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

[Audio Gap] Chief Financial Officer of RadNet. I appreciate you deciding to spend a portion of your morning with me, particularly at 10:00 a.m., which I know is early -- on the early side here in Las Vegas. In today's presentation, I'm going to take you through an introduction of who we are, give you a little bit of the history about RadNet. I'll talk somewhat about the industry that is -- has shaped up to provide a really great opportunity for us to continue to grow our business. I'll go more in depth into all aspects of the company, our operations, and I'll end the presentation talking a little bit about our core strategy as well as give you some financial information. So for those of you who are a little less familiar with RadNet. RadNet is the largest owner-operator of diagnostic imaging centers in the United States. We were founded in the early '80s. So we're not exactly an overnight success. And through the past few decades, we've grown our business substantially from a 1 center operation outside of Cedars-Sinai in Beverly Hills, California into a national provider that today is in 7 core markets across both the West Coast and the East Coast of the United States. We've been a fast-growing company. We've quadrupled the size of the business since 2006. In 2022, I should say -- or 2021, we did over $1.3 billion worth of revenue, $219 million of EBITDA. And today, we have approximately 9,000 employees and growing. I'll talk much more in detail later on in the presentation about our strategy, particularly around geographic concentration. We are only in 7 markets in the United States, East Coast, West Coast which includes California; our New York metropolitan area, which is New York and New Jersey as well as the Mid-Atlantic region, Maryland and Delaware; and we have smaller operations in Florida and Arizona, where we have great interest in expanding. We're geographically concentrated, not by accident. There are a number of benefits, which I'll get into later on in the presentation about -- from being geographically concentrated and having large clusters of centers in regional marketplaces. Our strategy has been to be a one-stop shop, what we call a multi-modality company so that the vast majority of our 351 facilities have the full breadth of imaging capabilities from the routine studies, all the way to the more advanced studies, and I'll talk a little bit more about why that benefits the company in a subsequent slide. We've also been a significant consolidator of the industry. We've done over 100 acquisitions during my 17-year tenure as CFO of the company. That will continue to be a big part of the story going forward. Most of these acquisitions have been of small mom-and-pop operators. We have a very -- as large as we are, we have a very fragmented industry where most of our competitors are smaller operators and one-off independent radiology centers. We also are unique in the sense that we do risk taking and value-based care, 11% of our revenue, which represents about $170 million of current revenue comes from capitation contracts where we take on the utilization risk for what's now close to 2 million lives, predominantly in California but also in the New York metropolitan area. Later on in the presentation, I'll dive deeper into how those contracts work. And most recently, we've made significant investments in the areas of artificial intelligence. We believe that AI is going to have a transformative impact on the way our business is managed, the way we deliver our services. RadNet being the scale player in the United States, we wanted to be at the forefront of this technology change and own these solutions, and I'll talk about some of our progress later on in the presentation. So what do we do? As I mentioned, we're a multi-modality company. 75% of what we do by volume is actually the routine studies, the x-rays, the ultrasounds, the mammography, the more advanced imaging modalities. The sexier part of our business are the MRI, CTs and PET/CTs, and that roughly represents 25% of our business by volume but over 60% of our revenue. So clearly, the revenue is being driven by the more advanced studies. What we found is that there's significant benefits that enures to us from being a multi-modality player. Often someone is referred into a RadNet facility for a routine study and then that patient based upon the results of that study is sent back to us for more advanced work. So we feel that we've been successful in capturing the high-end studies because of our presence and investments we've made in the routine equipment. I'm going to talk a little bit about the industry. If you believe the research out there, the diagnostic imaging industry is about $100 billion on an annual basis and growing. It's growing in the low single digits, and it's believed and projected to continue to grow that way into the future. It's being driven by a number of factors. One is technology, the quality of the equipment, the resolution of the equipment continues to get better. There has been advances in contrast materials, radioactive pharmaceuticals. There has been tremendous advancements in post-processing software. All of these technology improvements have created more and more medical indications for ordering these types of diagnostic tests. Also, the referring physician community is much more educated today than it was 10, 15, 20 years ago and are much smarter about the types of tests to order as well as are utilizing these tests more frequently. And then also, patients are much more aware of these scans and the effectiveness of these scans. And it's been proven that if you spend some money upfront and diagnose and detect disease, earlier in the disease process and more accurately, that ultimately it drives a lot of value and savings into the health care delivery system because you save a lot of more money on the treatment side. The industry remains fragmented. It's believed today that there's over 6,000 imaging centers in the United States. RadNet, by at least a factor of 2, is the largest player in the industry with only 351 facilities. So as large as we are and as quickly as we have grown over the past few decades, there's still a lot of greenfield space to continue to grow our business. I talked a little bit about industry consolidation. As I mentioned, most of the industry is comprised of mom-and-pop radiologists who may own a facility or a small group of radiologists who may own multiple facilities. These competitors generally don't have a lot of business acumen. They don't have the benefits of scale that we have with