RadNet, Inc. Q1 FY2021 Earnings Call

Good day, and welcome to the RadNet, Inc. First Quarter Financial Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet, Inc. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and thank you for joining Dr. Howard Berger and me today to discuss RadNet's first quarter 2021 financial results. Before we begin today, we'd like to remind everyone of the safe harbor statement under the Private Securities Litigation Reform Act of 1995. This presentation contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Specifically, statements concerning anticipated future financial and operating performance, RadNet's ability to continue to grow the business by generating patient referrals and contracts with radiology practices; recruiting and retaining technologists; receiving third-party reimbursement for diagnostic imaging services; successfully integrating acquired operations; generating revenue and adjusted EBITDA for the acquired operations as estimated, among others, are forward-looking statements within the meaning of the safe harbor. Forward-looking statements are based on management's current preliminary expectations and are subject to risks and uncertainties, which may cause RadNet's actual results to differ materially from the statements contained herein. These risks and uncertainties include those risks set forth in RadNet's reports filed with the SEC from time to time, including RadNet's annual report on Form 10-K for the year ended December 31, 2020. Undue reliance should not be placed on forward-looking statements, especially guidance on future financial performance, which speaks only as of the date it is made. RadNet undertakes no obligation to update publicly any forward-looking statements to reflect new information, events, or circumstances after the date they were made or to reflect the occurrence of unanticipated events. And with that, I'd like to turn the call over to Dr. Berger.

