American Shared Hospital Services (AMS) 2011 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to the 2011 first-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' first-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, 2010, and the definitive proxy statement for the annual meeting of shareholders to be held on June 9, 2011. The Company assumes no obligation to update the information contained in this conference call.

Our Gamma Knife business had a robust first quarter. Revenue in the first quarter was the highest since second quarter 2009, driven by especially strong gains in Perfexion procedure volume. This growth is the anticipated consequence of our strategy to upgrade many of our existing Gamma Knife sites to Gamma Knife Perfexion specifications.

We have placed a total of 10 Perfexion systems to date, and we expect the number to steadily increase. Underscoring our confidence, we have committed to purchasing 4 additional Perfexion systems. During the first quarter, we entered into upgrade contracts with Lehigh Valley Hospital in Allentown, Pennsylvania, the flagship hospital of the Lehigh Valley Health Network; and Lovelace Medical Center in Albuquerque, New Mexico, the flagship hospital of Lovelace Health System.

Also during the quarter, we announced multi-year contracts to supply a Perfexion system to Florence Nightingale Hospital Group in Istanbul, Turkey, and a Gamma Knife and linear accelerator system to Baskent University in Adana, Turkey. All of these devices are scheduled to go into service in the next several quarters and will further expand our revenue base in our Gamma Knife business. These latest contracts are in addition to the Perfexion upgrades that went to service at Smilow Cancer Hospital at Yale-New Haven, in the second quarter of 2010, and at Methodist Hospital in San Antonio, Texas, in last year's third quarter, and the launch of patient treatments at Fort Sanders Regional Medical Center in Knoxville, Tennessee, in January 2011.

We also anticipate that our Gamma Knife unit at Hospital Central FAP in Lima, Peru will begin treating patients later this year, and our linear accelerator site in Sao Paulo is scheduled to go on-line in 2012. We are optimistic that the momentum in our Gamma Knife business will continue, as we complete negotiations for additional contracts in the months ahead.

Turning to our proton therapy business, we are negotiating a finance package for the 4 centers we currently are developing in Dayton, Ohio; Boston, Massachusetts; Orlando, Florida; and, Long Beach, California. We continue to expect the flow of additional proton center development projects to accelerate, once the financing is in place for our first 4 projects. Proton therapy is widely regarded as the optimal radiation treatment for an increasing variety of cancers. With our many years of experience in radiation therapy equipment selection and innovative financing, American Shared is ideally positioned to take advantage of this growth opportunity, and we're pursuing it vigorously.

Our goal in the proton business is for AMS to be the company that hospitals and radiational oncology groups turn to first meet their requirements, whether for single treatment room or multi-treatment room facilities, depending on their patient volume. The economics of this business are compelling. We estimate that after the ramp up period, each of our proton treatment centers will generate about $7 million in EBITDA annually, assuming current reimbursement rates and anticipated volume. Our first 4 projects alone comprise a total of 5 treatment rooms, so it's easy to see what an impact on AMS' performance we anticipate for proton therapy in the years to come.

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

Thanks, Craig.

For the 3 months ended March 31, 2011, revenue increased 6.8%, to $4.367 million, compared to $4.088 million for the first quarter of 2010. Gross margin increased to 44.1% for the first quarter of 2011, compared to 41.6% for the first quarter of 2010.

Operating income for the first quarter of 2011 increased 43.9% to $226,000, compared to $157,000 for the first quarter of 2010. Net income for the first quarter of 2011 rose to $21,000, or $0.0 per share. This compares to net income of $8,000, or $0.0 per share, for the first quarter of 2010.

The total number of procedures performed in AMS Gamma Knife business during the first quarter of 2011 increased 12%, compared to the first quarter of 2010, including a 19% increase in procedures performed on Gamma Knife Perfexion systems.

Selling and administrative expenses for the first quarter of 2011 increased 5.7%, to $1.122 million, compared to $1.061 million for the first quarter 2010 in support of the Company's domestic and international growth initiatives. As I mentioned on our last call, we expect selling and administrative expenses to remain at approximately this quarterly level throughout 2011.

Cash flow, as measured by earnings before interest, taxes, depreciation and amortization, or EBITDA, was $2.047 million for the first quarter of 2011, compared to $1.984 million for the first quarter of 2010. At March 31, 2011, AMS reported cash, cash equivalents, and certificates of deposit of $10.384 million, compared to $10.438 million at December 31 of 2010.

Shareholders' equity at March 31, 2011, was $23.318 million, or $5.07 per outstanding share. This compares to shareholders' equity at December 31, 2010 of $23.044 million, or $5.01 per outstanding share.

