RadNet, Inc. (NASDAQ:RDNT) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good morning, and welcome to the RadNet, Inc. First Quarter 2023 Financial Results Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is recorded. I would now like to turn the conference over to Mark Stolper, Executive Vice President and Chief Financial Officer at RadNet, Inc. Please go ahead.

Mark Stolper: Thank you. Good morning, ladies and gentlemen, and thank you for joining Dr. Howard Berger and me today to discuss RadNet’s first quarter 2023 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 US 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, 2022. 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 first quarter 2023 results; give you 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 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. Let’s begin. I am very pleased with our performance in the first quarter. It was the strongest first quarter in our company’s history with record revenue and EBITDA. Relative to last year’s first quarter, our core Imaging Center segment revenue increased 13.9%, and Imaging Center EBITDA increased 26.2% from last year’s first quarter.

This strong performance resulted in improved EBITDA margins, increasing from 12.2% in the first quarter of 2022 to 13.6% in the first quarter of 2023, an improvement of 140 basis points. This improvement was the combination of strong volumes, careful management of expenses, and an improving labor market. With respect to volumes, we are experiencing heavy demand in virtually all of our markets. Aggregate procedural volumes increased 14.0% and same-center procedural volumes increased 9.3% compared with the first quarter of 2022. This performance is the result of a combination of several factors. First, the aging and growing population in our markets is driving increasing utilization for diagnostic imaging services. As people age, we rely on diagnostic imaging with greater frequency.

On average, for example, senior and Medicare patients utilize imaging two to times more frequently than patients under the age of 65. As baby boomers continue to age and life expectancy continues to increase, we expect this utilization trend to continue. Second, technology in our industry continues to evolve and improve, creating additional medical indications for ordering diagnostic imaging procedures. Advances in MRI technology and post-processing software have shortened scanning times and improved image quality. New contrast materials and radioactive pharmaceuticals are driving novel applications such as PMSA, or prostate-specific membrane antigen, PET scans, and Alzheimer’s imaging. Lastly, and perhaps most significant, we are benefiting from a shift in site of care.

More and more outpatient volumes are being shifted from hospital-based facilities towards freestanding outpatient facilities, where the cost to patients and the insurance companies are substantially less. Not only is the cost lower, but we strongly believe the quality and the patient experience is improved in well-run outpatient facilities like the ones we operate. We do not see an end in sites to these industry trends that are driving procedural volumes and believe that these trends will continue to help drive our consistent same-store performance for years to come. On the labor front, we are experiencing some stability and improvement. We have been more successful in filling open positions and have been reducing our reliance on expensive temporary staffing services and overtime hours of our existing team members.

While attracting new talent and retaining our existing employee base remains challenging, we are no longer being plagued by service interruptions from staffing issues like those we faced for most of last year. We have seen a 12% reduction in open positions since the end of the fourth quarter of last year. While hiring and retaining technologists remains our biggest challenge, we have been refining and increasing our visibility in the marketplace by repositioning our brand, utilizing our scale and the industry leadership to better leverage partnerships with local trade, schools and colleges, and have been adjusting compensation practices to meet the demands of the marketplace. We are engaging in direct mailing campaigns, partnering with accrediting bodies to identify qualified candidates, hosting open houses and hiring events, and instituting incentives such as referral payments and signing on bonuses.

There has been no magic formula for success. However, these grassroots efforts are slowly paying dividends. As a result of the strong performance in this year’s first quarter and the confidence we are feeling for the remainder of the year, we have elected to increase key financial guidance levels for 2023, though we remain vigilant about the economic environment, labor shortages, supply chain disruptions, inflation, and COVID-19. We are executing on opportunities to expand operations in all of our markets, both organically and through new acquisitions and joint ventures, resulting in what we believe will be strong results for the year than originally projected. Mark in his prepared remarks will review the increases we’ve made to our revenue and EBITDA guidance levels upon releasing our financial results this morning.

2023 will also be a year of reinvestment in our business to accelerate future growth. We currently have 13 de novo facilities in various stages of development, which will open for operations in the second half of 2023 and throughout 2024. These facilities are located in markets where we have patient backlogs, require additional capacity, or in locations where we currently lack access points to service identified patient populations. Six of these de novo facilities are scheduled to open in the second half of 2023 and early 2024 and another seven facilities should be producing revenue in the second half of next year. While these projects are requiring us to make capital investments above our normal spending, we are confident that these centers will be material contributors to our long-term performance and growth.

