American Shared Hospital Services (AMS) 2010 Q3 法說會逐字稿

Good morning, everyone, and welcome to the 2010 third quarter conference call for American Shared Hospital Services. (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, John, and thank you all for joining us for AMS' third 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 quarters ended March 31st and June 30, 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.

Revenue increased 9.0% compared to last year's third quarter and Gamma Knife procedure volume increased 15% versus the same period last year and is up 5.0% year-to-date. Also noteworthy is that revenue and procedure volume both increased sequentially for the second consecutive quarter.

Cash flow from our Gamma Knife operation is strong and the business is solidly profitable, although this is being masked on the bottom line by our continuing investments in our domestic and international growth initiatives.

We are investing the time and capital required to properly implement our strategy for long-term growth. This primarily involves travel expenses to meet with potential clinical partners, as well as legal and accounting fees to draw up contracts. These investments are the keys to building our Company and our efforts are delivering the results we anticipated.

In February, we announced a contract to supply Gamma Knife services at Hospital Central, FAP in Lima, Peru. In August we announced a 10-year contract to supply radiation therapy services at Hospital Santa Paula in Sao Paulo, Brazil. AMS will place an advance technology linear accelerator with IMRT capabilities at HSP and we expect to begin treating patients in early 2012, in conjunction with the expected completion of a new comprehensive cancer center to be built by the hospital.

With a population of over 190 million in Brazil and 11 million in Sao Paolo alone, we anticipate great demand for our radiation therapy services. Hospital Santa Paula will treat patients from all over Brazil, as well as other countries in Latin America who must now travel long distances for these treatments.

Then, earlier this week, we announced the placement of our ninth Perfexion device to Fort Sanders Regional Medical Center in Knoxville. This system will be an upgrade to Perfexion's specifications of an existing Gamma Knife we previously supplied to another hospital in the area. Following the upgrade and move to its new location, the Perfexion system is expected to begin treating patients in the first quarter of 2011. Fort Sanders is a regional referral center where other hospitals send their most difficult cases, so we are optimistic that we will see a significant increase in treatment volume from this agreement beginning next year.

The steady upswing in procedure volume and revenue in our Gamma Knife business these past couple of quarters validates the appropriateness of our decision to upgrade many of our existing Gamma Knife sites to the new Perfexion unit. The Perfexion unit that recently went into service at Smilow Cancer Center at Yale-New Haven contributed to the gain, as did a Perfexion device that went to service in this third quarter at Methodist Hospital in San Antonio, Texas.

In addition, we benefited in the quarter from improved performance at one of our sites where volume had been sharply reduced in prior quarters due to physician turnover.

We are optimistic that growth in our Gamma Knife business will continue. Treatments at our site in Lima are expected to begin in early 2011. A Perfexion at Fort Sanders in Knoxville is scheduled to go into service in the first quarter of 2011 and radiation therapy treatments in our site in Sao Paolo are expected to begin in 2012.

We plan to place additional Perfexion systems over the next two years, which is especially important, because of there is substantially higher treatment volume when compared to the Gamma Knifes and we are negotiating additional contracts in South America, Europe and the United States.

Even as we continue building our Gamma Knife portfolio, we are also making significant strides in our Proton Therapy business, with centers under development in Dayton, Ohio with Kettering Medical Center, as well as in Boston, Orlando and Long Beach, California and additional projects on the drawing board.

Still in its infancy today, the proton therapy market is expected to grow dramatically in the years ahead as clinicians and their patients recognize the benefits of this advanced treatment modality. We are positioning AMS to be a leader in this exciting new market. Our goal is for AMS to be the one-stop shop that hospitals and radiation oncology groups turn to first to meet their proton therapy requirements, whether for single-treatment room or multi-treatment room facilities, depending on their treatment volume.

