RadNet, Inc.
Q4 2007 Earnings Call Transcript

Published: 31 Mar 2008

[Operator:]

Good day ladies and gentlemen welcome to RadNet, Inc. fourth quarter and full year 2007 earnings conference call. (Operator Instructions) I will now turn the conference over to Mr. John Mills of ICR please go ahead Sir.

[John Mills:]

Thank you, good morning ladies and gentlemen, thank you for joining us to day to discuss fourth quarter 2007 earnings results. On the call today, from the Company, are Dr. Howard Berger, Chairman and Chief Executive Officer of RadNet and Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet. Before we begin today, we would like to remind everyone of the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. The following prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore, undue reliance should not be placed upon them. For more detailed discussions of factors that could cause actual results to differ materially from those projected from any forward-looking statements. We refer you to RadNet recent 10K for the 12 month period ended October 31, 2006, form 10KT for the two month transition period and the December 31, 2006, form 10K for 12 month period ended December 31, 2007, to be filed and the 10Qs for the three month period ended March 31, June 30 and September 30, 2007, filed with the Securities and Exchange Commission. With that, I would like to turn the call over to Dr. Howard Berger.

[Howard Berger:]

Thank you John and good morning everyone and thank you for joining us today. On today’s call, Mark Stolpher and I plan to provide a brief review of our first full year since the acquisition of Radiologix, which occurred in November of 2006. We will also provide you with highlights from our annual and fourth quarter 2007 results, issue financial guidance for 2008, discuss in more detail some of our recently announced initiatives and talk about why we think we are positioned for further growth and success. I would like to thank all of you for the interest in our Company and for dedicating a portion of your day to participate in our conference call this morning. I would like to start today’s call by saying that we are extremely proud of what we have accomplished since acquiring Radiologix almost 15 months ago. As Mark and I were preparing our remarks for this call, we began to reflect on all that our Company has achieved in this short time. Much of what we have achieved has contributed to our better than projected performance in 2007 while some of our more recent accomplishment have yet to be realized in our financial statements. Though some of you on this call have tracked our progress through the last 15 months, I believe it is worthwhile to reflect on many of our accomplishments some of which of which we will publicly announce subsequent to our last conference call. After I discuss these accomplishments, I will turn the call over to Mark, who will review our 2007 annual and fourth quarter performance. I will conclude the prepared portion of the call this morning by discussing the future opportunities for RadNet and why I believe we are well positioned to remain a leader in the outpatient diagnostic imaging industry. The principal reason for discussing our accomplishments is that I believe that these accomplishments when viewed as a whole contain several things regarding our strategy that I believe cannot be emphasized enough. As I list these accomplishments and describe them in more detail, they illustrate the following elements of what we believe is essential to our success, including

[Mark Stolpher:]