We continue to grow our hospital and health system joint venture business. Currently, 121 of our 363 centers or 33% are held within health system partnerships. Our partners are some of the strongest and most successful systems in our geographies. Partners include RWJBarnabas, MemorialCare, Dignity Health, Lifebridge, University of Maryland Medical System, Adventist, Cedars-Sinai, and others. These and other health systems are seeking solutions for long-term strategies around outpatient imaging and have recognized that cost-effective and efficient freestanding centers will continue to capture market share from hospitals, as payors and patients migrate their site of care towards lower cost, high quality solutions. We are in the process of expanding our joint venture business with both existing, as well as new health systems.

We expect that by year end, our joint centers could represent closer to 40% of our total center count and we believe that we could reach 50% in the coming years. Our hospital and health system partners have been instrumental in increasing our procedural volumes through influence on their physician partners to send patients into our jointly owned centers, which we otherwise might not have seen. Additionally, our joint venture partners are helpful in providing support, if needed, in establishing long-term, equitable outpatient reimbursement rates for our services. We continue to make progress with our artificial intelligence initiatives. Our enhanced breast cancer diagnostic program in mammography offering continues its rollout within our East Coast markets.

We are refining the program as we learned from our early rollouts. We are testing different levels of pricing, various service offerings, new marketing collateral and local market sales and marketing strategies. While there is much work to be done to optimize the program, we are experiencing positive results. We are identifying cancers that otherwise would not have been found until at later stages and more advanced stages. Since the inception of the EBCD program, we have diagnosed over 300 breast cancers that without the intervention of artificial intelligence would have gone undetected. Detecting cancer sooner allows for better patient outcomes through earlier treatment and intervention and reduces cost to the healthcare delivery system. Furthermore, we are reducing callback rates for patients through the use of artificial intelligence by being more definitive with the initial screening exam.

This saves time and money for our patients and their insurance companies, and enables our radiologists to be more efficient, as well as reducing stress on our patients. We are currently experiencing approximately 20% adoption rate from our mammography screening patients and believe we will see greater uptake as we get better at communicating and marketing the benefits to our patients and their referring physicians. The recognition our centers are receiving from offering this unique program has benefited our local branding and distinguished our quality from our competitive centers who do not offer similar capabilities. We expect to see an increase in this business throughout the remainder of 2023 and into 2024 and look forward to providing updates each quarter with our progress.

Consistent with our efforts throughout the pandemic, we continued to carefully manage our liquidity and financial leverage. Despite having front-loaded capital expenditures in the first quarter, which included liberal spending to fund our de novo centers in development, at first quarter’s end, excluding the losses in our Artificial Intelligence reporting segment, our leverage was 3.4 times net debt to trailing 12-month EBITDA. Our liquidity also remains strong. We ended the first quarter with $90.8 million of cash, and we were undrawn on our $195 million revolving credit facility. Our day sale outstanding at March 2023 was 35.6 days, which we believe to be one of the best in the industry. While we are committed to growing and expanding our business, we will also continue to follow a methodical and disciplined approach to managing our financial leverage.

Our low leverage, lower cost of capital and strong liquidity relative to many other industry operators position us to capitalize on acquisition opportunities. With the significant rise in interest rates over the past 12 months, along with the challenging labor market, there are many struggling operators in our industry, some of these operators will be unable to compete for acquisitions that may arise, while others may be targets of consolidation themselves. We remain patient and disciplined in our approach to acquisition, focused first on our core markets where we bring unique synergies and cost savings. While we are interested in expanding our geographic reach with larger platform acquisitions and new geographies, those acquisitions must come with scale, have a path to organic growth, and be actionable without causing our leverage to increase materially.

At this time, I’d like to turn the call back over to Mark to discuss some of the highlights of our first quarter 2023 performance. When he is finished, I will make some closing remarks.

Mark Stolper: Thank you, Howard. I’m now going to briefly review our first quarter 2023 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 first quarter performance. I will also provide an update to our 2023 financial guidance levels, which were released in conjunction with our 2022 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 interests 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 attributed to RadNet, Inc. common shareholders is included in our earnings release. With that said, I’d now like to review our first quarter 2023 results. For the first quarter of 2023, RadNet reported revenue from its Imaging Center reporting segment of $388.4 million and adjusted EBITDA, excluding losses from the AI reporting segment of $52.7 million. Revenue increased $47.3 million, or 13.9% and adjusted EBITDA, excluding losses from the AI reporting segment increased $10.9 million, or 26.2%.