Once they are fully operational, based on current reimbursement rates and projected volumes, we estimate that each our proton treatment rooms will generate approximately $7.0 million in EBITDA annually. When you consider that our projects in Dayton, Boston, Orlando and Long Beach alone comprise five treatment rooms, you can see how dramatic an impact on AMS' performance our Proton Therapy business could become in future years.

We are working 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 510(k) application has been submitted to the FDA and we hope to hear positive news on this application soon.

As for Still Rivers 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.

Now I'm going to turn the call over to Norm to review our financial results. Norm?

Thanks, Craig.

For the three months ended September 30, 2010, revenue increased 9.0% to $4,280,000 compared to $3,926,000 for the third quarter of 2009 and increased sequentially for the second consecutive quarter.

Operating income for this year's third quarter increased 14% to $196,000 compared to $172,000 for the third quarter of 2009. Pre-tax income increased 30% to $223,000 and net income for the third quarter of 2010 was $6,000, or $0.00 per share. This compares to pretax income of $172,000 and net income of $17,000, or $0.00 per share, for the third quarter of 2009.

The total number of Gamma Knife procedures performed during this year's third quarter increased 15% over the same quarter last year, and are now up 5.0% year-to-date. Gross margin improved to 43% for the third quarter of 2010 compared to 40% for the third quarter of 2009.

Selling and administrative expenses for this year's third quarter increased to $1,091,000 compared to $875,000 for the third quarter of 2009 and were essentially flat, sequentially, as the Company continues to invest in its domestic and international growth initiatives.

For the nine months ended September 30, 2010, revenue was $12,523,000 compared to $12,676,000 for the first nine months of 2009. Net income for this year's first nine months was $17,000, or $0.00 per diluted share. This compares to a net loss for the first nine months of 2009 of $51,000, or minus-$0.01 per share

Cash flow, as measured by earnings before interest, taxes, depreciation and amortization, EBITDA, was $2,067,000 for the third quarter and $6,052,000 for the first nine months of 2010, compared to $2,220,000 for the third quarter and $6,360,000 for the first nine months of 2009.

At September 30, 2010, AMS reported cash, cash equivalents and certificates of deposit of $10,091,000. This compares to cash, cash equivalents and certificates of deposit of $9,833,000 at December 31, 2009. Shareholders' equity at September 30, 2010 was $22,958,000, or $4.99 per outstanding share. This compares to shareholders' equity at December 31, 2009 of $22,755,000, or $4.95 per outstanding share.

Craig?

Thank you, Norm. Now we'd like to open the call to questions and joining us for the question and answer period will be Dr. Bates, as well as Ernie Bates, Vice President of Sales and Business Development. John, we are now ready for the first question.

Thank you. (Operator Instructions)

Lenny Dunn, Freedom Investors Corporation

Good morning. On October 26th, Still River Systems put out a news release, which would indicate that the St. Louis facility at least should be up and running a little ahead of schedule and my read of it would be that you may see even a mid-year approval if not sooner. Am I misreading that?

Well, I think its just that they understand that they're going to have to go through the FDA process, so, to some extent, its very difficult to gauge exactly when that will be. I think its fair to say they're on track to where they thought they we're going to be, in terms of the installation process, but they obviously have no control over the FDA approval process.

And Lenny, this is Dr. Bates. I think its important to remember that, as far as we know, no radiation therapy equipment that's been presented to the FDA has not been eventually approved and we're feeling very strongly that this machine is going to be approved. Craig was recently at the factory. Things are moving right along. They may come in earlier than what they're telling us.

All right. That's just my read of it. The news release indicates they're a couple months ahead of schedule and it would appear that because there's certainly a strong need for this that the FDA would act more expeditiously than they would on something that there wasn't a strong need for.

I agree with you.

Okay and then the other question I have for you and I understand that to get these contracts in place is in everyone's long-term interest and certainly I have no problem with you spending whatever money it costs to fly to South America and to other various places you have to fly to. So I see that there's higher SG&A, but can some of that maybe be controlled a little better so that we can at least see a little more profitability while we're waiting for this to work?

