Akumin Inc. (NASDAQ:AKU) Q1 2023 Earnings Call Transcript May 14, 2023

Operator: Good morning. My name is Laura, and I will be your conference operator today. At this time, I would like to welcome everyone to Akumin Inc.’s 2023 First Quarter Results Research Analyst call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Zine, you may begin your conference.

Riadh Zine : Thank you. Good morning, everyone, and thank you for joining us for today’s presentation. My name is Riadh Zine, and I’m the Chairman and CEO of Akumin. I’m joined today by David Kretschmer, our Chief Financial Officer. I want to thank all of you for taking the time to join us on this call. In today’s call, I will provide an overview of Akumin’s Q1 results and discuss some of the factors that impacted our results in the first quarter. I will also review our recent progress regarding our key transformation and growth initiatives. David will go over some of our key operating and financial metrics. I will then conclude the presentation and then we’ll proceed to Q&A. There’s a slide deck that is meant to go along with our presentation today.

A copy of it is available for download from the Investor Relations section of our website at akumin.com under Events & Presentations. Before we begin, let me remind you that certain matters discussed in today’s conference call or answers that may be given to questions asked could constitute forward-looking statements or information that are subject to risks or uncertainties relating to Akumin’s future financial and business performance. Actual results could differ materially from those anticipated in these forward-looking statements. Please refer to the disclaimer at Slide 2 of our presentation as well as the full forward-looking statements section of our earnings press release. The risk factors that may affect results and these forward-looking statements are detailed Akumin’s periodic results and public disclosure.

These documents can be accessed under our public disclosure at sec.gov and sedar.com. We may also refer to certain non-GAAP measures during this conference call, such as EBITDA, adjusted EBITDA, and adjusted EBITDA margin. You can find information regarding these non-GAAP measures, including definitions again, on Slide 2 of our presentation, as well as the non-GAAP measures section of our earnings release. A reconciliation of EBITDA and adjusted EBITDA to net loss, the most comparable GAAP measure, is included in the presentation as an appendix. We have not provided a reconciliation for any forward-looking non-GAAP measure referred to in this presentation as we would not be able to produce such a reconciliation without unreasonable efforts.

Turning to our Q1 results. On Slide 3, you can see the same-store consolidated volume growth in our key radiology services and our patient starts in our oncology segment versus our results in Q1 on 2022. Specifically, our MRI volumes were up 4%, which reflected strong demand for MRI procedures and alleviation of some of the clinical staff shortages that persisted in prior quarters. Our PET/CT volumes were up an impressive 16.1%, a strong demand, particularly from our hospital partners, continued for that modality. Total oncology patient starts were up 7.6% as momentum continues to build in this segment after repositioning efforts in 2022. Q1 revenue of $187.6 million was up 0.7% from $186.3 million in the first quarter of last year. Adjusted EBITDA of $33.1 million was up $1.1 million, a 3.4% increase from $32 million in the first quarter of last year.

Adjusted EBITDA margin of 17.7% is also up 0.5% from the first quarter of 2022 levels. Recall that Q1 is our seasonally slowest quarter. And given our high operating leverage, lower volumes in the first quarter typically put downward pressure on margins in that period. On a consolidated basis, accounts receivable at quarter end were $114.7 million versus $114.2 million at the end of Q4 2022. This equates to 56 days of sales outstanding near record low levels. Turning to Slide 4, we were pleased to see renewed growth in volumes within our radiology segment. We experienced a return to normal growth in our MRI volume because of reduced impact from the constraints we faced in the second half of 2022. More specifically, clinical labor shortages were less impactful as the labor market pressures are moderating and our initiatives to address them begun to pay off.

Our PET/CT volumes continue to demonstrate very robust growth as demand for that modality remains strong, particularly from our hospital partners. This impressive growth in our PET/CT volume is driven by an expansion of clinical applications and the development of new tracers. However, in the first quarter, this organic growth in our radiology segment was negatively impacted by a revenue loss from certain Florida facilities closed for renovations in the period. In our Oncology segment, our focus is now firmly on organic growth following the repositioning efforts we undertook in 2022. We were pleased to see growth continues in patient starts. As you also know, we embarked on a significant organizational transformation in 2022 to align and streamline all areas of our business.