A final note, in March, we announced a contract to upgrade a Gamma Knife to Perfexion specifications at Lehigh Valley Hospital in Allentown, Pennsylvania. As part of the upgrade, AMS has agreed to the early termination of the existing 10-year lease on the Gamma Knife system it supplied to Lehigh Valley Hospital in 2004, and Lehigh has agreed to purchase the Perfexion system. We expect pre-tax income of approximately $1.3 million from this transaction, which we expect to fully recognize in the second half of 2011.

Craig?

Thank you, Norm. Now, we'd like to open the call to questions. Also, joining us at this time will be Ernie Bates, Vice President of Sales and Business Development.

John, we are ready for the first question.

Thank you.

We will now begin the question-and-answer session. (Operator Instructions)

Our first question comes from Lenny Dunn from Freedom Investors. Please go ahead.

Actually, it's more than one question and one comment.

Obviously, the residual values that you write these things down to are not just realistic, but low because you're turning around and picking up a $1.3 million gain on the one Gamma Knife, so that's my comment.

But, the questions would be, the SG&A I assume is high because of the costs that you're incurring in arranging financing, which is an expensive process for the proton beams, but if that's going to stay constant, and we're starting to get some benefit from the Perfexion and additional Gamma Knives in the second half, we should actually start seeing some real earnings per share while we're waiting for the proton therapy. That accurate?

Yes, the SG&A cost, as Norm mentioned, we anticipate staying at this level due to some of the initiatives we're doing, both in terms of proton therapy, international, and domestically. As you know, just raising money as well as legal fees to get all these things in place can be significant, but we should see, as we mentioned earlier, new facilities coming on line which should, as you say, be accretive. That's our expectation.

Okay.

And the book value went up slightly. Is that -- Can you give me a little better explanation as to -- it's not a big increase, but there was a $0.06 increase in book value, given that there was a slight diminution of cash. Can you enlighten me on how that worked?

There was -- as you know, we ventured into business in Turkey, and part of that is, we have a non-controlling interest member that has joined, and that's increased partly because of their investment that they've made in our Turkey subsidiary.

Okay. I was just trying to get a better understanding. I'm not complaining about the increase. I was just trying to understand it. Okay.

Then, my next question, would be about Still River, which has just been hanging out there forever. It would appear to me that sometime late summer we should get some FDA movement. Is that a realistic time frame still?

I think what Still River is looking for, based on what we're told, is probably towards the latter part of this year, beginning part of next year, just because the cycle that it takes to get these things approved, so I think that's -- from what we understand, is a realistic time frame for them at this point.

Will Jewish hospital in St. Louis be up and running by late summer?

They will be installing the cyclotron during the summer period, so we anticipate that by the end of the year they should be probably pretty much fully integrated.

Lenny this is Dr. Bates.

I'm going ask Craig and Ernie Bates, who just recently visited the Barnes site, to make some comments about what they saw there. That was, I thinks last month. Ernie?

Yes, we were there recently, and attended a symposium in which there were a number of presenters, including Dr. James Cox from MD Anderson Cancer Center in Houston, and the event was very well attended. There were a number of existing sites that had signed contracts to purchase Still River equipment. The representatives that were in attendance, both a group of administrators and clinicians, and it was very impressive. It was very impressive. They had what's called the [Gantrean] beds installed, and it looks to be a very impressive facility, so all of the parties that were there were very enthusiastic about the way things are developing for Still River there.

Craig, do you want to make any comments about your visit?

The Barnes Jewish did an excellent job. It's going to be a really nice show site. It really shows how compact the system is when we saw it, and that was the amazing thing. When you visit some of these larger centers, and you see the Still River system, it is quite a bit smaller than all the other sites, so everybody was very enthused, as Ernie had mentioned, about seeing an almost finished product.

And, I want to add that we're meeting later on this week with people at MD Anderson in Orlando to start early preparation of getting that machine, which will be probably our first installed Still River machine, and hopefully by the time we start working on that we'll be very close to FDA approval.

I hope so. It would seem that the Still River system is more affordable in general. There's a much larger market for $25 million as opposed to $100 million systems, not to mention the size of the system and the ability to have the space to build it. There's a lot more places to put a Still River system than there is the variances.

Well, we feel now that we were certainly justified in limiting the size of our projects to 1 and 2 rooms. Remember, the Varian machine will only be 2 rooms, and the MD Anderson will be a 1 room, but we think this is where the market is really going. I think you'll see fewer and fewer of these large 4-and-larger room facilities.

That would be my thought as healthcare people try to contain costs rather than just have a prestigious facility.

So, anyway, appreciate everything you've been doing, and the future still seems always to be a quarter or two ahead of us, but at least we're making a very small amount of money while we're waiting.

Yes, Lenny, I think we clearly see, now, the light at the end of the tunnel. We've waited a long time to develop this project, but I'm quite certain that you will see a one-room machine up and running within the next 12 months, probably at Barnes.