Thank you Howard and thank you all for participating in our fourth quarter and full year 2007 conference call. I am now going to briefly review our full year 2007 and fourth quarter performance and attempt to highlight what I believe to be some material items. I will also attempt to give some further explanation of certain items in our financial statement as well as provide some insights into some of the metrics (inaudible) of our fourth quarter and full year 2007 performance. In my discussion, I will use the term EBITDA, which is a non-GAAP financial measure. The Company defines EBITDA as earnings before interest, taxes, depreciation and amortization each from continuing operations and adjusted for losses or gains on the disposable equipment, debt extinguishments and non-cash equity compensation. EBITDA included equity earnings in unconsolidated operations, subtracts minority interest in subsidiaries, and is adjusted for non-cash extraordinary and one-time events taking place during the period. As many of you may be aware, we delayed our 10K filing by approximately two weeks from our intended filing date of March 17, to give us and our auditing firm, Ernest and Young, additional time to complete the audit of our financial statements. As some of you have read in our press release this morning, the additional time was necessary to identify, analyze and adjust for two accounting issues. One pertaining to our medical malpractice insurance and the other relating to the collectability of old accounts receivable. Before I begin reviewing the 2007 full year and fourth quarter performance, I’d like to take a few moments to explain the two issues in greater detail, which required us to take certain non-cash accrual adjustments to our 2007 financial statements. The first issue regarding our malpractice policy resulted in our addition of a $1.7 million liability at December 31, 2007, relating to incurred but not reported, otherwise known as IBNR malpractice claims. We have what is called a claim made policy and we determine that we were not adequately reserved for IBNR exposure. We engaged a third party actuarial firm to calculate our accurate IBNR exposure, which approximates the cost of KL coverage should our malpractice insurer go out of business or should we stop paying premiums as of December 31, 2007. Also related to this issue, we recorded a non-cash expense of $170,000 for the year and to December 31, 2007 for medical malpractice. The portion of the liability, we booked associated with 2007. In order to avoid this issue in the future, we will get an actuarial update every quarter and true up our liability to the updated IBNR calculation. The second issue involved a revision to our estimated collectability of accounts receivable on our balance sheet related to dates of service prior to December 31, 2006. Following an in-dept analysis performed by us and audited by Ernest and Young, including the analysis of historical collections statistics by payer and by aging, we determined to record an $8.5 million non-cash allowance related to these 2006 and prior accounts. In May of 2007, we converted certain accounts receivable balances including those for which the national reserve is being recorded, to the Radiologix billing system and changed the personnel responsible for collecting these accounts. We believe this conversion materially contributed to slower than anticipated collections on these accounts in questions resulting in our decision to revise our estimate of their future collectability. Although it is possible that we may still collect a portion of that which we are reserving, we believe at this time the adjustment is prudent and appropriate. I cannot emphasize the following point enough; this issue regarding collectability of 2006 and earlier accounts receivable had no impact on our accounts receivable before our revenue recognition related to fiscal 2007. As part of the exhaustive study that we performed with Ernest and Young, we analyzed the revenue that we reported in 2007 and its future collectability. Both we and Ernest and Young deemed our collectability estimate as of December 31, 2007, for 2007 dates of service to be appropriate. As a practical matter, cash collections have been strong. Through March of 2008, we have already collected approximately 90% of the revenue that we accrued for 2007. From an accounting perspective, the $8.5 million non-cash adjustment is what is termed a change in accounting estimate related to a prior period. As such, the proper accounting procedure is to book the non-cash adjustment in the current accounting period, i.e. the fourth quarter, even though the adjustment is to correct a prior period estimate. Thus, the results of this accounting adjustment in the fourth quarter distorts the quarter’s and the full year’s performance by decreasing our net accounts receivable at year by $8.5 million and more notably, lowering our revenue by $8.5 million. Thus, for the purpose of this call, I will talk about adjusted revenue defined as revenue adjusted by backing out this $8.5 million accounting entry. With all that said, I would like to now review our full year 2007 and fourth quarter results. For the year ended December 31, 2007, RadNet reported adjusted revenue of $434 million. Adjusted revenue increased 4.3% from $416.3 million, which would have been the revenue in 2006, if the RadNet Radiologix combination had occurred prior to January 01, 2006. For 2007, we have reported EBITDA of $85.3 million. EBITDA increased 9.5% from $77.9 million over the prior pro forma 2006. It is important to note that adjusted revenue and EBITDA for 2007 is reflective of the full impact of the Deficient Reduction Act Medicare reimbursement cuts. Whereas 2006 pro forma results, to which I am comparing them, do not include these reimbursement cuts. The negative impact from the DRA is approximately $16 million of both adjusted revenue and EBITDA for RadNet for 2007. I mentioned the DRA to highlight the following point. When compared with 2006, a period not subject to the DRA, our 2007 results of increased adjusted revenue and EBITDA illustrate that we have substantially improved operational performance. This has been achieved through increasing scan volumes at our centers and lowering our operating costs. Overall, we have performed 2,709,502 procedures in 2007 as compared to 2,540,945 total procedures in pro forma 2006. This is an overall increase of 6.6%. MRI procedures increased 5.6%, CT procedures increased 3.5%, PET/CT procedures increased 22.2% and routine imaging procedures and this includes X-ray, ultrasound, mammography and all other exams, increased 7.1% in fiscal 2007. Net loss for the year, not backing out the $8.5 million accounts receivable allowance accrual was negative $18.1 million or $0.52 per share compared to a net loss of 6.9 million or $0.33 per share reported for the fiscal year ended October 31, 2006. Affecting 2007 net income were certain non-cash expenses and one time non recurring items including the following

[Howard Berger:]