Thank you, Mark. Good morning, everyone, and thank you for joining us today. On today's call, Mark and I plan to provide you with highlights from our first quarter 2021 results, give you more insight into factors that affected this performance, and discuss our future strategy. After our prepared remarks, we will open the call to your questions. I'd like to thank all of you for your interest in our company and for dedicating a portion of your day to participate in our conference call this morning. Before we start, I would like to say on behalf of myself and the entire team at RadNet, we hope all of you and your loved ones are healthy and staying safe. We are extremely grateful for all of our stakeholders, including our employees, business partners, lenders, and shareholders, and wish you all well during this challenging time. Let's begin. I'm extremely pleased with our performance this quarter. Our financial and operating metrics in the first quarter demonstrate continued strengthening and improvement in our business that began in the third quarter of last year and is the result of a number of factors. First, during the COVID period, we instituted a variety of cost-saving measures that have lowered operating expenses and created efficiencies in our regionally clustered centers, as well as cost reductions and efficiencies that will remain permanently with the business. Second, our procedural volumes have substantially recovered as the states within which we operate have loosened COVID-19 restrictions. The result of the loosening of these restrictions has been that patients are visiting their physicians with more regularity and are utilizing health care services with more normalcy. Lastly, investments we made last year and during the first quarter, both in terms of capital expenditures and acquisitions, are beginning to contribute to our financial results. We discussed on our last financial results call the extraordinary investment we made in upgrading our mammography systems during 2020 to 3D digital tomography or tomosynthesis. While we do not believe mammography volumes have fully recovered from the COVID-19 impact, we are experiencing enhanced reimbursement from the volumes we are now performing on these newly upgraded 3D systems. Additionally, during the first quarter, we acquired 10 facilities within the New York metropolitan market. The newly acquired facilities have unique cost-saving and consolidation opportunities with existing RadNet facilities. Though these centers contributed positively to the first quarter, we expect significant improvement from their results later in the year when we are further along with their integration processes. As a result of all of these factors, our results were the best first-quarter results in our company's history. Compared to last year's first quarter, revenue increased 12% and EBITDA more than 100%. I am particularly proud of the margin improvement we demonstrated in the first quarter relative to the first quarters of 2020 and 2019. After deducting the CARES Act stimulus funds and removing the impact from the CARES Act related retention bonuses, we achieved a 14.6% EBITDA margin this quarter. This is an improvement from 2020's first-quarter EBITDA margin of 7.2% and 2019's first-quarter EBITDA margin of 12.2%. The margin improvement is the result of many of the cost-saving measures we have implemented, which have included consolidating underperforming sites and changing key operational processes, both at the center level and within our corporate support departments. Adjusted earnings were also very strong in this quarter. Typically, EBITDA and profitability are challenged in the first quarter where we face seasonality related to winter weather conditions and lower utilization of health care services due to the annual resetting of patient deductibles. In contrast to net losses in the first quarters of previous years, this year's first quarter was profitable. We recognized net income per share during the quarter of $0.18. Adjusted to remove the gain from our swaps, the CARES Act stimulus money, and one-time COVID-related retention bonuses to employees and contracted physicians, net income per share was $0.04. This is an increase from net losses in last year's first quarter of $0.33, and $0.08 in the first quarter of 2019. Based on the strong performance in this year's first quarter and the confidence we are feeling for the rest of the year, we have elected to increase most of our key financial guidance levels for 2021. Mark, in his prepared remarks, will review the increases we made to our revenue, EBITDA, and free cash flow guidance levels. It is also worth noting that we decreased the guidance levels for cash interest expense as a result of the interest cost savings from the recently completed refinancing transaction. As many of you might have seen, on April 26, we announced the completion of the refinancing of our term loan and revolving line of credit. Based upon current and anticipated future leverage ratios, we expect to save up to $6 million annually in interest expense, although we are no longer subject to restrictive maintenance covenants concerning our term loan and have substantially more operating and financial flexibility under the new credit agreement. This includes lowering our annual amortization payments by over $30 million a year and adding over $100 million to our cash balance, which will enable us to accelerate growth. This refinancing is a meaningful achievement in the company's growth and development. I would like to thank all of the lenders and relationship banks for their trust and support of our business and executive management team. One of the factors that drove the successful refinancing transaction was that we've been able to achieve meaningful deleveraging of our balance sheet over the past few years. The strong performance and conservative fiscal discipline have enabled us to achieve a leverage ratio of 3.7x net debt to trailing 12-month EBITDA as of March 31, 2021. Pro forma for recent acquisitions, this ratio is even lower, which is indicative of further expected deleveraging in the upcoming quarters. While we are committed to growing and expanding our business, we will also continue to follow our methodical and disciplined approach to managing our financial leverage. Lastly, and before I hand the call over to Mark, I'd like to discuss the recent success in the area of artificial intelligence. On April 19, we announced that our artificial intelligence subsidiary, DeepHealth, received FDA clearance for its AI mammography triage software, Saige-Q. Saige-Q is a screening workload prioritization tool that enables radiologists to more effectively manage their mammography cases with the use of artificial intelligence. DeepHealth's powerful new AI technology automatically identifies suspicious screening exams that may need prioritized attention, allowing radiologists to optimize their workflow for efficiency and accuracy. This technology is the first FDA-cleared mammography triage product that supports both 3D and 2D mammography images. This FDA clearance is an important step in RadNet's commitment to delivering the best quality of care to our patients, with almost 2 million mammography exams that we will be performing annually in our markets. We have now begun to deploy this tool, enabling our mammographers to become more accurate and productive. We expect by year-end that the vast majority of our screening mammography exams will run through the Saige-Q AI engine. The efficiency gains we expect to exceed 25% on screening mammography exams and accuracy should be further enhanced by a more advanced diagnostic algorithm we plan to submit to the FDA for its review by year-end. At this time, I'd like to turn the call back over to Mark to discuss some of the highlights of our first quarter 2021 performance. When he is finished, I will make some closing remarks.

