RadNet, Inc.
Q3 2016 Earnings Call Transcript

Published: 9 Nov 2016

[Operator:]

Good day everyone and welcome to the RadNet Incorporated Third Quarter 2016 Financial Results Conference. Just to remind you that today's call is being recorded. And at this time, it’s my pleasure to turn the conference over to Mr. Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet Inc. Please go ahead, sir.

[Mark Stolper:]

Thank you. Good morning, ladies and gentlemen and thank you for joining Dr. Howard Berger and me today to discuss RadNet's third quarter 2016 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, 2015 and RadNet’s quarterly report on Form 10-Q to be filed shortly. 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.

[Howard 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 third quarter 2016 results, give more insight into factors which 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 you all for joining us today and for your interest in our company and for dedicating a portion of your day to participate in our conference call this morning. Overall I am extremely pleased with the continuing improving in our metrics and financial performance relative to the earlier periods of this year and as compared to last year's third quarter. This quarter we achieved record revenue and EBITDA. Our revenue increased 7.8% from last year's third quarter, primarily due to the contribution of the Diagnostic Imaging Group assets we’ve purchased in October of last year. On a same center we experienced slight procedural volume growth relative to last year and 0.4% same center revenue growth. This performance represents the 10th quarter in a row of same center organic procedural volume growth. We are very proud of this consistency. Sequentially relative to the second quarter of 2016, our revenue increased 2.8% and relative to the first quarter of this year our revenue increased 3.8%. As compared with last year's same quarter EBITDA increased 1.6% and sequentially relative to the second quarter of 2016 our EBITDA increased 2.2% and relative to the first quarter of this year our EBITDA increased 32.5%. This performance gives us confidence that we have a very healthy platform for our business from which to continue our growth. Much of our operational focus remains with challenges to complete the integration of our New York acquired operations most notably the Diagnostic Imaging Group and Lenox Hill New York Radiology Partners operations. We continue to spend the money necessary to integrate these substantial assets onto our IT billing, accounting and operational infrastructure. Integration efforts include the rebranding of selected centers, the strategic relocation of centers, augmenting and changing center level in regional, personnel and even consolidating facilities in a couple of instances. These efforts continue to take time and require financial resources and investment. Although this has been a substantial commitment of ours, I believe that we are positioning these operations to show marked improvement in 2017 and beyond. I'd like to spend a few minutes discussing several of our larger growth initiatives, efforts that I believe can also contribute to strong 2017. First, we continue to work on hospital and health system partnership to expand our joint venture business. Currently we have 15 health system joint ventures. Many of these are relationships where we own and operate outpatient imaging facilities in conjunction with local hospitals. In certain cases our radiology group partners staff the inpatient radiology departments within our joint venture of partners' hospitals. We are in active discussions with new partners and are pursuing expansion opportunities with existing partners. We continue to find these relationships extremely valuable. Our experience has been that our hospital partners are effective in driving business to our jointly owned facilities, and if there is great value in eliminating the health system as an outpatient competitor. In certain instances in order to establish these joint venture opportunities we sell financial interest in existing RadNet facilities to a local hospital or a system as an example this is what we did with LifeBridge Health Systems last year. And other examples we buy into existing hospital facilities or agree to construct new facilities by sharing the investment officially highlighted in the past regarding the Barnabas Health joint venture. We have the financial and operational flexibility to make any deal construct that is mutually advantageous. We also have various capabilities that can be offered in conjunction with our partners including eRAD IT Solution, Breastlink and teleradiology as well as on site professional staffing. I look forward to be in a position to announce more of these new joint ventures within the next two quarters. Second, earlier next year we will be expanding our Breastlink, breast disease management capabilities to East Coast markets, currently Breastlink operates comprehensive breast cancer diagnostic and treatment facilities in Southern California. Our offering provides a full continuum of care to our patients and our medical outcomes have been extraordinary. We have demonstrated in California that assembling world class breast imagers, medical oncologists and surgeons in the same medical practice on an outpatient basis can materially improve the experience and prognosis of patient. All this can occur while saving significant cost of the medical delivery system by eliminating or minimizing hospitalization and inpatient care. We are in the final stages of the process of assembling the necessary professional personnel and facilities to create the Breastlink offering in one or more of our largest East Coast markets. The Breastlink offering is highly complementary to our imaging business and drives procedural volumes both because our women’s health imaging business drives Breastlink patient volume and because patients with breast cancer are high utilizers of various advanced imaging modalities. We’re hoping to be in a position early in 2017 to formally announce our East Coast expansion of Breastlink. The third expansion opportunity that I will discuss today is the opportunity to bring capitation and risk based contracting to our East Coast markets. For RadNet’s West Coast operations capitation has been a significant driver over the last three years. Today capitation represents over $100 million of our annual revenues. We have over 40 contracts with large medical groups who sub-capitate imaging utilization to us for over 1.5 million lives. No other imaging center company in the United States has the network, systems and knowledge to service managed care lives under capitated agreements like we do. Capitation brings recurring and predictable revenue streams, fills capacities at our facilities and drives non-capitated fee-for-service business from the same physician referring community that have sends us their capitated managed care lives. We have demonstrated our ability overtime to effectively service large books of business profitably and we have had over 90% success rates in contractual renewals. RadNet is focused on multi-modality facilities and densely populated clusters of centers plays into our ability to create and service large network contracts. Our regional operations in the New York metropolitan area and the Mid-Atlantic are perfectly positioned to contract for large managed care populations from health systems, accountable care organizations and medical groups. We’ve been in discussions for servicing several large contracts that could significantly enhance the revenue of our existing operations and drive large patient populations into RadNet and RadNet contracted facilities. I look forward to keeping you apprised of our progress of bringing this offering to the East Coast and hope to be in a position later this year or early next year to discuss some of these successes. At this time I’d like to turn the call back over to Mark to discuss some of the highlights of our third quarter 2016 performance, when he is finished I will make some closing remarks.

