American Shared Hospital Services (AMS) 2017 Q3 法說會逐字稿

Good morning, everyone, and welcome to the 2017 Third 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 for American Shared Hospital Services.

Mr. Tagawa, you may begin.

Thank you, Sylvia, and thank you all for joining us for AMS's 2017 third 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 of 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, its quarterly report on Form 10-Q for the 3 months ended March 31, 2017 and June 30, 2017, and the definitive proxy statement for the Annual Meeting of Shareholders held on June 27, 2017. The company assumes no obligation to update the information contained in this conference call.

Treatment volume at our proton therapy center (inaudible) Orlando Health UF Health Cancer Center amounted to 940 fractions for this year's third quarter. This was up 8.2% from the 869 fractions for last year's third quarter, but down compared to the 1,189 fractions reported for this year's second quarter. I am glad to report that this slowdown in proton treatment volume appears to have run its course as volume rebounded sharply in October. Accordingly, we are optimistic that proton treatment volumes for this year's fourth quarter resumed its upward trend. We believe the pace of treatment volume has room to increase even further in 2018. We also are pleased to report that the MEVION S250 proton system we supply to Orlando Health continues to perform flawlessly, with no unanticipated operating issues.

Volume in our Gamma Knife business was down in the third quarter. As we previously mentioned, we lost one of our Gamma Knife units due to the expiration of its contract term at the end of April 2017 and a second unit in August 2017. The decrease in revenue from these 2 sites were only partially offset by revenue from our 2 new sites in Lima, Peru and Lincoln, Nebraska that began operations in the third quarter and are still early in the ramp-up phase. We are optimistic about a rebound in our Gamma Knife business, beginning in the fourth quarter and some ramp-up in patient volume at our new sites in Lima, Peru and Lincoln, Nebraska gathers momentum.

Another piece of good news is that the centers for Medicare and Medicaid Services recently announced a 6% increase in the Medicare reimbursement rate for simple, intermediate or complex proton treatments and a 1.5% increase for Gamma Knife treatments for 2018. These rate increases are a welcome development that should make a positive contribution to our financial performance in the new year.

We believe that the softness we have encountered in our businesses in the second and third quarters is now behind us. We expect to report better results beginning in the current quarter.

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

Thank you, Craig. For the 3 months ended September 30, 2017, rental income from medical services decreased 5.5% to $4,613,000 compared to rental income for medical services of $4,884,000 for the third quarter of 2016. Net income attributable to the company for the third quarter of 2017 was $99,000 or $0.02 per share. This compares to net income attributable to the company for the third quarter of 2016 of $334,000 or $0.06 per share.

Third quarter revenue for the company's initial Proton Therapy System installed at The Marjorie and Leonard Williams Center for Proton Therapy at Orlando Health UF Health Cancer Center in Florida increased to 17% to $935,000 compared to revenue of $799,000 for the third quarter of 2016. Revenue for the company's Gamma Knife operations decreased 9.4% to $3,564,000 for the third quarter of 2017 compared to $3,933,000 for the third quarter of 2016. As Craig mentioned, the decrease in revenue due to the loss of 2 Gamma Knife sites this year was only partially offset by revenue from our 2 new sites in Lima, Peru and Lincoln, Nebraska that began operations in the third quarter. Excluding the 2 sites whose contracts expired this year, Gamma Knife revenue increased 4.1% for this year's third quarter compared to the third quarter of 2016.

Rental income for medical services gross margin for the third quarter of 2017 increased 40.8% of revenue -- decreased to 40.8% of revenue compared to rental income for medical services gross margin of 49.1% of revenue for the third quarter of 2016, primarily reflecting the decrease in Gamma Knife revenue.

Operating income decreased to $439,000 for the third quarter of 2017 compared to operating income of $896,000 for the same period a year earlier.

Income before income taxes was $439,000 for the third quarter of 2017 compared to $899,000 for the third quarter of 2016. Non-GAAP pretax income, net of income attributable to noncontrolling interest was $263,000 for the third quarter of 2017. This compares to non-GAAP pretax income, net of income attributable to noncontrolling interest of $601,000 for the third quarter of 2016. Please refer to the financial statements included with this press release for a reconciliation of GAAP to non-GAAP financial measures.