Thank you, Howard. I'm now going to briefly review our first quarter 2021 performance and attempt to highlight what I believe to be some material items. I will also give some further explanation of certain items in our financial statements as well as provide some insights into some of the metrics that drove our quarter performance. I will also provide an update to 2021 financial guidance levels, which were released in conjunction with our 2020 year-end results in March. In my discussion, I will use the term adjusted EBITDA, which is a non-GAAP financial measure. The company defines adjusted EBITDA as earnings before interest, taxes, depreciation, and amortization and excludes losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishments, and non-cash equity compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling interest in subsidiaries and is adjusted for non-cash or extraordinary and one-time events taking place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or loss attributable to RadNet, Inc. common shareholders is included in our earnings release. With that said, I'd now like to review our first quarter 2021 results. For the first quarter of 2021, RadNet reported revenue of $315.3 million, adjusted EBITDA of $45.5 million. Revenue increased $33.8 million or 12%, adjusted EBITDA increased $25.1 million or 123.4%. Subtracting the $6.2 million of grants we received under the CARES Act Provider Relief Fund, adjusted EBITDA was $39.3 million, an increase of 92.8% from last year's first quarter. As Dr. Berger discussed in his remarks, the significantly improved performance is a result of increased procedural volumes, cost reductions instituted during the COVID-19 period, additional revenue from our migration to 3D mammography and the contribution from tuck-in acquisitions we completed in February and March. The performance in this quarter relative to the prior year's quarter was negatively impacted, however, by severe winter weather conditions that caused us to temporarily close East Coast sites for several days. Net income during the quarter was $9.5 million, an increase of $25.8 million over last year's first quarter. Per share net income for the first quarter was $0.18 compared to a net loss of negative $0.33 in the first quarter of 2020. This is based upon the weighted average number of diluted shares outstanding of 52.8 million shares in 2021 and 50.3 million shares in 2020. There were a number of extraordinary items impacting the first quarter, including the $6.2 million of grants received under the CARES Act Provider Relief Fund, a $10 million net gain related to our cash flow hedges and $6.8 million of employee COVID-19-related retention bonuses paid to our physicians and team members. Adjusting for all of the above extraordinary items, adjusted net income was $2.3 million, and diluted adjusted net income per share was $0.04 during the first quarter of 2021. In addition to the extraordinary items I just mentioned, also affecting net income in the first quarter of 2021 were certain non-cash expenses and nonrecurring items, including: $8.2 million of non-cash employee stock compensation expense resulting from divesting of certain options and restricted stock; $285,000 of severance paid in connection with headcount reductions related to cost savings initiatives; and $1.1 million of non-cash amortization of deferred financing costs and loan discounts related to financing fees paid as part of our existing credit facilities. For the first quarter of 2021, compared to the prior year's first quarter, MRI volume increased 6.9%, CT volume increased 9.5%, and PET/CT volume increased 2.5%. Overall volume, taking into account routine imaging exams inclusive of x-ray, ultrasound, mammography, and all other exams, increased 8.4% over the prior year's first quarter. On a same-center basis, including only those centers that were part of RadNet for both the first quarters of 2021 and 2020, MRI volume increased 2.5%, CT volume increased 4.4%, and PET/CT volume increased 2.9%. Overall same-center volume, accounting for routine imaging exams, increased 5.0% over the prior year same quarter. In the first quarter of 2021, we performed 2,018,849 total procedures. The procedures were consistent with our multi-modality approach, whereby 76.7% of all the work we did by volume was from routine imaging. Our procedures in the first quarter of 2021 were as follows: 281,096 MRIs compared with 263,055 MRIs in the first quarter of 2020; 178,510 CTs compared with 163,082 CTs in the first quarter of 2020; 10,950 PET/CTs compared with 10,683 PET/CTs in the first quarter of 2020; and 1,548,293 routine imaging exams compared with 1,425,678 of these exams in the first quarter of 2020. Overall GAAP interest expense for the first quarter of 2021 was $12.8 million. This compares with GAAP interest expense in the first quarter of 2020 of $11.6 million. Cash paid for interest during the period, excluding non-cash deferred financing expense and accrued interest, was $8.3 million compared with $9.9 million in the first quarter of last year. With regards to our balance sheet, as of March 31, 2021, unadjusted for bond and term loan discounts, we had $623 million of net debt, which is our total debt at par value less our cash balance. This compares with $678.8 million of net debt at March 31, 2020. Note that these debt balances include New Jersey Imaging Network's debt of approximately $51.6 million, for which RadNet is neither a borrower nor a guarantor. As of March 31, 2021, we were undrawn on our $195 million revolving line of credit and had a cash balance of $31.1 million. As Dr. Berger noted in his prepared remarks, the refinancing transaction that we closed in April added over $100 million of cash to our balance sheet. We expect our cash balance reported during our next financial results call in August will report a substantially higher cash balance. As of March 31, 2021, our accounts receivable balance was $146.7 million, an increase of $17.1 million from year-end 2020. The increase in accounts receivable is mainly the result of the significant increase in our procedural volumes and revenue, particularly during the second half of March relative to 2020 revenue. Our days sales outstanding, or DSO, remains near the lowest levels of our company's history. Despite increases in aggregate accounts receivable, our DSO was 36.3 days at March 31, 2021, essentially flat from year-end 2020. Through March 31, 2021, we had total capital expenditures net of asset dispositions and the sale of imaging center assets and joint venture interests of $30.3 million. Note that each year, we front-load the majority of our capital decisions into the first part of the year, so CapEx is disproportionately higher in the first half of the year. At this time, I'd like to update and revise our 2021 financial year guidance levels, which we released in conjunction with our fourth quarter and year-end 2020 results. For total net revenue, our original guidance range was $1.25 billion to $1.3 billion. Our new revised guidance range is $1.275 billion to $1.325 billion. We increased both the low end and the high end of the revenue range by $25 million. For adjusted EBITDA, our original guidance ranges were $180 million to $190 million. We've increased both the bottom and top end of those range by $7 million to $187 million to $197 million. For capital expenditures, our original guidance range was $70 million to $75 million. We increased both the bottom and the top end of this range by $2 million to $72 million to $77 million. For cash interest expense, our original guidance range was $39 million to $44 million. Because of the success of the refinancing transaction, we lowered the cash interest expense range to $35 million to $40 million. Finally, regarding our free cash flow, our original guidance range was $60 million to $70 million. This year, we revised our guidance range to $70 million to $80 million. And as a reminder, the company defines free cash flow as adjusted EBITDA less capital expenditures, less cash paid for interest. As noted, we have increased our financial guidance ranges for revenue, adjusted EBITDA, and free cash flow and lowered our interest cost due to the refinancing transaction. Each quarter, we reevaluate our actual and projected performance against guidance levels. We will continue to update these levels as appropriate throughout the remainder of the year. Regarding Medicare reimbursement for 2022, there is nothing to report at this time. As typical each year, we are expecting CMS to release a preliminary rate schedule sometime in the June or July timeframe. At that time, we will analyze CMS' proposal and our industry's lobbying group, the Association for Quality Imaging, will provide CMS our industry's feedback. At the time of our second quarter financial results call, we will be in a position to comment on CMS' proposal and its impact, if any, upon RadNet's future results.

