American Shared Hospital Services (AMS) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to the 2010 fourth 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 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's fourth quarter and 2010 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 for 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 & Exchange Commission, including the Company's annual report on Form 10-K for the year ended December 31, 2009, the quarterly quarter on Form 10-Q for the quarters ended March 31, June 30, and September 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.

Today, we are pleased to report a profit on higher revenue for the fourth quarter, capping a year of significant progress in both our Gamma Knife and our proton therapy business, and we are excited about the many positive developments on tap for the immediate future, the result of our commitment to investing the time and capital required to properly implement our growth strategy.

Growth resumed in our Gamma Knife business with the number of procedures up 8.5% and revenue up 5.2% in the second half of 2010 versus prior year. We are optimist that these trends will continue.

The benefits of our decision to upgrade many of our existing Gamma Knife sites to the new Perfexion unit are becoming increasingly apparent. This is primarily due to Perfexion's substantially higher treatment capacity compared to the Gamma Knife. Over the next few weeks, we expect to announce several new Gamma Knife and Perfexion contracts that will further expand our revenue base beginning in 2011.

These new contracts are in addition to the continued positive impact of the Perfexion upgrades that already went into service at Smilow Cancer Hospital at Yale-New Haven in the second quarter of 2010, and at Methodist Hospital in San Antonio, Texas in the third quarter. We also are pleased to announce the launch of patient treatments at Fort Sanders Regional Medical Center in Knoxville, Tennessee, our ninth Perfexion site in January 2011.

The system is an upgrade to a Perfexion of an existing Gamma Knife we previously supplied to another hospital in the area. Fort Sanders is a regional referral center where other hospitals send their most difficult cases. So we are very optimist that we will see a significant increase in treatment volume from this new site beginning in the current quarter.

We also anticipate that our Gamma Knife unit in Hospital Center FAP in Lima, Peru, will begin treating patients later this year in our lineal accelerator site in Sao Paulo, Brazil, is scheduled to go online in 2012. With a population of over 190 million in Brazil and 11 million in Sao Paulo alone, we anticipate great demand for our radiation therapy services. Hospital Santa Paula in Sao Paulo will treat patients from all over Brazil, as well as other countries in Latin America who now must travel long distance for these treatments. And we continue to negotiate additional Gamma Knife and Perfexion contracts in the United States, South America, and Europe. As I said, we expect to have news on this front soon.

In our proton therapy business, we are developing centers in Dayton, Ohio; Boston; Orlando; and Long Beach, California, and are pursuing many other opportunities. Proton therapy is widely regarded as the optimal radiation treatment for a wide variety of cancers.

Hospitals throughout the country are evaluating how they can offer this advanced therapy to their cancer patients. As we have mentioned previously, we are considering Varian Medical Systems as one of our equipment providers for some of our multi-treatment room projects, including the Kettering facility in Dayton. I am pleased to report that Varian recently received FDA clearance for its PBRT system. The next step from AMS's point of view is to put together the financing package required to buy the equipment. We have been working hard on this and hope to announce the package soon.

As for Still River Systems, the manufacturer of a compact, cost-effective proton beam system in which AMS owns a small equity interest, Still River continues to anticipate FDA approval by the end of this year or early 2012. 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 recently entered into a teaming agreement with Turner Construction Company; NBBJ LP, Garfield Traub; and Baines Group, Inc. to provide total solutions for proton therapy center development clients. Under the teaming agreement, AMS will be responsible for acquiring and providing proton therapy equipment, and Tuner, NBBJ, Garfield Traub, and Baines will be responsible for designing, developing, financing, and constructing the facility. This approach adds value for our clinical partners by providing complete turnkey integrated delivery with sole-sourced accountability.

This is an impressive world-class team that can facilitate every aspect of the complex and lengthy proton center development process from facility design and financing to construction. These services compliment AMS's expertise in radiation therapy equipment selection and innovative financing. We believe this teaming agreement enhances our visibility in the proton industry and improves our ability to win additional proton center development contracts.