I think what you're seeing is we are actively controlling the expenses, but to get into some of these new venues for us in foreign countries it does take a lot of research, so that we do do the appropriate due diligence, both from an accounting and legal standpoint, that when we start operating these systems they become profitable for us. And I think we've taken that due diligence to safeguard our shareholders from any unforeseen circumstances.

So, unfortunately, it does cost some money to do that, but we think now that we've done that in some of these countries that we'll be able to scale up and we won't see some of the costs going forward to that great a degree.

I do know from the news release that we're getting a lot more usage, finally, out of our Gamma Knifes, which I'm very happy to see. But I guess, just psychological reasons, I'd certainly like to see us move substantially into the black on a quarterly basis as soon as possible. We're obviously not losing money, with great cash flows, but we're just barely treading water as far as earnings. So is it unrealistic to expect you to start pumping out some real earnings in the next few quarters?

I think we will continue to see revenue gains over the next several quarters, but we're going to continue to have legal and accounting fees going forward as we gather more contracts.

I think what you're going to see, Lenny, is that these new nine Perfexions -- this is Dr. Bates speaking.

Yes.

That that volume should and we're anticipating its going to go up 30%. The neurosurgeons and radiation oncologists are using this machine and very excited about it. It is a remarkable piece of equipment. So, yes, I do think you'll see a significant increase in treatments as time goes on and as we replace the older machines with Perfexions.

That's all the questions I have for right now. As you know, we're patient shareholders and looking forward to what we see is a very bright future, but we'd like to see it a little sooner.

Tony Kayman, Eastwood Partners

Good afternoon. A question on --.

Good afternoon, Tony.

Hi Tony.

Hi. On the Perfexion you announced last week, from what I could see you were at Baptist Hospital before Knoxville, which looked like about a 75-bed hospital and the Fort Sanders, from what I can tell, seems like a 550-bed hospital. Is that about correct?

That's correct. I think the Fort Sanders is a part of the Covenant Health System and it's a significantly larger health system and the Thompson Cancer Center is a component of that and that's looked upon as one of the premier cancer hospitals within that region. So we're very excited to be affiliated with the Covenant chain and at Fort Sanders Regional Medical Center.

Okay and you've mentioned on previous calls that -- and obviously there's been talk about your move into international markets with Gamma, but this was the first time in awhile I feel like you've mentioned that you're also talking to people in the U.S. about further centers. Is that -- are those new centers or is that more in the nature of the last one where you're sort of upgrading and existing center or moving an existing center?

No. They're actually new centers that have come to us to see if we can't help them with their financing needs. As you know, the Perfexion is a lot more expensive than the existing Gamma Knife, so there are many more partnering opportunities with the Perfexion that we're seeing very recent.

That's great. Dr. Bates or Craig, can you comment on -- I know I've seen articles lately in terms of proton beam effectiveness in certain lung cancers and I think not only important in itself but also in the sense that proton beams have been questioned for whether they're really providing any more efficacy than lower-cost treatments. And it seems like maybe the proof is starting to appear, which, I would think, give a tremendous boost to what you're trying to do.

We think that protons will be very good for a number of indications, as we've mentioned before. Lungs is just one component of that and it has to do with the physics of protons where they stop. So if you look especially with the left lung, where the heart is behind it, its very important that you have that stopping capability so that excess radiation doesn't leak off into critical areas. So we think that protons and other heavy particles will have a significant impact on lung cancers going forward.

Yes, I agree, Tony. This is Dr. Bates again speaking. The non-small cell lung cancers, we're seeing some dramatic results with protons and other heavy particle treatments, particularly in Japan.

The results are really quite spectacular and people are talking about - and I say that with some hesitation - about curative therapies, so, to my mind, this is where cancer treatment is going. Its going to be a combination of radiation therapy and some chemotherapy and perhaps vaccine or gene therapy.

