RadNet, Inc. (RDNT) Earnings Call Transcript & Summary

Okay. Great. Thank you. Thank you, everyone, for joining us for our 3:45 p.m. presentation today. Joining us for our next presentation is the team from RadNet, Inc. Handling the presentation today will be Mark Stolper, CFO, who has always been great and gracious about joining us in our conferences. And we greatly appreciate that, Mark. I think we're going to go ahead and just move forward with a fireside chat format. There will not be a presentation. So I will kick it off with a handful of questions, Mark. And then I'll also moderate, for those that want to send questions in through the Veracast moderator, I will be here at this end, and I will process those questions as well.

But Mark, first of all, again, thank you for joining us as always. Second, I thought maybe we could start with just a discussion of the COVID -- not the COVID, the pandemic and its related impact on your performance. I've seen 3Q relative to 2Q was obviously materially stronger on multiple fronts. Your volumes obviously recovered and you got back to like fairly close to the place of about 95% of your original 2020 expectations in the most recent quarter. Can you just discuss kind of the environment? If you talk about what we saw back in March and April, and it's impacting your business. Obviously, you had the recovery. Are there any concerns now as you're looking into 4Q and early '21 given the resurgence? Is there anything to be taken away from that?

Sure. First of all, thank you, Larry. Thank you for inviting us to the conference. We've always enjoyed the conference. And before I start, I just hope everybody who's listening is safe, and they and their extended family are doing well. So with regards to your question, Larry, COVID, we saw the height -- at the height of COVID, which, for us, the low point was in mid-March, the second week -- excuse me, mid-April, the second week in April, our volumes dipped to 28% of our pre-COVID volumes that we enjoyed in January and February. And then we really started seeing a recovery I would say, late June, early July and into August. And when we had our earnings call, our third quarter earnings call, we were at full -- not full capacity, but we were -- our current per day volumes and our per day volumes at the time we had that earnings call was over 100% of our pre-COVID volume. So we've seen a real nice recovery. We were cautious when we talked about it on our earnings call because we didn't know how much of that volume was being enjoyed from pent-up demand, folks who didn't have elective procedures during the COVID period, and we're electing to go in now that the stay-at-home orders were lifted. But now I can say with more confidence that we feel like our business is back to normal, given that we stabilized at levels above our pre-COVID per day volume. So we feel extremely confident. We had a very good third quarter, particularly on the margin side and the EBITDA side of our business, where -- which was mostly the result of significant and aggressive cost-cutting that we were able to achieve during the third quarter and even in the second quarter, when we saw COVID coming on strong. And we -- and by the end of the quarter, our volumes had picked up. And so we were able to bring back most of the employees off of furlough. We had, at one time, 106 of our 340 facilities closed. By quarter end, we only had 19 of our facilities closed. The vast majority of them were x-ray only or x-ray and ultrasound routine imaging, hub-and-spoke facilities that we likely will end up being able to keep closed. But -- so I would say our business is back to normal. Addressing your question about a second wave, we have some concern as we see the COVID numbers increasing, particularly in a couple of our markets. We have, as you know, a significant presence in New York. And a very large presence here in California and in Southern California, specifically L.A. County, the COVID numbers have been rising and there are some new stay-at-home orders, particularly around restaurants that are impacting the way of life out here. But our feeling is that even as COVID numbers are rising, I think that people seemed to continue to be getting their diagnostic imaging services. They're continuing to see their physicians. And given that there's more familiarity today with the virus and how it's spread, versus where we were back in March and April, where there was a lot of confusion and hysteria about this virus, I feel pretty good about us not being impacted in a significant way from the recent rise in COVID numbers.

Did you say you thought the -- is there any way to kind of get a sense in 3Q if there was any recovery or capture from kind of, call it, pent-up demand? Is there any way to put a number around that or as the way you think about that?

It's hard to put a number around that because we don't have good data as to why a patient comes in, other than what his or her illness or injury is. And -- but we did see a -- the 2 modalities that were most impacted during COVID were routine x-rays and mammography. Mammography, most women self-refer because they are allowed a once-a-year screening exam by their health plan. And because that is not a -- at least the routine screening part of mammography is very much an elective procedure. And so women were just simply not coming in for their mammograms during the height of COVID. That, by the end of third quarter, we were seeing a tremendous increase in mammography. But that has continued into the fourth quarter. And the fourth quarter usually is our best quarter with respect to mammography because October is breast cancer awareness month. And so that has continued. So -- but I do believe there was some pent-up demand in terms of mammography. With respect to x-rays that were impacted greatly during COVID, our belief was that those were just lower acuity issues. Our #1 CPT code of any of our modalities is a simple 2-view chest x-ray. And that's someone who has a cough, a cold, pneumonia, you name it. A lot of them tend to be lower acuity. And so we -- even today, if there's any modality that seems to continue to be impacted, it's the -- it's generally x-ray exams at our facility. So there might be some pent-up demand with x-rays going into this quarter and into next year. But the higher acuity exams, particularly PET/CT, which is -- which are oncology study, tended to be least impacted by COVID. And I think if you've got life-threatening cancer, and you're due for a quarterly or semiannually staging of your cancer with PET/CT, we were seeing -- we've seen that steady even throughout COVID. So I think we've probably, at this point, Larry, worked through most of the pent-up demand.