These initiatives resulted in the realization of approximately $23 million in synergies. Although last year, they were somewhat offset by inflationary pressures and other cost increases during the year. We continue to implement initiatives related to rationalizing business processes, consolidating systems, and optimizing our procurement by leveraging our enhanced scale. As we indicated in our Q4 call, we expect to realize an additional $25 million in synergies from these efforts on a run-rate basis by the end of 2023. As we have highlighted in the past, there is significant operating leverage in Akumin’s business model. As such, we are very focused on increasing our capacity utilization and drive additional volumes through existing sites. On that front, we continue to focus on improving scans and treatments per labor hour, especially in an environment where clinical labor shortage is an important consideration.

We have also enhanced our scheduling and call center capabilities, and we are starting to see the benefits of these measures in reduced abandoned rates and improved utilization. We also continue to evaluate our fixed site footprint to identify opportunities for further operational improvements related to underperforming sites. As you know, another key element of Akumin’s strategy is to digitize the business to streamline operations in order to enhance patient care and the patient experience. The investments we’ve made in the patient journey and our remote technologist capabilities are examples of the initiatives we have underway. Part of the strategic rationale for the Alliance acquisition in 2021 was to better position Akumin to service hospitals and health systems partners in their ever-growing needs for out-patient service delivery functionality and capability.

With the extensive suite of services and facilities we have in place, including network density in key markets, we are an attractive out-patient partner for hospitals and health systems. While these relationships will take time to formalize, we continue to explore potential opportunities to leverage our capabilities for the mutual benefit of Akumin’s hospital partners. I will now turn the presentation over to David, who will walk us through some of our key operating and financial metrics.

David Kretschmer: Thank you, Riadh. And good morning, everyone. As Riadh mentioned at the outside, I will review some key operating and financial metrics of our business for the first quarter. Starting with Slide 6, we illustrate that while Akumin’s platform offers a diverse suite of services, we are very focused on areas of high growth and high value-added modalities. As you can see, 54% of our radiology revenues derived from MRI procedures making MRI volumes a key driver of that segment. Akumin is also a significant player in cancer diagnosis and treatment with 26% of our radiology revenues from PET/CT and 16% of our total revenues coming from our oncology division. These modalities are critical to delivery of quality patient care and are utilized by a variety of physician specialties across the care continuum from screening to diagnosis to treatment.

As we have highlighted previously, we undertook an initiative in 2022 to consolidate our fixed-site radiology footprint to eliminate underperforming sites. We now operate 100 radiology fixed sites and continue to evaluate all sites to identify opportunities to optimize our fixed site footprint and improve operations. As you know, Akumin is clearly well-positioned to benefit from the ongoing shift to out-patient service delivery as we partner with hospitals and hospital systems to transition care to lower cost sites of delivery. We continue to generate over 95% of our revenues from out-patient procedures as you can see on Slide 7. We have a balanced revenue mix between third-party payers for out-patient services and hospitals with no one customer representing more than 4% of our consolidated pro forma revenues.

As preferred out-patient solution provided to hospitals, half of our revenues come from our hospital customers. Balance of revenues or reimbursement for patient procedures paid by third-party and government payers. We expect the revenue share of hospitals to continue to grow as both existing and new hospital customers and partners search for out-patient solutions in both radiology and oncology. Our financial performance is primarily driven by procedure volumes. Given that the current mix of our business includes both hospitals and independent sites, we track actual scans by modality across our radiology platform. Previously noted MRI and PET/CT scan procedure volumes are the biggest contributors to the performance in our radiology segment. These volumes, together with the radiology procedures as a percent of revenues as illustrated on Slide 6, are the key metrics we use to track our operating and financial performance in radiology.