Thank you Mark, I will make my comments brief as the call is running a little late. In short, the opportunities that we encountered and pursued in 2007, has built a foundation for what I believe is a very exciting opportunity for 2007. From my earlier review of our accomplishments over the last 15 months, it is obviously that we have been aggressive in our approach to expanding the business. In the aftermath of DRA, I believe that the types of opportunities that we saw in 2007 will continue. There will be further consolidation in the industry; smaller operators will probably continue to go out of business and there will be opportunities to buy new and used equipment at favorable prices. We also believe very strongly, there will be further pressure on those who abuse imaging from self-referral and block leasing arrangements. Our industry will continue to grow as it has for each of the last 20 years. What we do is essential to how medicine is practiced today. Technological advances will continue to drive further applications. That being said, 2008 will be a year of digestion. What I mean by this is that we are extremely focused on optimizing the many initiatives to which we have dedicated our time and efforts in 2007. We have worked very hard to pursue these initiatives and we are determined to insure that they will reap their full benefit. We have grown rapidly and absorbed in that growth in a way that optimizes our operations will be a priority in 2008. I will close by reiterating what I touched on during the last conference call by saying, I can’t remember a time in which I have seen more and been more excited about the future growth prospects and the opportunities that lie ahead for our Company. Particularly included in that are the opportunities that we see in a comprehensive breast disease management initiative that will be kicked off in the second quarter of 2008. With the momentum we take into 2008, we see a bright future for the Company, a future that will transform not only our Company but perhaps will have a hand in bringing change to the outpatient imaging industry itself. Operator, we are now ready for the question and answer portion of the call.

[Operator:]

(Operator Instructions) We will have our first question from the line of Art Henderson, Jefferies and Company.

[Art Henderson:]

Good morning and thank for all the detail. A couple of questions for you, first, in terms of your guidance could you describe what sort of assumptions you are getting to get to the low end versus the high end of the EBITDA guidance for ’08?

[Howard Berger:]

The lower end of the guidance would anticipate the current operations along with the addition of the already announced initiatives that we have publicly disclosed. For example, the Rolling Oaks transaction, the InSight transaction that we are about to close and incorporating with that the acquisition that occurred in the fourth quarter of last year that will become fully implemented in 2008. The higher end of the range would include some contribution from the expansion that I talked about of some existing centers, replacement of the three centers that we talked about in the Radiologix markets that needed replacement. As well as, contribution from breast disease, management and the other new center that we built in Rancho Mirage. We are a this point not able to as accurately quanta Tate the amount of that impact; but, the successful operation of those would get us to the higher end of those ranges. The range does not talk about any further acquisitions or other activities other than what we have already talked about in the prior remarks.

[Art Henderson:]

Okay that is helpful. Just to touch on something you just said, should we expect that you are going to be doing fewer acquisitions this year and that you are going to spend more time integrating or are you going to try and keep a balance of looking for certain things?

[Howard Berger:]

I think the last comment; the balance is probably the way we will approach this. The focus, as I mentioned, is to make sure that all of the initiatives in 2007 as well as the first quarter get the full opportunity for contribution to the Company's performance. We will look at acquisitions which we find attractive in terms of consolidation opportunities; but, that will be something that we will probably be less aggressive about in the first two or three quarters of this year. One of the other things that we again will be putting a lot of emphasis on is the breast disease management, which will essentially get us into oncology and other exciting opportunities.

[Art Henderson:]

Yes and I am glad you mentioned that; can you talk about that a bit more in detail as to what you are thinking and how that gets rolled out and what the opportunities are in breast disease management?

[Howard Berger:]

