American Shared Hospital Services (AMS) 2017 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to the 2017 First Quarter Financial Results 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 Alexis Wallace, Controller of American Shared Hospital Services.

Mr. Tagawa, you may begin.

Thank you, Paulette, and thank you all for joining us for AMS' 2017 First Quarter Financial Results 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, 2016. The company assumes no obligation to update the information contained in this conference call.

First quarter net income increased by nearly 6x compared to the first quarter of 2016 and revenue was up 16%. Gross margin was up versus prior year as with EBITDA, and we achieved these gains despite having a couple of Gamma Knife units off-line for Cobalt-60 reloads during this year's first quarter. AMS' improved financial performance continues to be driven by our first proton center at UF Health Cancer Center-Orlando Health which began treating patients in April 2016. Treatment volume at the center increased to 1,220 fractions in the first quarter compared to 1,019 fractions performed in last year's fourth quarter, 869 fractions performed in the third quarter and 442 fractions performed in the second quarter. The reliability and throughput of the MEVION S250 proton system were supplied, Orlando Health is meeting or exceeding our expectations and we believe there is room for further growth in treatment volume.

On the Gamma Knife side of our business, as I've said before, the decrease in revenue in this year's first quarter was the anticipated result of routine Cobalt-60 reloads at 2 of our centers. Keep in mind that as we previously announced, we will lose one of our sites due to the expiration of its contract term in this year's second quarter. However, looking forward ahead, we expect the Gamma Knife Perfexion system we recently contracted to supply to Bryan Medical Center in Lincoln, Nebraska to begin treating patients in this year's second half. We also expect patient treatment to begin in this year's third quarter on the Gamma Knife located at the Air Force Hospital in Lima, Peru. With the many attractive growth opportunities in both our proton and our Gamma Knife businesses, we believe this reflects the steady accumulation of research and clinical evidence supporting these modalities in the treatment of many cancers. We are focused on taking advantage of these opportunities to build on the success we have achieved to date. We are confident that AMS will deliver future growth in the years ahead.

Now I will turn the call over to Alexis Wallace to go over the financial results in detail. Alexis?

Thank you, Craig.

For the 3 months ended March 31, 2017, medical services revenue increased 16% to $4,914,000 compared to medical services revenue of $4,238,000 for the first quarter of 2016. First quarter revenue for the company's initial Proton Therapy System installed at The Marjorie and Leonard Williams Center for Proton Therapy at UF Health Cancer Center-Orlando Health in Florida was $1,155,000. Revenue for the company's Gamma Knife operations increased to $3,619,000 for the first quarter of 2017 compared to $4,125,000 for the first quarter of 2016, primarily because of the 2 sites that were offline during the year's first quarter for Cobalt-60 reload.

Net income attributable to the company for the first quarter of 2017 increased to $293,000 or $0.05 per share. This compares to net income attributable to the company for the first quarter of 2016 of $51,000 or $0.01 per share.

Medical services gross margin for the first quarter of 2017 increased to 47.7% of revenue compared to medical services gross margin of 40.9% of revenue for the first quarter of 2016, primarily reflecting the increase in revenue from proton therapy.

Operating income increased 51.1% to $754,000 for the first quarter of 2017 compared to operating income of $499,000 for the same period a year earlier. Income before income taxes increased 91.4% to $758,000 for the first quarter of 2017 compared to $396,000 for the first quarter of 2016.

Non-GAAP pretax income net of income attributable to noncontrolling interest was $509,000 for the first quarter of 2017. This compares to non-GAAP pretax income net of income attributable to noncontrolling interest of $115,000 for the first quarter of 2016.

Selling and administrative expenses for the first quarter of 2017 increased to $1,139,000 compared to selling and administrative expenses of $949,000 for the first quarter of 2016. Interest expense increased to $453,000 for the first quarter of 2017 compared to interest expense of $285,000 for the first quarter of 2016, primarily reflecting the addition of the proton center in Orlando.

Adjusted EBITDA, a non-GAAP financial measure, was $2,616,000 for the first quarter of 2017 compared to $2,129,000 for the first quarter of 2016. Please refer to the financial statements included with our press release for a reconciliation of GAAP to this non-GAAP financial measure.

At March 31, 2017, cash and cash equivalents was $2,403,000 compared to $2,871,000 at December 31, 2016. Shareholder's equity at March 31, 2017, were $27,774,000 or $4.87 per outstanding share. This compares to shareholder's equity at December 31, 2016, of $27,173,000 or $4.97 per outstanding share.

Craig?

Thank you, Alexis. Paulette, we are ready for the first question.

(Operator Instructions) And our first question comes from Tony [Gammon] from Eastwood Partners.

It seemed to me that the second quarter or that this quarter was, in many ways and many metrics, maybe the second best quarter AMS has had in probably a decade. So I guess I'm a little surprised that the reaction of the shares and just want to try to understand a little better, the delta between maybe what expectations were and where you ended up. So Craig, you mentioned that the Cobalt reload is routine maintenance. Can you talk a little bit more about how often the Gamma Knives have to go through Cobalt reload?