Thank you, Mark. As you likely gathered from our discussion today, the challenges created by the COVID-19 pandemic have enabled us to become a stronger business that we believe is well positioned for future growth and sustained profitability. COVID-19 required us to reevaluate every aspect of our business, a business that has grown substantially in the past through acquisitions. COVID-19 allowed us to pause and analyze all of our procedures and processes in order to achieve more optimal performance. The pandemic also gave us the opportunity to make decisions that would have proven to be more difficult in normal times. We were able to consolidate some of our centers that were in close proximity with other centers in ways that preserve patient access, convenience, and our procedural volumes. As you also heard today, COVID-19 has also facilitated highly strategic acquisitions that may have otherwise not been available to us. As a result, we believe that we have created a platform with infrastructure and processes to effectively manage and support a significantly larger and more diverse business. Today, RadNet is more multifaceted than at any other time in our history. We are growing our business in all 7 states on both coasts in which we operate, all of which have attractive demographics and a multitude of local market opportunities. We are now partnered with some of the largest and most prestigious hospital and health systems in joint ventures that encompass approximately 25% of our facilities. We also control our own IT infrastructure with our suite of eRAD products and services that we also sell and license to other industry participants. Furthermore, we have made significant investments in the development of artificial intelligence, which we believe will have a transformative impact on our business and the diagnostic imaging industry in general, particularly around the diagnostics and screening related to breast, prostate, colon, and lung diseases. As we have tried to emphasize in today's report, our business is healthy and growing, and we are exceeding the expectations that we originally set forth in our initial guidance levels. Furthermore, the refinancing transaction positions us with significantly more available financial resources due to the over $100 million we were able to fund to our balance sheet, the lowering of our interest cost, and the substantial reduction of required debt amortization. In conclusion, we are excited and enthusiastic about the opportunities that lie ahead for RadNet, and we look forward to updating you further in the upcoming quarters regarding our progress. Operator, we are now ready for the question-and-answer portion of the call.