It is pretty well accepted throughout the industry that the entire process for a woman who has an abnormal mammogram and then ultimately perhaps gets diagnosed with breast cancer can be a lengthy and very anxious period of time for a woman. Statistically speaking, about one out of every eight women will develop breast cancer at some time in their life and generally the process by which a woman goes through is first have a mammogram, has to come back if its suspicious or abnormal. Once the abnormality is further defined, their may be biopsies necessary, which generally can be performed in our imaging centers either stereotactic ultrasound or now even MRI guided biopsies. Once the diagnosis is more fully established, there has to be a referral to a surgeon, the surgeon then perhaps does some of their own diagnostic workup including other more definitive surgery and biopsies and the patient then is referred to an oncologist. That process is not uncommonly taking women six, eight weeks, sometimes three months during which, you can well imagine, it completely puts them out of commission as well as the anxiety for their family. What we are doing is incorporating that entire process into one center of groups of centers that will allow women to have a mammogram, the diagnosis, be immediately referred to one of our surgeons and ultimately in concert with our oncologist and streamline the procedure. One of the things that make this exciting and effective is that we will be able to capture in an integrated manner, all of the imagining, which has become so critical for the diagnosis and treatment of breast cancer. The newer applications that have been developed, really in the last couple of years, including PET/CT, breast MRI scanning, newer types of diagnostic mammography, biopsy procedures and other specialty imaging has transformed the way breast oncology, just as cancer, is practiced. By having this in an integrated model, it will allow us to both streamline the process to which a woman gets the diagnosis and ultimately starts treatment and will allow us to include within that the ability to capture all of the imaging and perform it, we believe, at a much higher level. The potential implications of that, for our centers, is that based on this model and with the large number of women’s health centers that we have, imagining centers, in particularly southern California and starting now in northern California, will allows us to integrate all of these processes and make this a far better outcome for the patients and a better business opportunity for us. To initiate this, we have purchased the practices of three of the most prominent surgeons and oncologists in all of southern California. The entity is known as BreastLink, which is a trademark name and can be looked up on the internet and it involves people who have worked at the highest academic levels here in California and who have established a reputation and only handle breast cancer as a part of their practice. We see this as an opportunity different from the way, perhaps, others have begun to approach oncology through radiation therapy and have focused our attention on the medical oncology side starting first with breast cancer and perhaps looking for opportunities to expand that and again be able to capture the imaging and other specialty procedures associated with this very serious disease.

[Art Henderson:]

Okay that is very helpful, thank you very much.

[Operator:]

We will go next to Ann Hynes, Leerink Swann.

[Ann Hynes:]

Getting back to guidance, can you give us your assumptions for organic growth evolve when it comes to volume pricing, bad debt?

[Mark Stolper:]

With respect to volumes, we are assuming a 3% increase in our volumes overall. We would expect at a blended basis, we expect the PET/CT, obliviously, to continue to grow faster than that. We are taking a conservative approach with respect to our base business. With respect to bad debt, we assume between a 6 and 7% of net revenue, which is where it is today, which is reflective of the higher bad debt percentage that Radiologix has because of its hospital based billing contracts. What was the third part of your question?

[Ann Hynes:]

Pricing.

[Mark Stolper:]

Pricing, my model assumes a 1% decrease in overall private payer pricing.

[Ann Hynes:]

When you said you were taking a conservative approach to your base business, is that economy driven or do you just think you are being conservative and leaving room for upside?

[Mark Stolper:]

I said this a number of times that if we had been growing faster than 3% as evidenced in our press releases the last few quarter, at some point you run into capacity issues patient care can deteriorate. You can’t always continue to grow your business at the types of same store sales levels that we have today. My long-term model has a 3% same store sales growth rate to it and that is what we are comfortable in incorporating in our guidance.

[Ann Hynes:]

Does your guidance include any other markets that you would input some of the digital mammography? Don’t you have some capacity in California to upgrade that technology or your recent acquisition in Delaware?

[Howard Berger:]

Yes Ann, Delaware has no digital mammography currently and that is again our plans to implement that just like we have now done and almost completely finished in Maryland and there are some additional digital mammography expansion opportunities here in California, although, we have been working on that program now for the last six months.

[Ann Hynes:]

Are you providing any kind of free cash-flow guidance?

[Mark Stolper:]

Not explicitly but if you were to take the EBITDA range that we gave, we also gave a maintenance level CapEx number as well as an expected cash interest or actually total interest expense. We, I believe, gave you enough information to back into a steady state free cash-flow number.

[Ann Hynes:]

Right, thank you.

[Operator:]

Your next call is from the line of Rob Mains, Morgan, Keegan.

[Rob Mains:]

Good morning, one follow up to the question on the same store growth; I might have missed this but did you give same store fourth quarter growth in overall procedures? I have the specialties.

[Mark Stolper:]

I believe I did; let me go back to my own notes. The routine procedures, which includes x-ray, ultrasound and mammography, Rob, the same store sales growth of 8.6%.

[Rob Mains:]

I know; my question is if you look at all procedures, routine plus PET plus CT…

[Mark Stolper:]

No, I did not do that as an average. But offline, I am happy to do that for you. It is not a difficult calculation.

[Rob Mains:]

I would imagine on a weighted basis, you would be closer to that routine number than where you were for MRI and CT, right?

[Mark Stolper:]

It weights closer to that because almost 77% of our business on a volume basis, scan basis, is routine.

