American Shared Hospital Services (AMS) 2011 Q2 法說會逐字稿

Good morning, everyone, and welcome to the 2011 second quarter conference call for American Shared Hospital Services. At this time, all participants are in a listen-only mode. (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, Rosa, and thank you all for joining us for AMS's 2011 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, 2010, the quarterly report on Form 10-Q for the quarter ended March 31, 2011, and the definitive proxy statement for the annual meeting of shareholders held on June 9, 2011. The Company assumes no obligation to update the information contained in this conference call.

Turning first to our Gamma Knife business. I am pleased to report another quarter of strong growth in procedure volume on our Perfexion devices. The number of procedures performed on Perfexion systems supplied by AMS increased 10.3% for the second quarter of 2011 and 15.9% for the first half, compared to the second quarter and first half of 2010 respectively. This growth, which is a direct result of our strategy to upgrade many of our existing Gamma Knife sites to Gamma Knife Perfexion specifications, also contributed to the improvements in gross margin and operating income for the second quarter and first half of 2011 versus prior year.

We continue to implement our upgrade program. In June, we announced the Perfexion system AMS supplied to Lovelace Medical Center in Albuquerque, New Mexico began treating patients. Lovelace Medical Center is the flagship hospital of Lovelace Health System. ThIs system is an upgrade to the Gamma Knife supplied by AMS to Lovelace in 2003. This Perfexion system is in addition to the contracts we announced last quarter with Lehigh Valley Hospital in Allentown, Pennsylvania, the Flagship Hospital of Lehigh Valley Health Network, and Florence Nightingale Hospital Group in Istanbul, Turkey. All of these devices are scheduled to go in to service in the next several quarters. We have several additional Perfexion systems in the negotiation pipeline, and we hope to announce more contracts in the months ahead.

Also in the second quarter, the Gamma Knife system we supplied to Baskent University in Adana, Turkey, under a contract announced in March 2011, began treating patients. As part of this same contract, we also are providing an IGRT unit that we expect to begin treating patients in September. The Kisla Campus of Baskent University houses the largest and most modern oncology center in the Adana region now including both a Gamma Knife and 2 linear accelerator devices used for radiation therapy. Turkey's the fastest growing economy in Europe and the third fastest growing economy in the world behind only China and India. Given the small number of radio surgery devices and the services in the country today and the fact that more than 90% of the population of 77 million is covered by health insurance, Turkey represents a significant growth opportunity for AMS. 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 Palo, Brazil is scheduled to go online in 2012.

In our proton business, we continue to negotiate financing for the 4 proton therapy centers AMS currently is developing in Dayton, Ohio, Boston, Massachusetts, Orlando, Florida and Long Beach, California. We believe the flow of additional proton center development projects will 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. We are positioning AMS to be the go-to solution for hospitals and radiation oncology groups seeking to develop single treatment room or multi-treatment room, proton treatment facilities depending on patient volume.

The economics of this business are compelling. We estimate that after the ramp-up period, each of our proton treatment rooms 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 obviously, our success in the proton business can have a dramatic impact on AMS's performance 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 3 months ended June 30, 2011, revenue increased 1.2% to $4,206,000, compared to $4,155,000 for the second quarter of 2010. Net income for the second quarter of 2011 rose to $21,000 or $0.00 per share. This compares to net income of $3,000 or $0.00 per share for the second quarter of 2010. As Craig mentioned, the number of procedures performed on Gamma Knife Perfexion system supplied by AMS increased by 10.3% for the second quarter of 2011 and 15.9% for the first half, compared to the second quarter and first half of 2010 respectively.

The total number of procedures performed in AMS Gamma Knife business decreased 3.1% for the second quarter and increased 4.1% for the first half compared to the second quarter and first half of 2010 respectively. The reason for the slight decrease in overall Gamma Knife procedures despite the increase in procedures on Perfexion systems in the second quarter is that procedures at 3 of our non-Perfexion sites were below a year-ago volume. Also, as I mentioned last quarter, our Lehigh unit is being held for sale and we no longer get credit for any procedures performed there. We're able to recognize a little revenue until the sale is completed in the third quarter, but that is less than the actual revenue recognized in second quarter last year.