And we start with Brian Tanquilut from Jefferies.

I guess, Howard, my first question for you, you talked about recovery and you mentioned mammography is one that's still kind of lagging. So just wanted to hear your thoughts and your views on the recovery pace, how much upside left do we have to volumes going forward? And then just any color you can share on mammography.

Good morning, Brian. Thank you. The majority of our modalities have returned to pre-COVID levels and actually are beginning to exceed those. The one exception to that is our mammography. In reviewing not only our statistics but also national statistics, we saw during primarily the second quarter of the pandemic, meaning 2020, all of our volumes decreased substantially, but the one that appeared to have the greatest impact from COVID was screening mammography. This should not be unexpected, given that all screening mammography is elective. During that quarter, primarily the second quarter of last year, we saw in addition to other modalities, at one time, almost an 85% to 90% decrease in our volumes in the East Coast. In analyzing this further, what we have determined, and I believe is not unique to RadNet, is that the annual screening mammography was essentially disrupted. The patients who elected not to get their screening mammography during the second quarter of last year have since completed that cycle later in the third and fourth quarters of 2020 and the first quarter of 2021. While we're pleased with the volumes we are experiencing here in the second quarter, with other areas such as diagnostic x-ray and MRI and CT having fully recovered and exceeded some of our expectations, it will probably take us a quarter for the additional screening mammography volume to return to the same levels of growth that we have seen in the other modalities. This phenomenon, as I've mentioned, with literature and reports from various sources, was something that was pervasive throughout the United States.

No, that makes a lot of sense. And then, I guess, you mentioned something on AI, right, in the developments that you've seen there. But as you think about the eventual commercialization of AI technology and imaging and the initiatives that you've put in place there, how are you thinking about that flowing into your business, whether it's a growth rate boost or the P&L in general?

I think that AI will have probably a more profound impact in radiology and imaging than any other of the subspecialties. When you consider that the 4 major cancers, namely breast, colon, lung, and prostate, are the cause of about 80% of total cancers, all 4 of those uniquely allow themselves to benefit from various screening procedures that we provide in our imaging centers. As the growth of AI occurs, I believe it's not just about diagnosing acute disease that you would see in hospitals but rather evolving, similar to how we have in breast mammography, to create screening tools that will be driven by population health management and wellness. RadNet as a company will continue, as it has demonstrated already, to make those kinds of investments which we are now more capable of, given the change in our capital structure and the cash flow of the company, but where we can target these investments, similar to our IT platform with eRAD towards areas that we know will benefit the company. As we implement these various tools, not only will we see a greater volume of business, but that business will need to be managed by artificial intelligence to accommodate the type of demand we foresee on the horizon. I remain hopeful that RadNet, as a leader in this industry, will continue to demonstrate not just tools that enhance diagnosis accuracy but will focus on the elective side of what we do, such as ensuring women can access early breast cancer screenings through innovative tools. I think the compelling benefits for cost reduction and improved health outcomes will drive our business forward, and our own IT platform will facilitate that implementation more rapidly.

That makes a lot of sense. And then I guess my last question, since you talked about your expectation of volume bolus coming up, where are the payer moves now to restrict access or shift access away from hospital-based imaging to outpatient? We heard that during the pandemic, some of that was eased a little bit, so just curious if you're seeing payer efforts resume.

Yes. I think there isn't a payer out there that isn't beginning to more firmly embrace the benefits of moving volumes away from the higher-priced hospital settings to outpatient imaging. We're in conversations regionally with virtually all of the payors to implement tools, which I believe is a more aggressive effort on their part through utilization management to encourage patients to move away from hospitals. Additionally, I think there's a growing understanding among payers of the need to change their plan designs to incentivize more patients to choose outpatient imaging centers. Regardless of whether you're referring to United or the Blue Cross/Blue Shields or Cigna or Aetna, there is an inevitable movement, albeit slow, toward creating better opportunities for patients to receive faster and better screenings in outpatient settings. This is particularly important as patients have expressed a greater comfort level returning to these facilities following the pandemic.

We take our next question from John Ransom from Raymond James.