But the results are looking very promising. I know right now, if any close friend of mine were to get the diagnosis of non-small cell lung cancer, I would suggest that they immediately get proton or carbon treatment for that disorder.

Okay and a final question. I think, Craig, that you said earlier in the call that your anticipated EBITDA from each for a single treatment room would be about $7.5 million. And when you -- I guess, if you look at the current Company's EBITDA prior to that, if you're sort of above $8.0 million, that would suggest that the current $8.0 million and the $7.5 million per treatment room, that's $15.5 million versus the current market cap of probably less than $12 million. Is that correct?

Yes. I think what I had said, just to correct you slightly, is about $7.0 million.

$7.0 million.

But we see that this could be a transformative technology that we'll be introducing. So clearly we can almost double our EBITDA as put on rooms -- put on the first rooms, so I think its very exciting for us. As Mr. Dunn had mentioned previously, we are spending money to get this business up and running, as well as some of our Gamma Knife businesses, both domestically and internationally, but we think its money well spent.

Well and I guess, if you -- it stops the effect of one room and if you model out getting all five treatment rooms I think you have sort of on the drawing board, it would be a dramatic -- assuming those projections are correct, it seems like the EBITDA for all of those machines plus your current would be sort of pretty dramatically in excess of your market cap.

Absolutely and that's why we're putting in the effort to move this initiative forward.

Terrific. Well, thank you guys very much and congratulations on the counts going up on Gamma Knife. That's pretty encouraging to see.

Well, thank you.

Thanks.

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

Yes. Hi, this is Dr. Bates again. I would like our Director of Sales and Marketing, Ernie Bates, to talk about what is going on internationally and particularly, I want him to talk about Turkey, where I've visited recently. And what's happening in Turkey is that -- and as you know Turkey is a very successful company with a GDP going up faster than anything in Europe, but the government has decided that they would be no more purchasing of radiation therapy equipment, that it'll all be done as revenue sharing and of course that's our model. And right now Ernie is very much involved in several hospitals here with this revenue sharing concept. Ernie, just say a word about it.

Sure. I'll just start by saying that we have -- we signed a memorandum of understanding with a large private hospital. We've not publicly announced it, so I'm not going to mention the name just yet. But it is a large private hospital with about 800 beds and we have an agreement to place -- or an understanding to place a new Perfexion Gamma Knife at this hospital, which we're very excited about.

We are also working with a renowned neurosurgeon in the country and a large neurosurgery group that is part of the hospital. So we're excited about that and expect to sign the definitive lease agreement with that hospital very shortly.

In addition to that, we've identified several other opportunities, both private hospitals and public hospitals in Turkey to place not only Gamma Knife equipment but also linear accelerators, which of course can treat outside of the brain where there are, of course, many indications and potential volumes that can be treated.

So this is something that we're basically looking to replicate what we've done in the U.S. in these large markets such as Turkey, with a population of over 75 million people and also Brazil, which was talked about earlier on the call. And we think that our revenue-sharing model is being validated by the hospitals that are showing this great interest for our services, so we're very excited about the prospects going forward, internationally.

This is Dr. Bates again. I do want to just say something about what is new in protons. We got back yesterday from a meeting in San Diego where we met with Sumitomo Heavy Industries and IBA and both of those companies have introduced at this meeting their new one-room proton machine. And I think this clearly validates what Still River and ourselves have been promoting for the last five years.

This is where the market's going, the one- and two-room machines and not the large five and six rooms. So I think we have validation by these two major companies of what we have been proposing for the last three or four years and what Still River has been suggested.

Well, thank you all for joining us this afternoon. We look forward to speaking with you on our 2010 year-end conference call in about four months.

This call will be available in digital replay immediately following today's conference. To access the system, dial 888-843-7419 and enter the passcode 28330094, followed by the pound sign to access the 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.