Here's the background on Lehigh. 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 agreed to the early termination of the existing 10-year lease on the Gamma Knife system it supplied to Lehigh Valley in 2004 and Lehigh has agreed to purchase the Perfexion system. We expect pre tax income of approximately $1 million from this transaction to be recognized in the third quarter of 2011.

Gross margin for this year's second quarter increased to 43.7% compared to 42.1% for the second quarter of 2010. Operating income increased 37.2% to $225,000 for the second quarter of 2011 compared to $164,000 for the second quarter of 2010. Selling and administrative expenses for the second quarter of 2011 decreased 3.9% to $1,041,000, compared to $1,083,000 for the second quarter of 2010.

Reflecting the addition of new Perfexion systems to AMS Gamma Knife portfolio, interest expense increased to $570,000 for this year's second quarter compared to $503,000 for the second quarter last year. For the 6 months ended June 30, 2011, revenue increased 4% to $8,573,000 compared to $8,243,000 for the first 6 months of 2010. Operating income increased 40.5% to $451,000 for this year's first half, compared to $321,000 for the first half of last year. Net income for the first 6 months of 2011 increased to $42,000 or $0.01 per diluted share compared to net income for the first 6 months of 2010 of $11,000 or $0.00 per diluted share.

Cash flow as measured by earnings before interest, taxes, depreciation and amortization, EBITDA, was $2,034,000 for the second quarter and $4,081,000 for the first 6 months of 2011 compared to $2,001,000 for the second quarter and $3,985,000 for the first 6 months of 2010. On the balance sheet at June 30, 2011, AMS reported cash, cash equivalents and certificates of deposit of $9,818,000 compared to $10,438,000 at December 31, 2010.

Shareholders equity at June 30, 2011, was $23,954,000 or $5.19 per outstanding share. This compares to shareholders equity at December 31, 2010, of $23,044,000 or $5.01 per outstanding share. Craig?

Thank you, Norm. Now we would like to open the call to questions. Rosa, 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. Please go ahead.

A couple questions. We're obviously producing a great deal of cash flow and a slight amount of earnings and this is going to change I guess for the better starting in the next quarter and I'm not even regarding the $1 million one-time credit we're getting, but obviously that helps the balance sheet, but just some of these newer knives will be in use so I would assume that we could start earning at least a few cents a share per quarter going forward. Is that a leap of faith?

I'm sorry, I didn't hear the end of it, Lenny.

Is it a leap of faith to assume that setting aside the $1 million credit, which is substantial and looking forward to it, that we could start earning $0.02 a share, the number of procedures we're performing should start increasing in the third quarter?

We haven't given guidance in the past and I think we're going to continue with that policy, but what I can tell you is we believe that the revenues will continue to increase in the quarters to come as we bring on more of these units online and as more of the units get upgraded to Perfexions.

Now, with this $1 million addition in the third quarter and our book value just keeps going up regularly, we're up to $5.19 now, we're going to have a hard book, I assume, pushing $5.50 by the end of the third quarter, just penciling in the arithmetic again, and stock is trading at $3.05. So I think, just looking at it from the outside, that this could be attributed to the lack of earnings but even that, the discount is just far more than it ought to be. So hopefully as we start to show real earnings, you'll get some more attention, but right now market clearly is not the greatest market background either, to say the least. My other question has to do with Still River. Do you have any projections on what you think is going to happen there, Jewish Hospital in St. Louis, as far as them getting approval?

Lenny, this is Dr. Bates. I'm pleased to say that we finally are seeing light at the end of the tunnel. That Still River unit is being shipped to Barnes the end of September of this year and they'll start commissioning there the second quarter of 2012 and you can expect FDA approval at that time. So it's finally happened after waiting all these years. I think we're there and we're quite excited about it.