[Rob Mains:]

Okay, fair enough, if I look at the guidance for EBITDA and can of back in to where the margins are, obviously, above where you were in fourth quarter, kind of a steady state basis, is that a reflection of seasonality which we are building into the fourth quarter? You mentioned that you have some timing issues that happened in Q4 or is there some significant improvement that you are expecting on an operating EBITDA basis?

[Howard Berger:]

Rob, I think there is some seasonality there. We say last quarter from fourth quarter related to some adverse weather conditions on the east coast as probably most of you who are on the call are from the east coast know that December, January and even into February was a rather severe winter and it did affect a number of our centers even those that are use to some of the harshest conditions; but, perhaps like in Rochester. That being said, the other part of that was the way the holidays fall this year. Both December 25 and January 1 were on Tuesday and had a substantial impact on lower volumes during those two weeks than we might experience in a year where the holidays fall either on a Monday or on a Friday. I believe that based on the experience that we had in the fourth quarter, we will project some seasonality and see some impact this year in the fourth quarter again as I think the holidays flip from Tuesday to Thursday, which doesn’t necessarily make it better for us. Even less having had that experience last year, we will certainly reflect to do a little bit less. That being said, the fourth quarter though should be benefitted by all the initiatives that we described being fully operational by the third and fourth quarter. It will make it a little more challenge for us to compare the fourth quarter of this year to the fourth quarter of last year as we outline a lot of the changes that occurred to the Company based on acquisitions, expansion of centers and the implementation of four or five new centers.

[Rob Mains:]

At a margin basis, what would you experience in the second and third quarter that we should view as more normal than what happened in the fourth?

[Howard Berger:]

I would say it is on the low side. I would expect it to be a little better. Remember by the end of next year, all of the integration opportunities for Radiologix will have been completely realized so that there will be some other benefits in each of the quarters of this year in particularly in the second, third and fourth.

[Mark Stolper:]

Yes, our EBITDA margin is running close to 20% maybe a hair higher than 20% now and we believe that there is an opportunity to increase that by 200 to 300 basis points.

[Rob Mains:]

Apropos to that it has been about four months since you first talked about Papastavros, anything changed there in term of the profile of the whole operations revenues, margins, anything like that?

[Howard Berger:]

No, not that we have seen now. We are very comfortable with the practice; we think there is a lot of growth opportunity. There has been an under investment in both systems and equipment in that market, particularly as I mentioned earlier. We will be implementing full digital mammography there, which given their volumes will have a substantial impact on their revenue along with some other initiatives that we have. We view the Papastavros acquisition with every bit as much enthusiasm as we first announced it and we have been keeping very close to the operations there ever since we announced the acquisition.

[Rob Mains:]

Just to clarify, the slow digital mammo conversion that is embedded in your CapEx and revenue EBITDA guidance? My last question, the cash interest expense guidance for ’08, you talked about items that made the GAAP interest expenses different from cash in ’07 and do those go away for the most part in ’08?

[Mark Stolphen:]

No, those will continue. Deferred financing costs such as related to the GE credit facilities are being amortized over the life of the credit facility. Those have another five years before they write off and its being amortized on a straight line bet basis. This swap is a little more difficult to predict; because essentially that one swap which goes through our P&L is market to market every month and to the extent that we have a loss on the mark to market, it is a non-cash hit to our interest expenses to the extent that month it’s a gain, it is a benefit to the interest expenses. What that swap is doing is providing more volatility in our income statement and it is very difficult to predict. That one particular swap does expire in April of next year. At least it will be off our P&L at that point.

[Rob Mains:]

For modeling purposes, we have to add at least an extra 1.6 million (inaudible) benefit from the swap.

[Mark Stolphen:]

I am sorry Rob; I misunderstood your original question. The interest expenses number that is there is the total interest expense not a cash interest expense. It compares to the interest expense you see on our income statement this year, which was a hair more than 44 million. Rob Mains – Morgan, Keegan Yes, it is. That is very helpful, thanks a lot.

[Operator:]

That concludes our question and answer session; I will turn the conference over to Dr. Berger for additional closing remarks.

[Howard Berger:]

I want to thank you all for joining us this morning and taking time out of your busy day. I hope that the conference has been useful in giving you some insight the Company's performance and initiatives and we look forward to talking to you again when we have our earnings call for the first quarter, which would be in May. Thank you all and have a good day.

[Operator:]

That concludes today’s conference. You may disconnect.