Our goal in the proton business is for AMS to be the one-stop shop that hospitals and radiation oncology groups turn to first to meet their requirements, whether for single-treatment room or multi-treatment room facilities depending on their patient volume. Once they are fully operational, based on current reimbursement rates and projected volumes, we estimate that each of our proton treatment rooms will generate about $7 million in EBITDA annually.

When you consider there are projects in Dayton, Boston, Orlando, and Long Beach alone comprise five treatment rooms, you can see how dramatic and the impact on AMS's performance we anticipate from proton therapy in the years to come.

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

Thanks, Craig. For the three months ended December 31, 2010, revenue increased about 1.5% to $4.152 million, compared to $4.092 million for the fourth quarter of 2009. Operating income for the fourth quarter of 2010 increased 19% to $348,000, compared to $293,000 for the fourth quarter of 2009.

Net income for the fourth quarter of 2010 increased to $40,000, or $0.01 per share. This compares to a net loss of $137,000, or $0.03 per share, for the fourth quarter of 2009.

The total number of Gamma Knife procedures performed during the fourth quarter of 2010 increased 2% compared to the fourth quarter of 2009, and increased 4% for 2010 versus 2009.

Gross margin for the fourth quarter of 2010 was 46%, essentially the same as the fourth quarter of 2009.

Selling and administrative expenses for the fourth quarter of 2010 decreased 5% to $1.005 million, compared to $1.058 million for the fourth quarter of 2009, even as the Company continued to support its domestic and international growth initiatives. We expect selling and administrative expenses to remain at approximately this quarterly level in 2011.

Cash flow as measured by earnings before interest, taxes, depreciation, and amortization, or EBITDA, was $2.159 million for the fourth quarter and $8.211 million for 2010, compared to $2.175 million for the fourth quarter and $8.535 million in 2009.

For the 12 months ended December 31, 2010, revenue was $16.675 million, compared to $16.768 million for 2009. Net income for 2010 was $57,000, or $0.01 per diluted share. This compares to a net loss for 2009 of $188,000, or $0.04 per share.

At December 31, 2010, AMS reported cash, cash equivalents, and certificates of deposit of $10.438 million compared to $9.833 million at December 31, 2009.

Shareholders' equity at December 31, 2010, was $23.044 million, or $5.01 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 would like to open the call to questions. John, we are ready for the first question.

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

Good afternoon. Glad to see we're in the black. I think that's very important while we're waiting. My question is when do you anticipate the St. Louis facility will be physically finished? Obviously, the approval is nothing you can do other than speculate on, but the physical -- when is it expected to be physically finished?

I think they expect it to be completely set up some time the second half of this year.

As late as December or --

No, they believe it will be earlier than that. But, remember, this is the first one that is becoming operational.

I understand that. I --

And Lenny, this is Dr. Bates. Construction has started and it is moving rather quickly there, so we're quite excited about it. I'm sure in the next several months there will be a facility that you could go visit.

I think once it is up and ready to go, it's not going to get quick approval, because the Varian System already has approval, and it should be that difficult to get this approved, so that's the reason I asked the question, but, of course, you never know with the government, so. And the second question I have is -- you know, you are alluding to the financing, which is -- you know, it's obvious that you are not going to be able to put a Varian System in without having financing in place, and do you really expect to have that completed in a reasonable time frame now?

We do. We are working on that very, very diligently to come up with the financing package that will work. So at this point, we're fairly comfortable that we're moving along the right path to get that done.

Yeah, Lenny, I think we're at probably the last leg of structuring that financial deal, and I expect that we'll be able to announce that in the next few weeks.

That would be great, because I think that -- you know, probably alert some people to the stock that have been shadowing and waiting for something concrete, no pun intended. But -- okay.