Sure. The Cobalt has a half-life of 5.3 years approximately which means that at that point, a treatment would take approximately twice as long as from the one that the Cobalt is initially loaded. So there's a time factor involved in doing treatments. So historically, we've done reloads at year 6 to around year 7. So for each unit, that's what we expect that we will do.

Okay. So this is for each unit, it's a once every few years occurrence?

Correct. Every 6 to 7 years (inaudible) each unit.

Okay. And then on the SG&A side, I saw that inched up a bit. Was there anything extraordinary or one time about the SG&A increasing this quarter?

Hi, Tony, this is Alexis. We had some onetime legal expenses. Our building rent is up compared to the first quarter of last year because we did move offices in August of 2015. Our lease was up and we were subleasing a portion of our office at that time last year. So there was a handful of one-off related to legal and then the building.

Okay. So if you haven't had the Cobalt reloads and the one-time SG&A things, would it be fair to think that the earnings per share would have been closer to what you achieved in the last quarter?

Yes, we think that's reasonable.

Okay. Next question is on the -- you have one expiring Gamma Knife machine. Does the company believe the 2 machines that are coming in over the next couple of quarters will substantially make up for the loss in revenue of the machine that you're expiring on?

Yes, we believe it will. There's no -- since these are new units coming on, there's no guarantee as to what their volumes would be. But yes, we believe that they can compensate from a revenue standpoint.

Okay. And then a couple more for Dr. Bates. Dr. Bates, can you talk about the size of the pipeline as you see it for proton beams? Obviously, you've been working on it for some time and I'm curious also with the change from Obamacare to whatever Trumpcare is going to be. I would guess there might be both positive and negative implications on that. I've heard anecdotally that hospitals are maybe going a little more slowly on their purchases. At the same time, I would think that this would encourage hospitals to want to share risk and that, that could be very favorable to a company with the business model of AMS.

You're absolutely correct, Tony. I think there is some concern about the American Health Care Act and how it will impact on hospitals going forward with their CapEx expenditures. And I suspect that it will be down for hospitals, so this will be a good thing for companies like ourselves where we think can solve that problem for them. In terms of the pipeline, who we are talking to at the present time, we're actively negotiating with a hospital in Connecticut, we're doing the same in a hospital in Illinois. Two hospitals in Southern California. (inaudible) putting another unit in at our unit in Orlando. We're also talking to a hospital in Northern California, one in Indiana and one in the Central Valley and also one in Ohio. So it's a very active pipeline. We're feeling comfortable that we will get many of these. I don't think I can give you a timetable when we're going to get them. As I've said, there's some uncertainty about what Washington's going to do, but I'm reasonably confident that we will get most of these.

Great. Next question, Dr. Bates, on sort of the clinical research developments around proton beams. I feel like it seems like there's a lot less of the kind of reviews on protons that there were years ago. And then in fact, it's becoming really regarded as the highest standard of care for many treatments. Is that correct? And what do you see in the clinical research environment?

That is correct. There was a study recently done in the U.K. showing not just protons but photons, both in treating prostate cancer, particularly those cancers that people were thinking that [what's the waiting] would be appropriate treatment for those. And now we know that's not the case because when these cancers come back, they're more malignant. So the feeling now is that -- and the consensus is that these patients should be treated. So I think you're going to see the number of prostate cancers that are being treated with radiation therapy, including protons, is going to go up. Ernie, you've been in a recent meeting, what do the papers show them?

There are recent papers that have come out. Just recently, there was the annual proton conference, PTCOG International Conference and there were some poster sessions that had taken place. So we think a number of these recent clinical papers will be sent out from a widespread reading. We'll be sure to share those with you, Tony.

Great. And final question was it's been a while since the shares have been, I think, under $4 or so. I was curious, is the company -- I know at one point, you had a buyback authorization and I wonder, is that still in effect? And if the shares continued to stay under pressure, is that something the company could consider?

It's still in effect and we've not brought that up with the directors recently, but it's certainly something that we could consider. But understand that we will be needing most of our cash for deposits on these machines that we are hopeful you're going to sign up in the next several months.

Our next question comes from Lenny Dunn from Freedom Investors Corporation.

A decent quarter and considering the downtime on the Cobalt, I think a fairly good one. Just a couple of things. First, you wrote down the MEVION investment a while back and it would appear to me that with MEVION selling all these machines now and with them appearing to have the machine of choice, that the MEVION investment probably should be revalued upwards. Am I guessing wrong there?

Well, from a gap standpoint, we're not able to revalue it up. So the only time that at this point, you'll see a revaluation up is when we actually decide to sell the shares. And at that point it either -- it will be gain, loss or neutral, depending on how that transaction is valued.

Do you think that they're now reconsidering going public again or...

We talk with them frequently. There's been no mention recently of them going public. And if they do go public, it's not clear whether they'll go public in America or in China. We're just not certain.

They may do better going public in China but going either way, that would be an event that you could then price your shares based on the public market.