Most of it. Yes.

Yes.

Okay. Okay. That's fair. And on the margin side, obviously, your margin was very strong in 3Q. Is that sustainable?

We believe it is. Now during COVID, we aggressively attacked all aspects of our business. And in hindsight, I think we're going to be very grateful that we went through COVID because it caused us to pause in some of the growth initiatives of our business and really focus on every aspect of what we do and how we deliver our services and look for areas that, one, we could eliminate costs; and two, we could conserve cash. And so we were able to renegotiate supply agreements with folks who provide us MRI and CT contrast materials, radioactive pharmaceuticals. We were able to lower our cost of our equipment service and maintenance contracts. We were able to permanently lay off about 360 employees that we -- but for COVID, we likely were not able to have done -- before that time period, we're able to close facilities that likely will remain closed. Our -- the expenses related to employee reimbursements for travel have gone down significantly. Many of these cost reductions will be durable and will continue with us going into the fourth quarter and into 2021. Where the biggest cost savings/cash conservation came from furloughing employees. At one time, Larry, we had 3,600 of our 8,600 employees, unfortunately, on furlough, and that was related to those 106 facilities that were closed. I'm proud to say that we have been able to bring back most all of those furloughed employees, and then there were those employees that remain with the business who did not work on the frontline. So all of the support functions, all of the general administrative, all of the executive management took pay cuts, and we've been able to bring everybody back to 100% of their pre-COVID salary levels. So some of the benefit that we received in the fourth -- and excuse me, in the third quarter from salary reductions and furloughed employees, we won't have the benefit of that going forward. However, our revenue has gone up significantly, and we've only brought those people back off of furlough. And we've only brought them back up to 100% of their salaries as we've seen volumes increase. So to your question directly, our third quarter EBITDA margin was up about 170 basis points relative to 2019's third quarter. So our margin was about 15.7% in the third quarter. Our annual margin of EBITDA in the -- in 2019 was somewhere in the 14.5% range. So -- or 14.2%, I think, if I'm remembering correctly. So I think we do have the ability now going forward to have higher margins. And I'm hoping that, throughout 2021, we can have closer to 15% margins or even higher than that. You won't see that necessarily in the first quarter because I think you're aware, that's our weakest quarter from the standpoint of seasonality, which is impacted greatly by both the reset of deductibles from health plans of our patients as well as winter weather conditions in our East Coast operation.

Okay. Great. I just wanted to see, kind of the unique aspects of your company has always been the capitated arrangements and your differentiator. Can you talk about how that the arrangement, the capitation range, performed kind of through COVID? And does it change your thinking or looking in terms of opportunity around capitation? Is there any -- kind of modified your mindset around capitation in this environment?

Sure. No, it's a good question. So as you're aware, our capitation contracts -- in our capitation contracts, we get paid a per member, per month fee for managing on an exclusive basis. All the diagnostic needs of a fairly significant patient population today, that patient population is about 1.7 million lives. The vast majority of those are here in California, where we contract with about 40 medical groups that are, in turn, getting a per member, per month fee for managing the patient care of HMO lives here in California. And because we got -- we get paid under these capitation arrangements based upon enrollment and not based upon the number of procedures we perform, our capitation contracts actually performed beautifully during the COVID period because the enrollment in these plans and with our medical groups didn't change throughout COVID. Even if employers put their employees on furlough, such as what we did here at RadNet, those furloughed employees remained on the benefit plans. And so we saw no drop in enrollment in our capitated lives. And therefore, our revenue during the COVID period for capitation was actually even up, I want to say, in the range of 8% to 10% relative to last year's second and third quarter capitated revenue. And that was mostly a function of price. We're generally successful in getting fairly modest price increases year-over-year on our capitated contracts. And then we did have a couple of new capitated contracts here in 2020 versus 2019. So it's -- it was a shining spot of our business during COVID. And it remains about 12% of our revenue as a company, roughly about $135 million a year of revenue. We'd love to do more capitation. We are continually negotiating with new groups here in California. We think that there's some opportunities in the New York metropolitan area, where we do have 1 capitation contract with a group called AdvantageCare Physicians, which is a subsidiary of EmblemHealth in New York. And to the extent that we can grow that faster than our fee-for-service business, we would we would snap our fingers and do that in a second. We like that business. There's very little bad debt associated with that business. It creates predictable revenue and cash flow. It fills our facilities and covers a lot of our fixed costs in many of our facilities. And it also creates lots of pull-through business, where the physicians who are obligated to send us these capitated patients also see many of the other payer classes, such as personal injury, workers' comp, commercial insurance, Medicare, Medicaid. And they tend to send us their fee-for-service business as well. So it's really a great book of business. And as I think health care is moving towards risk-based contrast -- contracting between payers and providers. As that continues to take hold in our markets, I think the opportunity for us to capitate more in the future will expand. We certainly like the business. We have the systems to manage risk very effectively. We're geographically concentrated so that we can service effectively and provide the necessary access to significant patient populations that might span large geographies. So we're certainly positioned to do more of it in the future.

Okay. Great. Just to follow on some of your commentary, actually I have questions that's coming in from an investor. The question is, could you talk about the attorney personal injury business? How sizable is it for you? And how does this business work? And are the margins significantly better than the company average margins?