A couple of questions. You guys have been talking about AI, I mean, likely for a while. But why is it reasonable to expect that to have some material effect on your bottom line?

Material effect, John, on our what?

On your earnings P&L, yes. When would that show up as a kind of measurable income statement contributor?

Yes. I think it will take probably until the latter part of this year, John. Now that we have finally received FDA approval on the first product, Saige-Q, we are beginning to implement it across our 346 centers, most of which perform mammography. We have a lot of centers to ramp up and applications to train both our radiologists and technologists on the use of these tools. While we could implement this rapidly if we were just dealing with a handful of centers, with over 700 to 800 radiologists that are part of RadNet, this process will take time because it's not just a matter of deploying software; we must also ensure the integrity of our IT infrastructure to manage data flowing across our network efficiently. The implementation processes we plan to execute over the next 3 quarters have already commenced, even prior to the FDA approval, to prepare the company for expected productivity gains amongst our radiologists. I would say we should start seeing these benefits reflected in our financials by the latter half of this year.

So if we're thinking about '22, there might be some hopefully measurable impact in the cost to read a scan now that you can look at some of those costs and take a little bit of a scalpel to those costs as a result of this?

Well, I don't think it's so much about cutting our current costs, John. It's about enabling our radiologists to be more productive as our volumes increase, which we are very confident will happen in mammography. This capability means we won't necessarily need to employ more radiologists with the anticipated volume increases. I think it's one of RadNet's responsibilities to show the industry our capacity to manage the rising demand for screenings, particularly in mammography and other imaging needs. Currently, RadNet does approximately 5% of all mammography in the United States, and we expect that number to grow significantly over the next 2 to 3 years as we implement AI as well as data mining tools to improve compliance and bring women into the screening process faster. The potential additional volume we can capture is significant.

John, just to expand on what Dr. Berger just mentioned, the data suggests that approximately 40 million mammography exams are completed in the United States each year. As Dr. Berger indicated, if all women over age 40 were compliant with annual screening, the number of exams could be around 60 million, resulting in about 20 million additional exams nationally. We operate in states comprising about 25% of the U.S. population, so if we apply that figure to the 20 million additional exams, we talk about another 5 million exams that could be performed in the markets where we operate. That's an extraordinary potential increase. So, not only will AI enhance productivity with current volumes, but as mammography grows in the industry, we will be positioned to absorb much of that additional volume without needing to add to our radiology staff. Our tests revealed that our radiologists are over 25% more productive using these AI tools, which serve as both a worklist tool and a prioritization tool. We believe that number could increase when our second product undergoes FDA review next year. This could have a significant financial impact on our business given both the current volumes and our plans for future growth.

I found this very interesting, and I hope you’re willing to discuss it further. Howard, we’ve talked about alternatives to the current unpleasant prostate screening. Do you see a possibility for this technology to be used in other screenings like prostate, or are there other areas that I might not have considered that could benefit?

Absolutely, John. Thank you for the question. I think that's something you obviously personally experienced as well as many other men. We are working with various companies and considering internally options for prostate MRI as a screening tool. We are striving to develop effective, efficient screening for prostate cancer that provides substantial advantages over current costly and cumbersome procedures like PSA tests or invasive biopsies. We believe that these tools are on the near-term horizon not only for prostate but also for colon cancer using CT screening as an alternative to traditional colonoscopies. Additionally, while lung cancer screening is available, we see that it remains drastically underutilized. The statistics show that only 5% to 10% of the population qualified for lung CT scans actually participates. I firmly believe that imaging is key to population health management not just for cancers but for cardiovascular diseases as well. As such, we will continue to prioritize these tools along with our partners to transform the imaging industry and positively impact overall healthcare.

It appears there are no further questions at this time. I'd like to turn the conference back for any additional or closing remarks.

Okay. Thank you, operator. I want to, again, thank everybody for their participation in today's call and for the support of our shareholders and employees of RadNet for their dedication and hard work. Management will continue its endeavor to be a market leader that provides great services with an appropriate return on investment for all stakeholders. Thank you for your time today, and I look forward to our next call. Stay safe, everyone.

And this concludes today's call. Thank you for your participation. You may now disconnect.