In your release there was some discussion about financing for these larger units, the [varian one]. Is there progress actually being made or is it just very tenuous still?

I think we're making progress. It's always a very difficult financing, obviously, large amounts of money, but we feel very confident that we're going to be able to get the financing in the time frame that we need it.

Acting on it by the end of the year in order to keep the potential buyers interested?

I'm sorry, Lenny, could you repeat that question?

Wouldn't you need to have at least initial financing in place for 1 of the units by the end of the year or maybe they would look to other financing if by the end of calendar 2011 you don't even have the initial financing in place. Isn't there kind of a time constraint on this?

I think in terms of the Still River, until they receive FDA approval it's unlikely that we're going to get permanent financing for those units. So we really have to wait for the Still River to get FDA approved.

I was referring like to the Kettering unit and the larger ones that probably want to move forward.

Yes. We are working on that very diligently now at this point, Lenny.

Okay.

Lenny, this is Dr. Bates again. I don't think we're going to have any long-term difficulty in financing the Kettering unit. It looks very promising right now and hopefully there will be in the near future announcement that, that financing is in place. We're quite excited about that, too.

Again, the book value at $5.19 and headed for about $5.50 with the $1 million one-time credit, we certainly shouldn't be trading at $3.05, but I guess until we start showing some earnings we may have to wait.

Norm, do you want to comment on what the book value might be with the anticipated $1 million that's going to come in next quarter?

Well, yes, I'm not going to dispute your numbers, Lenny. I haven't run those myself, but we should certainly expect our book value to increase. And I agree with you that we think the share price is very much undervalued compared to our book value, so hopefully that's something that will turn around shortly but, unfortunately, we have a bad market going on root right now as well, we have no control over.

We've been at a discount to book value for some time.

I agree.

We have now turned at least marginally profitable every quarter so there won't be any erosion of book value so you would think we would at least trade up to book while waiting for these other projects to come in, but I guess we'll have to be patient.

Thank you, Lenny. Is that all your questions?

Yes it is. Thank you.

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

I'll let Dr. Bates make some closing remarks.

Before I make a few closing remarks I would like Ernest R. Bates to make some comments about the international market and particularly Turkey which we are very excited about. I can say this, that our first unit is on track to do over 250, 260 patients this year which will be a record for us. Have we done better than that anywhere, Craig, in the last 4, 5 years?

No, I don't believe we have.

And there are a lot more opportunities over there. I might add that the average machine there is doing over 1,000 patients. Sitting here in the room is Rick from Turkey is here with us today. We are very excited about Turkey, very excited. I'll just at that at Baskent University, in Adana, Turkey, which again is in the southern part of Turkey. We did announce several weeks ago that in the first week of operations at this site we treated 14 patients which is the fastest start-up that we've had at any of our sites historically at American Shared and in addition to that we are looking at a run rate that exceeds our expectations for patient volumes as, Dr. Bates mentioned, so we're very pleased about that. In addition, at this same site, as Craig mentioned earlier we expect to begin treating patients on the IGRT machine sometime in September. The hospital's currently going through the final installation process and that is going smoothly. And, lastly, with respect to Turkey we have just completed some administrative procedures related to the licensing of the Gamma Knife which we expect to be up and running shortly at Florence Nightingale Hospital and at this site, as we mentioned in previous press releases, we're going to be installing the Perfexion unit and we expect this site to also be a leader in terms of patient volumes for American Shared. So we're excited about that and, lastly, on Peru, I should mention that we broken ground on construction on that facility and progress continues to be made with our site there.

I'd like to thank everybody for joining us this afternoon and we look forward to speaking with you on our 2011 third quarter conference call in about 3 months from now.

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 of 30430782 followed by the pound sign to access the replay. The Webcast of this call will be available at www.ASHS.com and at www.earnings.com. This concludes today's teleconference. Thank you for participating. You may now disconnect.