Adjusted EBITDA, a non-GAAP financial measure, was $2,412,000 for the third quarter of 2017 compared to $2,831,000 for the third quarter of 2016. For the 9 months ended September 30, 2017, rental income for medical services increased 6.1% to $14,472,000 compared to rental income for medical services of $13,640,000 for the first 9 months of 2016.

Proton therapy revenue increased 137% to $2,963,000 for the first 9 months of 2017 compared to $1,246,000 for the first 9 months of 2016. Excluding treatments at our customer's site lost due to the expiration of their contract terms in April 2017 and August 2017. Gamma Knife revenue decreased 0.5% for the first 9 months of 2017 compared to the first 9 months of 2016.

Net income attributable to the company for the first 9 months of 2017 was $505,000 or $0.09 per share. This compares to net income attributable to the company for the first 9 months of 2016 of $478,000 or $0.09 per share.

Adjusted EBITDA, a non-GAAP financial measure, was $7,577,000 for the first 9 months of 2017 compared to $7,288,000 for the first 9 months of 2016.

On the balance sheet of September 30, 2017, cash and cash equivalents was $1,665,000 compared to $3,121,000 at December 31, 2016. Shareholder's equity at September 30, 2017, was $28,188,000 or $4.94 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. And Sylvia, we are ready for the first question.

(Operator Instructions) And our first question comes from Anthony Marchese from [rejoining].

A question for you. Gamma Knife, do we anticipate any more losses during the current quarter or the quarter following? Let's say, for the next 6 months as far as you can tell?

Losses for Gamma Knife. I think the Gamma Knife is still a profitable business, so I'm not quite sure what the question is...

In other words, you said you had -- you said you lost a Gamma Knife unit due to the expiration in April and in August. I guess, the question is you have any other -- do you have any other Gamma Knives that are going to be expiring over the next 3 to 6 months, that you know of?

No, we do not know of any Gamma Knife contracts that are expiring within the next 3 to 6 months.

Okay. Second question is, it sounds like you should have had, I would think -- and again, I joined the call late because I had a problem logging on, but did you have any cancellations or deferments due to -- in either of your Gamma Knife or proton beam due to the hurricanes in Florida?

Yes, we were impacted somewhat. Luckily, most of ours were not, but we were impacted, probably in our proton system, but 1.5 to 2 days' worth of business was interrupted due to the hurricane.

But you don't think the Gamma Knife was affected then?

It might be, but the Gamma Knife's not on a daily basis, it's more of a single shot. So it's not impacted quite as much as protons would be.

I see, okay. And finally, are you -- I guess this is a question that we keep asking on every call, but could you give us your outlook for potentially -- you guys have an initiative to help finance more proton beam machines. Can you give us any update, if you can share that with us?

Tony, yes, we are looking at 3 possible offers to finance our units going forward: one is a medical equipment trust, that looks promising; the other is a corporate bond; and the other is a debt proposal. These all look promising.

Is that the impediment in your mind to -- is it purely a question of financing and not need? So in other words, if for argument's sake, you had, whatever, millions of dollars of capacity to finance these, sounds like what you're saying is the demand is there but for whatever reason, the financing isn't quite there yet.

That's correct. As I mentioned to you in the past, we're negotiating out with 13 hospitals that clearly would like to have proton services, but they have a problem. Recall, our model requires them to pay for installation cost, construction cost, land acquisition, and that's a pretty big bite for a lot of these hospitals, and we provide the equipment. And in view of what is going on in Washington, D.C., with the uncertainty as where health care is going to end up next year, they're a little hesitant, but we believe that's going to get better.

Our following question comes from [Robert Bocce], (inaudible) shareholder.

Just a longtime shareholder. And most of the questions that were -- I was thinking have been answered. I'll let you know (inaudible) I remember one time you mentioned that in China, there's 15,000 hospitals and maybe you'd be going to expand there or maybe other foreign countries (inaudible) in a foreign (inaudible).

Yes, we do have an opportunity, not in China. As you recall now, MEVION, its primary ownership is now owned by a Chinese company. And they expect, at some point, to be able to sell these machines in China. We've had discussions with hospitals in Europe and most recently with a group in the United States that want to put a proton machine in Vietnam. So there is an opportunity going forward.

It looks like it's a great opportunity. Great demand for the proton beam in the Chinese or eastern area there? Is there good demand -- where does the demand come from...

Well, there is a demand. I don't know if it's a great demand, but there is a demand. Again, the issue is cost. But I might add that the price of machines are coming down. As you recall, the multi-room machines, 2 or 3 more rooms were not doing well but for 1-room facilities, including ours at Orlando, are doing well.