Including our AI reporting segment, revenue of $2.1 million, revenue was $390.6 million in the first quarter of 2023, an increase of 14.3% from $341.8 million in last year’s first quarter. Unadjusted for AI reporting segment adjusted EBITDA losses of $4.5 million in the first quarter of 2023, and $3.6 million in the first quarter of 2022, adjusted EBITDA for the first quarter of 2023 was $48.2 million, as compared with $38.1 million in the first quarter of last year. Net loss for the first quarter of 2023 was $21 million, as compared with diluted net income of $3 million for the first quarter of 2022. Net loss per share for the first quarter of 2023 was negative $0.36, compared with a diluted net income per share of $0.05 in the first quarter of 2022, based upon a weighted average number of diluted shares outstanding of 57.7 million shares in 2023 and 56.4 million shares in 2022.

There were a number of unusual or one-time items impacting the first quarter, including the following: $4.1 million of non-cash loss from interest rate swaps; $959,000 expense related to leases for our de novo facilities under construction that have yet to open their operations; $1.6 million of non-cash increase to contingent consideration related to completed acquisitions; $719,000 expense related to the revaluation of holdbacks related to completed acquisitions; and $7.6 million of net pre-tax expenses related to our AI division. Adjusting for the above items, adjusted loss from Imaging Center reporting segment was $4.7 million and diluted adjusted loss per share was negative $0.08 during the first quarter of ’23. This compares with adjusted loss from Imaging Center operations reporting segment of $7.6 million and diluted adjusted loss per share of negative $0.13 during the first quarter of 2022.

Also affecting net income in the first quarter of 2023 were certain non-cash expenses and unusual items including the following: $12.2 million of non-cash employee stock compensation expense resulting from the vesting of certain options in restricted stock; $134,000 of severance paid in connection with headcount reductions related to cost savings initiatives; and $746,000 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 2023, as compared with the prior year’s first quarter, MRI volume increased 16.7%, CT volume increased 16.8%, and PET/CT volume increased 20.9%. Overall volume taking into account routine imaging exams, inclusive of x-ray, ultrasound, mammography, and all other exams, increased 14% over the prior year’s first quarter.

On a same-center basis, including only those centers which were part of RadNet for both the first quarters of 2023 and 2022, MRI volume increased 11.9%, CT volume increased 10.6%, and PET/CT volume increased 20.5%. Overall same-center volume, taking into account routine imaging exams, inclusive of x-ray, ultrasound, mammography, and other exams, increased 9.3% over the prior year’s same quarter. In the first quarter of 2023, we performed 2,504,635 total procedures. The procedures were consistent with our multimodality approach, whereby 75.5% of all the work we did by volume was from routine imaging. Our procedures in the first quarter of 2023 were as follows: 369,556 MRIs as compared with 316,784 MRIs in the first quarter of 2022; 229,379 CTs as compared with 196,461 CTs in the first quarter of 2022; 14,126 PET/CTs as compared with 11,683 PET/CTs in the first quarter of ’22; and 1,891,574 routine imaging exams, compared with 1,672,257 of all these exams in the first quarter of 2022.

Overall, GAAP interest expense for the first quarter of 2023 was $15.7 million. This compares with GAAP interest expense in the first quarter of 2022 of $11.6 million. The higher interest expense resulted from an almost 500 basis point increase on our unswapped debt exposure, as well as the additional debt we have at our NJIN, New Jersey Imaging Network joint venture from its refinancing transaction last year. With regards to our balance sheet, as of March 31, 2023, unadjusted for bond and term loan discounts, we had $789.2 million of net debt, which is our total debt at par value, that’s our cash balance. This compares with $693.8 million of net debt at March 31, 2022. Note that this debt balance includes New Jersey Imaging Network’s debt of $148.1 million, for which RadNet is neither a borrower nor a guarantor.

As of March 31, 2023, we were undrawn on our $195 million revolving line of credit and had a cash balance of $90.8 million. At March 31, 2023, our accounts receivable balance was $176.4 million, an increase of $10 million from year-end 2022. The increase in accounts receivable is mainly the result of the increase in our procedural volumes and revenue, particularly during the second half of March, as well as the normal first quarter effect on cash collections from the resetting of patient deductibles each year in January. Our days sales outstanding, or DSO, remains near the lowest levels of our company’s history at 35.6 days at March 31, 2023. Through March 31, 2023, we had capital expenditures, net of proceeds of the sale of imaging equipment of $75.7 million.