[Mark Stolper:]

Thank you, Howard. I'm now going to briefly review our third quarter 2016 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 to some of the metrics that drove our third quarter performance. Lastly I will update 2016 financial guidance levels. 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, bargain purchase gains and non-cash equity compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling interest in subsidiaries as is adjusted for non-cash or extraordinary and one-time items taking place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or a loss attributable to RadNet income and shareholders is included in our earnings release. With that said, I’d now like to review our third quarter 2016 results. For the three months ended September 30, 2016 RadNet reported revenue and adjusted EBITDA of $224.6 million and $35.9 million, respectively. Both levels were the highest in our company’s history. Revenue increased $16.3 million or 7.8% over the prior year same quarter and adjusted EBITDA increased $557,000 or 1.6% over the prior year’s same quarter. For the third quarter of 2016 as compared to the prior year’s third quarter MRI volume increased 4.7%, CT volume increased 6.6% and PET/CT volume increased 9%. Overall volume, taking into account routine imaging exams inclusive of X-ray, ultrasound, mammography and other exams increased 6.7% over the prior year’s third quarter. In the third quarter of 2016, we’ve performed 1,526,326 total procedures. The procedures were consistent with our multi-modality approach whereby 77.8% of all the work we did by volume was from routine imaging. Our procedures in the third quarter of 2016 were as follows. Please note that we have standardized our procedural volume categorization among regions according to our internal KBI or key business indicators dashboard. So the volumes I’ll be quoting for last year’s comparison period will be slightly different than those are reported at this time last year. Because the restated procedural volumes for last year’s period are calculated under the same methodology as the current period the comparisons between the two periods are accurate as are the conclusions that can be drawn. Here are the numbers. We performed 190,397 MRIs as compared to 181,786 MRIs in the third quarter of 2015. We performed 141,939 CTs as compared with 133,114 CTs in the third quarter of 2015. We performed 6,637 PET/CTs as compared with 6,088 PET/CTs in the third quarter of 2015 and we performed 1,187,353 routine imaging exams, which include nuclear medicine, ultrasounds, mammography, X-ray and all other exams as compared with 1,110,153 of all of these exams in the third quarter of 2015. Net income for the third quarter of 2016 was $1.6 million or $0.04 a share compared to net income of $8 million or $0.18 per share reported for the three months period ended September 30, 2015. This is based upon weighted average number of shares outstanding of $46.3 million and $44.8 million for these periods in 2016 and 2015 respectively. The comparison of net income is affected by certain unusual items, which occurred in each of the third quarters of 2016 and 2015. During the third quarter of 2016 we have wrote-off $709,000 or deferred financing fees and expensed $606,000 of one-time rating agency and legal fees related to the refinancing transaction we completed on July 1, 2016, which was the first day of the quarter. We also had a one-time $1.2 million adjustment to depreciation expense and $2 million of severance related to our New York acquisition. Affecting the third quarter of 2015, we recorded a $4.8 million gain from the sale of our New Jersey facilities to our joint venture with Barnabas Health and also in that 2015 third quarter, we reported $2 million of implementation revenue from the commencement of operations of our management service agreement in Qatar. Adjusting for these events in both quarters, adjusted earnings per share was $0.11 in the third quarter 2016, as compared with $0.10 in the third quarter of 2015. Also affecting net income in the third quarter of 2016, excluding the items I just mentioned above is adjusted in our adjusted earnings calculation were certain non-cash expenses or non-recurring items including the following