Yes. That was the point of going to one unit, yes, and you're doing it well. Anyway, you have a lot of competition in there also, so I just wonder if there's any market that was waking up or becoming more inter -- you mentioned South America. Now that looks right over there, you've had a couple of units of works there. Is that expanding at all in South America?

We have an opportunity in South America for the Gamma Knife. We've been looking at possibly 3 units that Elekta owns and now is putting up for sale. And when looking at them, at least 2 of them would be accretive. And I think it's a good chance that we may acquire these. Ernie, you want to say a word about that?

Well, these are existing facilities that have -- and in operation for over 5 years, and 2 of them have demonstrated success in terms of consistently showing net income. So we are looking at these projects.

I will say that the market in the U.S. for protons are still in its infancy. If you look at where we think the number of rooms should be, we think, going forward, there should be about 600 rooms or more that could benefit from proton therapy. And there are about 80 rooms currently in the United States in operation. So I think within the United States, there's a tremendous opportunity of growing the Gamma Knife -- the proton business.

For 1-room?

For the -- that is our concept. Yes, we believe in the 1-room, and the numbers I was quoting you were for the number of rooms that are -- that we believe there's a capacity for, at least as well as how many rooms they're currently operating in the United States.

Our final line question comes from Lenny Dunn from Mutual Trust.

Clearly, as it must be to you, this is a disappointing quarter and hearing that we're going to have a better quarter next quarter is always nice, but we have to actually have one. And you said October started off well, which is again encouraging and, of course, next year, you're going to get a better reimbursement. But the SG&A is still running fairly high, and I understand some of that was with the start-up in Peru, but is there anything we can do to keep that a little -- under a little better control so that we see more to the bottom line?

I think, yes, we believe that we have it under control. I think there are a number of things that we had to do corporately in the beginning part of the year, where we did have more legal fees that we had to accrue, and -- but I think those are past us. There were some things from an accounting standpoint that we had to research as the new -- some of the new pronouncements came into effect, which I think are pretty much behind us now as well or now sense of all that. So yes, there're going to be costs associated with really starting up the proton business and continuing to grow that business. So there probably will be some lumpiness in terms of the SG&A cost. But we're cognizant of it, Lenny, and we're trying to keep it down as low as possible.

If we saw another proton contract and that was the reason for it, that's fully understandable, but we've yet to see one and I thought, by now, we'll at least see one. And financing -- I understand hospitals may have a little reluctance to proceed forward, but there's got to be 1 or 2 out there that are -- who would want to move on it. And certainly, the one in Orlando is a good demonstration that these can work and they were done at the current cost. So I don't know what needs to be done, but something needs to be done. None of us are getting younger waiting, so.

That's true, Lenny. I think we have opportunities here in San Francisco to put in a unit. This is our hometown, and that's looking very promising. We have 2 opportunities in New England that look very promising and 2 down in Southern California that look very promising.

Well, let's get one of them signed up.

(inaudible) for hospitals to make this decision.

Yes, but we have to get somebody off the starting gate, so it just seems like, by now, we should've been able to get someone to move. But it's been a long time and early in the year, I thought, by now, we'd have somebody else signed up as I'm sure you did, too, but I don't know what can be done.

We did, Lenny, we did. We really thought we'd have a unit in new England signed up (inaudible) have happened, the hospital is just not ready to make a decision. I think the interesting thing is that we do not have any competitors at this point competing with us. We think we are the first choices for all these 13 hospitals and probably the county and these new hospitals that we're talking to. Once they decided they have the money to come up with their cost for the building and the land acquisition, it's going to happen. It's clear that the clinical results coming out now, particularly for esophageal cancer, for breast cancer and for prostate looks very good compared to proton treatments. We're seeing better survivorship and hospitals now realize that this is something that they're going to need at some point, if they're going to provide total cancer care for their communities.

Well, you have leasehold on it, but you got to get one of these hospitals sold.

You're right about that.

Okay. Well, again, this is a public company and we've been extremely patient. And the market today is...

Yes, you have.

Yes, the market today is reacting negatively because the carrot keeps going further down the road. So let's get it done this time.

We will.

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

We'd just like to thank everyone for joining us this afternoon and we look forward to speaking with you on our fourth quarter conference call in March.

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 45970345, followed by the pound 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. You may now disconnect.