Well, as you probably know, Lenny, everybody's had some difficulty getting these proton beams financed, and I think we now have a road map for getting, not only the a Varian machine placed and financed, but the others, too, that we're talking to, once the Still River machines get FDA approved. But even if that is delayed, we expect to do other Varian deals.

Okay. And it sounds like things are all falling in to place at the same time. You are getting the Gamma Knife business back on track, and the Still River, finally, is going to get on track, and the Varian System, so I guess it has been a long wait, but it looks like we're on the cusp of everything happening at one time.

I think so. I'm feeling fairly confident that we've overcome the major obstacles that we had in developing this business. But, again, remember, this is a whole exciting new technology, and I think what we're going to see just some exciting results for cancer, particularly cancer of the lung, head and neck. Just some very promising results.

Excellence.

Our next question comes from Gregg Greenberg, private investor. Please go ahead. Gregg your line is now open.

Yes. Just wondering if you can review the mechanics of the GK Financing agreement since obviously it seems the majority of your current profits go to the 19% minority shareholder.

The way that the GK Financing company works, is GK Financing is a limited liability company, 81% owned by American Shared Hospital Services and 19% owned by Elekta. So most of the revenues that you see under American Shared Hospital Services are actually those of GK Financing. One of the key differences, when you look at it, is that not all of the expenses of American Shared are put in to the financial statements at GK Financing. So GK Financing, when you look at it, is much more profitable than American Shared because of that attribute. American Shared has expenses of being public, as well as other expenses that aren't put into GK Financing before the distribution of income and cash to the parent company. Does that answer your question, or is there --?

Yeah, it does. The other question is just as far as the debt and the debt going forward when you do these proton beam, any of this recourse to either GK Financing or to American Shared, or is it all asset-backed-type stuff?

We're still working out some of the attributes of that, but it definitely will not be to GK Financing. GK Financing is strictly for transactions that we've performed with Elekta products, be it Gamma Knives or some other Elekta products such as linear accelerators.

Okay. Thank you very much.

You're quite welcome.

(Operator instructions) Our next question comes from Edward Corcoran of (inaudible). Please go ahead.

Hi Dr. Bates. It sounds like a lot of promising things on the horizon. I think I have somewhat of a follow-up question to Gregg Greenberg's question. You have a an $8 million of EBITDA that sits thrown off per year right now. Do you have a CapEx plan or what -- where is the most of that cash flow going right now?

A lot of it is going from the GKF standpoint. We're going to put some of it back into operations to fund some of the international growth that we're doing, as well as the domestic growth, and some of the other free cash flow will be distributed up to American Shared and to Elekta based on our ownership interest. So from American Shared's standpoint, it will just go to the corporate for corporate uses.

Okay. Then kind of the follow-up question on that is, what is the likely need for capital raising on the equity side, because we're talking about a completely different profile of the company with proton beams and the huge CapEx (inaudible), so I'm sure they are going to -- my guess is that they are going to ask whoever is going to give money is going to ask for, you know, additional equity pay ups so that the debt to equity ratios are in line with what they are willing to do. Is that correct or not correct?

Partly correct. I think we're very cognizant of not causing excess dilution to our existing shareholders at this time because we feel the stock is undervalued. So we're going to be very judicious about the amount of equity we put out at this time. We see we're doing a lot new projects both, domestically and really I think you will see a lot in the international front coming up, so we're going to work on getting the stock to where we think it's fairly valued before we make any significant equity allocations.

On the financing package that you're working on, are you going to offer any of the financing to the existing shareholders?

There's a possibility that we may do that.

I'm definitely interested. I have kind of accumulated a significant position in the company over the last three years, and I'm curious about that. The financing guys sometimes seem to make more money than the shareholders in certain cases.

Craig, are you comfortable telling how the Varian deal is being structured? No, he's not comfortable. But I'll tell you this, there will be an opportunity for you.