This total includes $19.8 million spent under capital leases and the remainder spent in cash. Additionally, the total includes approximately $38 million spent to purchase imaging equipment already in service, which we were renting on operating leases. 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 2023 financial guidance levels, which we released in conjunction with our fourth quarter and year-end 2022 results. We amended our previously announced guidance levels as follows: for revenue, we increase both the low end and the top end of our guidance level by $25 million to $1,550 million to $1,600 million; for adjusted EBITDA, we increased the bottom and the top ends of our guidance, our previously announced guidance ranges by $5 million to $225 million to $235 million; for capital expenditures, we’re increasing our low-end and high-end ranges by $5 million to $110 million to $120 million for the year; for cash paid for interest, we’re increasing the low and high ends of our range by $10 million to $45 to $50 million; and for free cash flow generation, we’re decreasing our guidance ranges at the low end and the high end by $5 million to $65 million to $70 million.

For our artificial intelligence segment, our guidance levels remain unchanged. We’ve increased our guidance ranges for revenue and adjusted EBITDA to reflect the first quarter’s strong financial results, as compared with our original budget. Though we remain vigilant about the economic environment, supply chain disruptions, inflation, and the possibility of further variants of COVID-19, we have opportunities to expand our operations in all of our markets, both organically and through new acquisitions and joint ventures. We are also increasing our guidance levels for cash interest expense and capital expenditures to account for both the rising cost of interest on that portion of our debt, which is not subject to our interest rate swaps and to fund the completion of certain of our de novo facilities scheduled to open during the remainder of 2023 and the first half of 2024.

With respect to Medicare reimbursement for 2023, there’s nothing to report at this time. As is typical each year, we are expecting CMS to release a preliminary rate schedule sometime in June or July, at which time we will analyze CMS’s 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’s proposal and its impact, if any upon RadNet’s future results. I’d now like to turn the call back to Dr. Berger, who will make some closing remarks.

Howard Berger: Thank you, Mark. As we move towards the midpoint of 2023, we are excited about the initiatives we have for the remainder of the year. The demand for diagnostic imaging is greater than ever. Technology embedded in state-of-the-art imaging equipment continues to improve. Contrast materials and radioactive pharmaceuticals for PET scanning are being advanced. Significant progress has been made in post-processing software. These factors and others are driving increased clinical indications for ordering diagnostic imaging procedures. As a result, our centers are extremely busy and we are pursuing expansion opportunities in all of our core markets through a focus on same-center performance, de novo centers, health system partnerships, and tuck-in acquisitions.

To meet the heavy demand for our services, we are investing substantial capital to continue construction of de novo facilities in core markets. Our acquisition pipeline remains active for tuck-in acquisitions in our core markets and we are in various stages with new potential health system partnerships, as well as expanding existing joint ventures. In addition, we are advancing our AI strategy and now have algorithms to address three of the top four most prevalent cancers. We expect to have tools that lower the cost and increase the accuracy and early detection of cancer diagnosis in a form that can be created to influence widespread population health initiatives. While this artificial intelligence can serve to lower our cost of delivering our services, more importantly, artificial intelligence could create substantial new revenue streams for our company.

We have already begun deploying our breast artificial intelligence and anticipate accelerating its growth for the remainder of 2023. Furthermore, in addition to this clinically-focused artificial intelligence, we believe artificial intelligence could have a material impact in almost every facet of our business processes in the areas such as patient scheduling, clinical reporting, medical coding, sales, marketing, and workflow improvement with the adoption of generative AI through ChatGPT algorithms. 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 coming quarters regarding our progress. Operator, we are now ready for the question-and-answer portion of the call.

Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Brian Tanquilut with Jefferies. Please go ahead.

Operator: Next question comes from John Ransom with Raymond James. Please go ahead.

Operator: The next question comes from Larry Solow with CJS Securities. Please go ahead.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Dr. Howard Berger for any closing remarks.

Howard Berger: Again, I would like to take the 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. We eagerly look forward to our next call where we believe we’ll have more information about the continued success and growth of the company as it exists now, as well as other opportunities to have a substantial impact, not only in radiology, but in healthcare. Wishing you all a good day.

Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.