That's correct.

Okay and I'm certainly encouraged by the number of proton installations you could potentially get. Clearly, there's a long time between the signing and the actual getting them up and running but still, there's only so many that you could do at one time. What would you -- I mean, if somebody -- if they came -- if you're able to close 3 deals next year, I mean, now to build next year, wouldn't that be about the maximum amount that you could possibly handle?

Well, I think it depends on how we structure the transactions. If we structure the transactions much like we did with Orlando. I think we could actually take on more. But if we did a turnkey, I think you're probably correct, 3 is the max or 3 would be a good number.

Okay, you have 2 year at favorable pricing, so that would also be helpful. Now we keep hearing that you're fairly close, do you realistically think that you'll have at least one signed up in the next 3 months?

Hopefully we will, but we just can't promise that. As I said, hospitals, you'll recall that our model essentially is that the hospital provides the construction for the machine, and we provide the machine. And hospitals are so concerned about their funding of the construction. So it's going to take a little bit longer than what we thought previously. And that again, has a lot to do with what's going on in healthcare in Washington.

Okay, well, certainly there's uncertainty at this point but anyhow, you're grinding out nickels, that can't hurt. And before '97, book value was very real, so I'm a little disappointed we're trading below that. I thought we'd move up a little in the report today but apparently, 1 or 2 shareholders wanted out and just got out. So it'll recover but I'm not disappointed with the results you showed, I am a bit disappointed by the lack of reaction to them because it doesn't make a lot of sense, but can't read other people's minds.

Craig, you might say a word about Orlando. We're still excited about how that machine is doing right now and we expect that to grow.

Yes, I think they are very pleased with the technical aspects of the equipment, the results that they're seeing preliminary on the patients that they're creating. And they're very, very pleased with the system and we think there's still capacity to grow.

Okay. The story is good and you have done occasional roadshows. Do you have anything planned in the near term?

Well, we're focused on protons.

That I understand but I think we need a little more exposure...

I'm sorry, Lenny, I didn't hear, did you say roadshows?

Yes.

I think we're planning on one in Los Angeles this year and Craig, is there one on the East Coast this year?

Yes, that we might go to.

Yes. I think we need some exposure because whoever got out, clearly, I disagree with their decision what they did, and we need to get some new shareholders involved. And I think it's a very good story to tell, good entry point for somebody.

Thank you.

(Operator Instructions) And we do have a question online from Anthony Marchese, private investor.

A question regarding Orlando. I understand what you reported in terms of fractions. What is the realistic maximum that you guys feel that, that facility -- 2 questions. One, what's the theoretical -- not theoretical but what's the practical maximum that you can achieve? And secondly, you guys mentioned that Orlando is or might be considering a second machine and what are the, if any, limiting factors to their actually going ahead? Obviously, they have a lot of experience with the machine and are pleased with it so it would seem to me that at least from my vantage this point, this shouldn't be a difficult decision.

Answering the theoretical, it really depends on the type of indications that you're treating. Pediatric patients take longer. Prostate patients take the shorter and there's an in between for some of the -- most of the other types of indications. I would say theoretically, you're between 30 and 35 a day, is depending on what the volume of pediatric patients you're treating but that would be my guess.

And where are you at right now on average?

I think in the first quarter, I think we were in the lower 20s, lower than the 20...

Okay, so there's another potential 50% greater throughput depending on...

Correct.

Okay. All right, and I guess, the second question, what's -- if you can discuss it, what's the limiting factor, is it capital?

Yes, I think, yes, capital. I think these are not inexpensive to put-in and I think we're just all looking at -- they're looking at options as to where they could put it. It's not easy to site these systems, especially in an urban environment and they're doing some research in terms of that and looking as to what the cost component of that would be.

And Tony, there is a commitment to get the latest and the best MEVION and that would be the new HYPERSCAN. And that has been installed at Georgetown but has not been FDA approved yet. And it's clear to us that, that is what Orlando wants, is the HYPERSCAN. So I don't think they're going to make a decision until they know the status of the HYPERSCAN upgrade for the MEVION machine.

Yes, I think, when you look at the machines, they would complement each other. There's certain things that our current double scatter machine does better than for certain indications, so they would like to have one of each.

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

Dr. Bates, would you like to make a closing remark?

Good, we're still very encouraged by what's going on with protons. I'm excited about the hospitals that we've talked to. We're talking to several a month and they all are committed to eventually upgrading their cancer department with protons. And I think we're going to be making ourselves available to that opportunity. I think we've picked a good partner in MEVION but we're excited that the other equipment that's coming out there Varian and IVA, and I think what we've proven, without a doubt, is the proper approach to this business is the single room machine.

I would like to thank everyone for joining us this afternoon, and we look forward to speaking with you in August on our second quarter and first half results conference call.

Thank you. 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 44932897 followed by the # sign to access the replay. The webcast of this call will be available at www.ashs.com and www.streetevents.com.

This concludes today's teleconference. Thank you for participating, and you may now disconnect.