All right. Great. I know your son is working on the international side, when do you think those deals are going to be cash-flow positive? On like a one-by-one basis?

We feel that they'll be accretive on a cash flow basis within the first six months if we meet plans, so we're very bullish on the international front. That it's going to be accretive to our shareholders.

Craig, I don't think it's inappropriate that we talk about what is happening in Turkey because we were hoping that we were going to announce that yesterday. I'll take the liberty of telling you that. We are very close to concluding a deal in Turkey to so place two Gamma Knives and the linear accelerator at two major hospitals in Turkey. I'm very excited about it. The only reason we didn't announce it today that the financing wasn't complete. Hopefully it will be completed by tomorrow. We're doing that with a Turkish partner. Do you want to say a little word about that?

Yeah. What we're doing is someone that does business currently in Turkey, so he's very familiar with the hospitals we will be partnering with, so it's very important for us to get that first-hand knowledge so that we have -- and we do have back up on the ground in Turkey in that way. He'll be a 30% partner of ours. He distributes Elekta equipment currently, so I think it's a very positive sign that someone that knows the equipment, knows the hospital, wants to partner with us on our revenue sharing arrangements that we provide.

I think what is so exciting about Turkey, is the Turkish government has now decided that hospitals cannot really purchase machines; that they have to do revenue sharing with companies like ourselves, and I'll let Craig describe that.

Yeah, so what we're going to be doing is much like what we do in the United States where we each share revenues based on what we're contributing in terms of both equity and operating expenses. So I think it's a wonderful opportunity for companies like American Shared to get in on the -- in an emerging market, much like Turkey, and I think there are other opportunities in Europe for us to do the same thing, and we just to -- we're going to expand within Turkey, we believe, and as well in other countries within Europe.

Also what we're finding is it is going to be a lot easier to finance these deals internationally with the international banks than it is here in our country. So all of these deals that we're doing Turkey, we will have financing with international banks.

Okay. That's good. I mean, Turkey -- the reason that model will prevail in emerging countries is because there is so much corruption on equipment purchase so they would rather have it done on an operating basis versus a purchase of the equipment and then people run away. But that's great news. The more transparent we can be though on what the actual cash flow will be back to AMS at the top, the better on that type of deal, so we understand what kind of capital commitments are made and the return on assets are.

We're expecting good margins in Turkey.

I spent a bit of time there, and it's a tricky market, so if you have those tricky issues taken care of, then that's great.

Well, that's an exciting country, too, with the GDP is growing more so than it is in the EU, I don't know why they want to join the European Union. But they are a very dynamic, progressive country. We're very excited about that. We think that we're going to place a large amount of equipment there with our partner, Elekta.

Great. So those were the main questions I had on it, really. I'm curious about monitoring of CapEx budget and EBITDA, because obviously you've got a business plan that's international plus proton beams plus upgrade of the existing, and it's still a very small company with very, very big ideas, and, you know, just have to make sure that we -- that, you know, that we keep focused on how do we, you know, progressively get the stock price up becauseyou can't do too much with the stock price so low, which is what we're all hoping is going to see some improvement. Well, thank for your time. I appreciate it.

You're quite welcome.

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

I'll let Dr. Bates make his closing remarks at this time.

I think I made the points already that I wanted to say, but I'll say it again. We're very excited about the resurgence of the Gamma Knife business, also very excited about the international market, and I'm particularly excited about the proton market and later light ions. I think we're moving in the right directions. We're going to be probably some of the early users of this new technology, and I think everyone agrees that the early studies coming out of international countries with protons and carbons are showing some very exciting results with the local tumor control and extension of life expectancy. I think this is the direction that cancer treatment is going, and we're in the forefront.

Well, I would like to thank everyone for joining us this afternoon. We look forward to speaking with you on our 2011, first quarter conference call in about -- several 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 pass code 29178344 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 conference. Thank you for participating. You may now disconnect.