[Howard Berger:]

Thank you, Mark. As we are approaching midway into the fourth quarter, it’s only natural to reflect on 2016. This year has been a year where we’ve paused from our acquisition activity and focused on base operations and on integrating the significant acquisitions we made over the last couple of years, notably in New York. Although this integration has been challenging to our staff and systems, I believe we will see many of the fruits of our labors in the quarters to come. This will be especially apparent when some of the growth initiatives I mentioned in my opening remarks begin to materialize and be made public. What this illustrates is the logic and power behind our core operating strategy of consolidating regional marketplaces and focusing on densely clustered networks. The larger we get on a regional basis, the more opportunities arise such as capitation, joint ventures, reimbursement benefits, operational synergies and eRAD and Breastlink expansion. As we move into 2016, our focus will be continued to be on our operations, however we will always be in the market to evaluate opportunistic acquisitions that further our strategy. This could mean completing more small acquisition in 2017 of independent operators or it could mean the completion of one or more significant transactions of mid-size operators that would provide us with immediate market penetration and scale that we can leverage in the near-term. Our size in the Mid-Atlantic region, the New York Metropolitan area and in New Jersey has led to discussions with health plans and insurance companies, which resulted in reimbursement benefits to RadNet. As we continue to become an indispensable part of the healthcare delivery systems in the markets in which we operate, this leverage grow stronger, particularly as business continues to move away from hospital based settings. We remain optimistic about our future and position in the healthcare industry; we are constantly striving to be a better and more efficient company. I am extremely proud and excited as I sit here today when I think about the potential for RadNet’s future. I look forward to updating you on many of these initiatives that we have discussed on our call today during our fourth quarter call in the New Year. Operator we are now ready for the question and answer portion of the call.

[Operator:]

Thank you. [Operator Instructions] And we’ll go first to Brian Tanquilut of Jefferies.

[Brian Tanquilut:]

Hey good morning, guys. Howard thanks for all color on just the partnerships and everything, but let me start by asking obviously topic of the day, how should we be thinking about your exposure to that changes and the ACA whether from Medicaid expansion as well. I know that was a benefit for you couple of years ago specially in California?

[Howard Berger:]

What is the topic of the day Brian, is there something else other than RadNet earnings call, going on. Hi Brian, yeah I am not at all concerned about the results of the election, as it relates to RadNet and in fact I think in some respects there maybe some relief here I think that will be less emphasis on issues like single payer systems and continued regulatory issues that I believe have actually been detrimental to the healthcare system, as well as the general economy. In particular I am also now concerned about the unwinding of the Affordable Care Act, I believe RadNet has primarily benefited from that really only in California and primarily in the large increase that has come through our medical groups that we capitated with in the Medicaid program here called medical in California. I believe the people that have entered this system as we saw initially here, our people that have not accessed appropriately the healthcare system over many years and have indeed been very much changing the way the entire medical system now appears in terms of the average type of person that it covers. They were considerably older and sicker patients that was the driver in our utilization and for which we have enjoyed a resetting of our rates with all of our medical contracted systems that has resulted in substantial increase in revenue. I do not see these people going back into the general market uninsured particularly when they are in a relatively healthy state at this time meaning California with its financial situation and these people would left unattended to their healthcare cost of system far more than it is in the HMO arena. So the long and short of this is I don’t expect major changes certainly in the near-term these people need the healthcare that they are now seeing and if anything the pressure I believe will continue to be on hospital systems that at least in case of imaging and other ambulatory services continue to see pressure and movement away from the hospital systems into the more cost effective and I think better environment to see patients than in a hospital setting. So overall I think this maybe at least for RadNet a -term positive.

[Brian Tanquilut:]

Got it. Hey Mark do you mind giving us parsing out the same store data is there a way for you to compare with the East Coast versus West Coast operations?

[Mark Stolper:]

I don’t have that I think at my fingertips, but I would tell you that we had increases in our advanced modalities on both coasts we were up 2% in MRI, 3.9% in CT, 6.3% in PET/CT nationwide and that those for positive same store sales comps on both costs. We were down a little bit in routine modalities nationwide, which I think is more of an aberration than anything else. Nor is it from a revenue standpoint material to us given that the differential in pricing on advancement imaging.

