks from now and I really think that our decision to go the two-room or one-room route is -- was the right choice. I do not believe that these large four and five rooms will be in the end economically feasible and that the direction that this market is going is to the path that we've chosen and that's one and the two-room machines.

Okay. And I guess a final question, in terms of your home city there in San Francisco, do you anticipate sometime in the next few months to be able to announce further developments there on your consortium?

Absolutely. One of the problems we're having here is -- which is not unusual when you have very competitive hospitals, getting them all to agree on all the terms. So that's been the hold up. But we think -- we're pretty far along and we might have to exclude some of them and go with one or two rather than all four or five, but we're pretty much convinced that this is going to happen. I mean this is going to be one of the major markets for proton in the country and, of course, it's our backyard and it's Varian's backyard. And we're going to push real hard to see that the next announcement that we make will be a machine in our backyard.

Great. Thank you very much.

Thank you.

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

I would just like to thank everyone for joining us this afternoon. We look forward to speaking with you at our 2010 third quarter conference call in about three months. Dr. Bates, do you have any other remarks you would like to make at this time?

No, I don't. I just want to let everyone know that we're feeling really encouraged, that we really turned the corner. Despite what's going on in the country, the economy, I think healthcare is coming back strong and I think radiation therapy in particular is coming back strong because I think it's going to replace a lot of surgical procedures. So I'm very excited.

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 27642608 followed by the # sign to access the replay. The webcast for 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.