Okay. That's all I have. Thank you again.

(Operator Instructions)

Our next question comes from Tony Pollock from Maxim Group. Please go ahead.

Good afternoon. I got on the call a little late. The four systems that you talked about in Dayton, and Boston, Orlando, Long Beach, are they Still River Systems? Are they other people's systems? Can you expound on that a little?

Yes. The one in Dayton is a two-room system, another vendor that we're working with, and the other 3 are Still River Systems.

how soon after approval do you see actual revenues coming from the Still River system projects? In other words, let's say they get approval in March of next year, when due you actually start seeing revenues?

Probably, more than likely, it's about an 18 month to 20 month cycle from the time they start construction.

Okay.

And, are we talking -- like I said, I got in a little late. You talked about a potential $7 million EBITDA. Is that what you were talk about on the Still River Systems, or is that the systems that you -- the four projects you're working on?

That's on the per room, what we're projecting once the ramp-up period is over.

Thank you very much.

You're quite welcome.

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

Yes, I'll turn it over to Dr. Bates forces closing remarks.

I just want to comment on the 2 new board members that are coming on board for American Shared, and I'm going to ask Ernie Bates to say a word about Murt, who has just joined our board from Turkey, a remarkable, brilliant, young and successful entrepreneur, in Turkey who is opening up a whole new market for us. Ernie, just quickly say a work about Murt.

Yes, Mr. Ozerck's family has been -- his company, his family company has been a distributor of medical products in Turkey for about 50 years, and they have been elected as exclusive distributor for the past 25 years, so Murt will bring to the board a great depth of experience in the international sphere, where we're obviously focusing a good deal of attention, so we think that he will be a fantastic addition to our Board.

Ernie, while we're on the subject, the international market, would you say a word about what's happening in Peru and Brazil and, of course, what's happening in Turkey?

Right now, we're taking a two-pronged approach to our international business. The main focus right now is on implementation, so in Turkey, as Craig mentioned earlier, we are working on the -- installing two pieces of equipment at Baskent University in the southern town of Adana in Turkey. So, we expect to be up and running sometime in the July, August time frame with the Gamma Knife and sometime in the September-October time frame with the access radiosurgery unit.

We expect to be up and rung sometime in September-October at Florence Nightingale with the Perfexion, and with our Gamma Knife project in Peru we expect to be treating patients, as Craig mentioned, by the end of the year.

We're also continuing to focus on our project in Brazil, where we are going to be placing a linear accelerator sometime in the early part of 2012, and we are in the process of identifying other potential projects as well. And, I should point out that we are having discussions with vendors -- other than Alecta as well -- for some of these project that we're looking at, so we're looking to expand the scope of equipment that we're placing in these locations internationally.

Just briefly explain why this whole new revenue sharing concept that's being developed in Turkey and why it opens up such an opportunity for us in that country and similar countries that are now looking at doing revenue sharing.

What we're seeing in places such as Turkey and other countries is that hospitals and/or physician groups are reluctant to purchase equipment, to make capital expenditures on their own, so as a result they're entering into revenue sharing arrangements with private parties, such as ourselves. And so, we're looking to take advantage of these opportunities, to bring our depth and experience in the revenue sharing space and the contacts that we have on the funding side of the equation as well.

Thank you.

Craig, just a word about Dave Larson who, to my mind is probably one of the greatest radiation oncologists in the world, and how fortunate we are to have him with his wisdom and experience join our Board.

Yes, we've known Dr. Larson for quite some time. He's a professor at UC San Francisco, radiation oncologist, and he was the past president of Astro, which is the major society for radiational oncologists. Very well thought of, a leader in the Gamma Knife field, and just well respected in terms of both his academic accomplishments as well as his clinical accomplishments over time.

Thank you.

I really don't have anything else to say other than I'm quite excited at the direction that we're going. I'm really very pleased with the resurgence of the Gamma Knife business and the performance of the Perfexion. I might add that we've just agreed to purchase -- is it 3 or 4 more Perfexions?

4 more.

4 more Perfexions. I think you're going see some significant increase in revenues from these additional machines.

Also, encouraged by the opportunities that we're now seeing in proton and other heavy particles, because to my mind, as I've said, I think this will eventually be the answer for a cancer that with a combination of heavy particles and protons and chemotherapy. Very exciting, very exciting things going on, but thank you.

Okay.

I would like to thank everyone for joining thus afternoon, and we look forward to speaking with you on our 2011 second-quarter conference call, which will occur in about 3 months.

This call will be available in digital replay immediately following today's conference. To access the system dial 888-843-7419. Again, 888-843-7419, and enter the passcode 29730188, 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.