[Howard Berger:]

Let me add a little color to that at least as far as the East Coast is concerned Brian, we haven’t highlighted the success that we’ve had in transitioning over to 3D mammography, which has been a major focus on the East Coast as oppose to the West Coast for 2016. We have invested heavily in that which is another reason why our CapEx was a little bit higher than originally anticipated this year. But the results of that have been that we are doing currently 1200 to 1300 3D mammograms a day on the East Coast since the beginning of the year. And given that we generated here anywhere from $50 to $70 per exam for this technology it has been a significant driver not in overall volume, but in revenue and when I say not overall volume is because the same women in prior circumstances were getting 2D mammography and now are electing to do 3D mammography either on their own or as a result of the request of the referring physician. So I believe that maybe part of why we’re seeing increased revenue disproportionate to increased volume overall for the company. The other point for us to add to that is that mammography is a -- women’s health is a major focus of the company as it relates to breast disease and breast cancer and this very much feeds into our overall Breastlink strategy, which I hope to be talking about in more detail in coming quarters.

[Brian Tanquilut:]

Got it. And then last question from me, Mark on the comment on reimbursement next year given all the moving parts without getting into guidance is it safe to assume or is it correctly assume that EBITDA should be up next year?

[Mark Stolper:]

We would -- yeah I mean obviously we’ll give guidance after our fourth quarter earnings release, but yeah you can bet that we’re predicting next year to have higher EBITDA than this year for sure.

[Brian Tanquilut:]

All right. Thanks, guys.

[Mark Stolper:]

Thanks, Brian.

[Operator:]

[Operator Instructions] And we’ll go next to Mitra Ramgopal from Sidoti & Company.

[Mitra Ramgopal:]

Yes hi good morning just couple of questions. First I was wondering if I can get some more color as you look at the same store overall volume numbers this quarter versus what we've seen in the past few quarters’ kind of softening there. And PET/CT however had really nice same store and I was wondering if there was anything in particular driving that?

[Mark Stolper:]

Yeah the same store numbers when you look at advanced imaging meaning MRI being up 2% and CT 3.9% and PET/CT being up 6.3% is strong. What looks interesting is that routine imaging was slightly down as we do as I mentioned 77.8% of our business is routine imaging. So if routine imaging is down a point, but advanced imaging might be up 2 or 3 points than that kind of balances others out. So when we report in aggregate our same center was only up 0.1%. But in the modalities that really matter the advanced imaging we were up significantly. We also changed and reclassified a couple of our other exams and pulled it out of our volume numbers year-over-year and I think that may have had a little effect of the comparisons. But this doesn't concern us I mean this is the 10th quarter in a row where we’ve had positive same center volume trends. And we feel strong going into this final quarter with where we're halfway through the quarter already.

[Howard Berger:]

I'll make a comment that you alluded to about PET/CT scanning why it was up disproportionately to the other advanced imaging modalities. I'm pleased to report that our actual use of PET scanning is going up. We haven't added necessarily new PET/CT systems into our inventory. But what's happening is that growth in PET scanning particularly in three areas that we are uniquely able to participate in have started to take route. The first of that is prostate imaging, which combined with ultrasound scanning to do fused imaging has been extremely successfully in concert with the large urology groups in both on the East Coast and West Coast that we have relationships with. Secondly, as our mammography volume increases the amount of breast MR that we're doing as well as PET scanning for breast cancer has continue to grow. The third is that we are actively participating in a nationwide research program for new prostate scanning agents as well as Alzheimer scanning for PET/CT evaluation. And we are doing a disproportionate amount of that research relative to what is done in the other centers in the country. So that is a major driver for us and something that I think you'll continue to see us benefit from and invest in.

[Mitra Ramgopal:]

Good thanks, that was great. And my other question I just wanted to follow-up a little on the capitation business. I know you mentioned you're doing over $100 million on the West Coast and as you look to cover the opportunities on the East Coast, if you can give us a sense of your expectations in terms of being able to match the West Coast in terms of what kind of timeframe roughly you're thinking about? And do you need to make some substantial investments ahead of that?