In Slide 8, you can see the MRI, PET/CT procedure volumes over the last four quarters in 2022 and the percentage same-store changes in those periods. As we noted in our last call, growth in MRI volumes in the second half of 2022 were negatively impacted by labor constraints, particularly in shortage of clinical staff. We took measures in late 2022 to mitigate these pressures and have started to see some benefits augmenting our ability to perform more MRI procedures. It’s important to note that as the market leader in PET/CT, we have seen strong growth in that modality in recent years as pharmaceutical industry continues to develop improved tracers, which can allow for earlier detection of diseases. As we previously mentioned, labor constraints are less of a factor in PET/CT, given the highly specialized skill sets of clinical personnel for this modality, and we are better able to capitalize on the strong demand for these services.

In Oncology segment, we track activity level by patient starts volume. As you can see, patient starts grew in Q4 as we completed the review and repositioning that business in Q2 and Q3 of last year. We expect our oncology division to continue this improving growth trajectory over time, given the compelling value proposition of radiation therapy we bring to our hospital partners in this modality, including our mobile fleet, which keeps programs treating patients while replacing equipment and our significant experience with Varian’s Halcyon, new treatment platform which provide faster and more cost-effective treatments. On Slide 9, we present quarterly revenue and adjusted EBITDA trends for Radiology and Oncology segments. As you can see, the contribution from our Radiology and Oncology segments have been consistent over the past five quarters, with Radiology ranging between 83% and 84% of total revenues and Oncology making up the balance of the 16% to 17%.

For Radiology segment, our first quarter adjusted EBITDA margin was 19.3% before allocation of corporate services. Our Oncology segment is higher margin with an adjusted EBITDA margin of 32.6% for the allocation of those corporate services. Note, as we had already mentioned, that first quarter is typically our seasonally weakest quarter as annual benefit plans rollover and winter weather in some regions results in lower volumes. As you can see on the chart on the left, the seasonality impact was less pronounced in 2022 part because of the impact of Hurricane Ian in Q3 and the clinical labor shortage we discussed in our Radiology segment, which impacted us negatively in the second half of 2022. In addition, our Oncology segment revenues were essentially flat in 2022 as we undertook the repositioning of that business.

As we have previously stated, our Oncology segment is typically a high growth activity and we expect to see stronger growth in this segment in future years as business development efforts are now our renewed focus. The chart on the right illustrates the quarterly adjusted EBITDA and EBITDA margin over the past five quarters. The impact of seasonality in our business can be seen more clearly in this chart. Given the high operating leverage in our business, the segment volumes in Q1 with higher labor costs put a bit of downward pressure on margins for the period. That noted, we did see some modest year-over-year growth in both revenue and adjusted EBITDA in Q1 2023, and we believe we have established a solid foundation in which to build. Turning to Slide 10, you see the annual last trailing 12-months financial performance in our radiology and oncology segments and the consolidated adjusted EBITDA.

Note that the 2021 results and pro forma results, assuming the legacy Akumin Alliance businesses with the combination of which was completed in September 2021 were combined for the entire period as well as the adjusted for the fourth quarter 2021 divestiture of Alliance Oncology of Arizona. As you see in the chart on the left, the radiology segment contributed $627 million of revenue for the trailing 12-month period, while representing approximately 83% of total revenues; and oncology segment contributed $124 million of revenue or approximately 17% of the total. As we have mentioned on prior calls, growth in consolidated adjusted EBITDA as reviewed in recent periods, we have focused on internal integration and transformation initiatives and address labor constraints in 2022.

Going forward, we are confident that we’ll see volume growth driving revenue and EBITDA, given the demand for our services and the operational improvements we have made in improving labor market conditions. Slide 11 is a bridge from our adjusted EBITDA to our free cash flow in the first quarter. As you can see from the slide, our cash position decreased by approximately $14 million in the quarter. When you look at our balance sheet, you’ll note that our accounts payable fell by $11 million as we accelerated payments at the end of the quarter in anticipation of our migration to a single general ledger platform on April 1. Business is the largest driver of the change in working capital. And in past quarters in that service, finance lease payments continue to have meaningful impact on free cash flow.