[Howard Berger:]

Well as I alluded to in my early remarks, we're in active conversations with several participants on the East Coast. And we believe that we will be able to announce successful completion of some of these initiatives that will then continue to grow within the next three to six months. Relative to the any investments for this it will be relatively nominal investment. Because most of this business would be driven into RadNet network centers given the fact that we've already got the infrastructure and equipment in place in order to achieve the additional or see the additional capacity that will be driven by these contracts. Other tools that we have in place such as our utilization management and IT infrastructure will also be greatly beneficial to managing the risk and overseeing the utilization necessary to provide the kind of opportunity and profitability. And I can’t help but the reinforce that these capitation contracts come with relationships with medical groups that also have a significant fee-for-service or PPO component of their practices, for which we generally are the beneficiary of that since these referring physicians really want -- do want one stop shopping for their patients regardless of what their financial classification is for their health insurance. So we have seen that here on West Coast and we have every reason to believe that that same logic and opportunity exist on the East Coast and we I think have demonstrated our ability to both financially and clinically manage the risk appropriately.

[Mitra Ramgopal:]

Great, thanks for taking the questions.

[Howard Berger:]

Thanks Mitra.

[Operator:]

And we’ll go next to Ed Chrysler at Angelo Gordon.

[Ed Chrysler:]

Good morning, guys. Thanks for having the call. Mark you had gone over the AR build related to the East Coast I think commercial renegotiation and saw a kind of Q1 cash flow from ops kind of gone way down and a $28 million change of working cap. I did missed kind of however the timing that you had mentioned was it all within this quarter? And then when does that the new contract go into place and kind of expect to see the benefit of the increased rates? Thank you.

[Mark Stolper:]

Yeah. So we have been holding claims since July 1st of this year, with respect to one of our largest payers in our East Coast marketplace. And we have been in negotiation with that payer over a rate increase really since July, we have since completed that negotiation, which will result in a successful increase in our reimbursement and the reason why we were holding claims is because our goal, which we were able to achieve was to have that increase be retroactive to July 1st. And so we didn’t want to have any claims paid and then have to go back and show them the claims that were paid and try to get the differential in the increase for those claims. So we have been holding claims, we completed the negotiation a couple of weeks ago, we started to release those claims in batches to this payer and we expect to get all of this money in by year end. Just to give you an indication of how significant this was and how big this particular payer is. It was $80 million of gross charges that we were holding up, which will result in about $25 million to $30 million of additional cash that we will receive likely before end, we expect it to receive in all before end and that represents cash for our consolidated operations, cash for our JV as well as our physician partners and some professional services contracts that they have with hospital. So we are really pleased that we got this increase, it is a function of the relationship that we have with this payer, the importance that we have in their provider network and I think the recognition of the payer that although they are going to be paying a little bit more these services that the pricing that we provide them is at a significant discount relative to their alternative, which is to have their outpatient going into the local hospitals where we see a tremendous differential. So I think this is all good news, it shows the logic in our strategy and a lot of this AR build which looks like it’s built up in the last couple of quarters will dissipate by year-end.

[Ed Chrysler:]

Got you. And releasing that I mean the difference kind of between that accounts for the difference like a $12 million of cash flow from ops from the comp quarter versus three this quarter, that’s the delta there?

[Mark Stolper:]

Yes.

[Ed Chrysler:]

Perfect. Thanks very much.

[Mark Stolper:]

Otherwise we would have expected -- we withdrawn $1.6 million on our revolver at quarter end and if we hadn’t had this negotiation in health claims we would have not only had zero dollars drawn on our revolver, but we would have had a significant amount of cash in the bank.

[Ed Chrysler:]

Alright. One more while I have got you, please. On the guidance update, CapEx has gone up a little bit and when I think about kind of the math for free cash flow generation. CapEx has gone up from kind of a 45 to 50 guidance number in Q1, now the 55 to 58. EBITDA has been flat over that kind a guidance period, but yet free cash flow generation hasn't moved when we’ve kind of had maybe $10 million CapEx boost. How we reconcile that?

[Mark Stolper:]

Yeah I think it's somewhat of a timing issue with the additional CapEx that we're spending this year versus next year I think because of that additional CapEx we’ll probably towards the low end of the range on the free cash flow guidance we just chose not to change it.

[Ed Chrysler:]

Got you, understood. Thanks very much, guys.

[Mark Stolper:]

You’re welcome.

[Operator:]

[Operator Instructions] Gentlemen it appears I have no further questions for you at this time. I'll turn the program back over to you.

[Howard Berger:]

Thank you, operator. Again I would like to take this opportunity to thank all of our shareholders for their continued support and the 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.

[Operator:]

And once again ladies and gentlemen that does conclude our conference for today. And again thank you for joining us.