And as you know, cash minority interest primarily relates to oncology joint ventures with hospital partners and as a function of performance of these centers is not a fixed obligation as these partnerships become more profitable and generate more cash for cash distributions to our minority partners increase as well. It should be noted that we incurred over $7.1 million of cash costs in Q1, which were related to site repairs in our Port Charlotte facility, which was particularly hard hit by Hurricane Ian, as well as our ongoing restructuring efforts. We have receive partial reimbursement on the Port Charlotte repairs and will be recovering more. In 2023, we continue to expect to reduce burden of restructuring charges together with the additional synergy capture we had discussed earlier, which will benefit our free cash flow.

This will be offset somewhat by additional cash interest payments related to the Stonepeak subordinated notes, which will cash pay in the later part of the year. Turning to Slide 12, we present an overview of our 2023 guidance announced in the Q4 call. As a reminder, for 2023, we expect consolidated revenues to be in the range of $765 million to $775 million and adjusted EBITDA to be in the range $150 million to $160 million. Our 2023 guidance reflects the fact that some ongoing labor constraints and cost inflation persists in some markets, although we have seen some improvement on these fronts thus far this year. Turning to CapEx, as we did in 2022, we continue to refine our capital expenditure plans to ensure the most efficient deployment of equipment better aligned with our strategic priorities.

We continuously evaluate our markets and prioritize those based on our criteria that have the greatest near-term potential for growth. We continue to expect total CapEx to be in the range of $55 million to $65 million, with approximately 50% allocated to growth CapEx for new customers and new sites and the balance for maintenance CapEx. Recall that we define maintenance CapEx we spend for existing customers at existing sites for growth CapEx is primarily oriented towards new hospital customer partner acquisition, as well as capacity expansion. Our investments in new customers and sites continue to the high return, typically with a four-year payback on the growth capital. We anticipate total CapEx to be funded by approximately 20% in cash and the balance to be financed by combination of OEMs, equipment, finance companies, and local banks.

Higher financing cost may be a bit of a headwind in coming quarters. Turning to Slide 13, we depict our capital structure at the end of Q1 2023. As you can see, Akumin secured leverage of 5.6 times for unsecured leverage is now 2.8 times. As an organization, we are focused on reducing this leverage over time. Near term drivers deliver reduction will come from increasing EBITDA as a result of synergy capture, network rationalizations, technology-driven standardization, and the streamlining of service delivery, as we outlined in our Q4 call. Note that as very significant shareholders, we are highly incentivized to prudently optimized capital structure, and we’ll continue to evaluate options to do so as the market conditions permit. And I’ll turn it back over to Riadh to wrap up before we take questions.

Riadh Zine: Thanks, David. That concludes the prepared remarks portion of the presentation. I hope that we provided more color on the performance of the first quarter. We would now ask the operator to start the question-and-answer period.

Q&A Session

Operator: Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Noel Atkinson from Clarus Securities. Please go ahead.

Operator: Thank you. Your next question comes from the line of Endri Leno from National Bank. Please go ahead.

Operator: Thank you. [Operator Instructions] Your next question comes from the line of Rishi Parekh from JPMorgan.

Operator: Thank you. There are no further questions at this time. I’d now like to turn the call back over to Mr. Zine for any closing remarks.

Riadh Zine: Thank you very much again. Thanks, everyone, for your participation today. Again, I hope we provided more color on the first quarter. And we want to again thank all of our stakeholders, thank all of our staff and team members for their continued effort and support in transforming Akumin. And hopefully, the platform that we’re building will only see a return as we’ve witnessed in the first quarter to more organic growth, which will further position the company as we streamline our service delivery for more hospital partnerships, which we — really is the ultimate goal is more partnerships on both radiology and oncology side. Thank you again and have a wonderful day.

Operator: Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your line. Have a lovely day.