respect to up and down the capital structure of how they -- the cost of billing and collecting, the cost of hiring and retaining employees, the cost of servicing the equipment, the cost of obtaining contrast materials and other medical supplies. And so we've been very effective in acquiring tuck-in small acquisitions in our markets. We can acquire anywhere between 3x and 6x EBITDA. And generally, we bring a fair bit of synergies to this model so that when we acquire a business, we can usually get at least one further turn of EBITDA from these acquired businesses. We've done in the past 6 years over $330 million worth of acquisitions, and that will continue to be part of the story going forward. So as I mentioned, we're an East Coast, West Coast company. We're only in 7 states. However, these are highly populous states, over 25% of the United States populations reside in the 7 markets in which we operate. So we're clearly going where the money is and where the people are. We've got, as I said, 351 facilities today. We have 23 joint ventures with some of the larger health systems in our markets, and I'll talk a little bit about the joint venture opportunity going forward. That represents about 29% of all of our facilities held within joint ventures with hospitals. We think that, that number could grow to upwards of 50% in the next 3 or 4 years. The reason why we are geographically concentrated and focused on the markets in which we operate is that there's great benefits to being geographically focused. First of all, from a cost perspective, we're able to drive significantly lower cost than our competitors by being able to centralize functions like reimbursement operations to centralize functions such as call centers, customer service, scheduling, preauthorization departments. We can have floating technologists, RadTechs go from facility to facility. Our marketing groups can market multiple clusters of centers as opposed to one-off centers. So it allows us to utilize our labor much more efficiently, which is key, particularly in a difficult labor market as we're all experiencing today. The second major benefit from being geographically concentrated comes from the leverage that we have with the private payers, meaning the insurance companies. Most of what we do, and you'll see on a subsequent slide, that 55% of our revenue comes through negotiations with private health plans such as the large national plans as well as regional plans. And what we have found is that when we are the largest operator in all the markets in which we operate, and we have a significant market share, we have real leverage in those discussions to be able to establish long-term, stable and fair pricing. Our competitors who don't have that leverage are really subject to the wins of the insurance companies and really get the pricing dictated to them. And that's never been something that we've ever wanted to have with RadNet. So where does our revenue come from? As I mentioned, about 75% of our volume comes from the routine studies, but that represents the other 25% of our volume, the more advanced studies, represents about 60% of our revenue base. So clearly, the margin in our business is in MRI, CT and PET/CT. However, advancements in the area of mammography have made mammography extremely profitable as well. There's been greater reimbursement focused on the area of mammography as it relates to new technologies such as 3D mammography or tomosynthesis as well as reimbursement ultimately that will come from utilizing CAD software and artificial intelligence. So this payer mix is very indicative of the overall payer mix of a normal patient population. And we've always said that we want to be able -- our marketing people want to be able to put 1 prescription pad on the desk of a referring physician and no matter what he or she needs with respect to imaging, it can be sent to the imaging -- the RadNet imaging center down the street. Our payer mix is also very diverse, as I mentioned, over 55% of our revenue, specifically 57% of our revenue comes from negotiations with the private health plans. We are exposed to some level of Medicare reimbursement, 20% of our reimbursement is Medicare reimbursement. Medicare reimbursement has been remarkably consistent and stable over the last 6 years from 2015 through 2021. We did face and are absorbing a small cut here in 2022 as it relates to Medicare increasing the reimbursement for primary care physicians, family practitioners and doing that on a budget neutrality basis. So Medicare CMS lowered the reimbursement slightly with radiology as well as a lot of the other specialties in 2022. 11% of our business is capitation, full risk contracts, which I'll talk about on the next slide. And then we have some smaller books of business in terms of workers' comp, personal injury and special group contracts that rounds out the remaining part of our revenue. So I'll talk a little bit about capitation because it is unique to the RadNet model. We're the only imaging center company of any size that we now of that does full risk-based contracting. Today, we're doing it for over 1.9 million lives, the vast majority of which are in California. And these are contracts where RadNet is the exclusive imaging provider to HMO lives who are capitated through large primary care medical groups. And so when you choose an HMO product as a patient in California, you're forced to choose a primary care physician. Well, most of those primary care physicians in California are part of these large medical groups known as IPAs, Independent Practice Associations. And those IPAs, they group HMO lives together, they're getting paid to provide full health care services to those patient populations, which includes the responsibility for providing diagnostic imaging and then they come to us or we go to them and we subcapitate the radiology risk from these primary care groups, and we get a small piece of the per member per month fee that they -- these medical groups are getting from the various HMOs. It's been a great book of business for us. We've been doing it for over 25 years in California. It's predictable revenue, predictable utilization. We have a utilization management department that looks at the necessity of all of these scans, and we're constantly pushing back and educating the medical groups with whom we are contracted. And we've had a great record -- track record of renewal. We have 1% to 3% price increases in the vast majority of these contracts. And a unique aspect of these contracts is that many of these capitated medical groups and the physicians within those groups also see fee-for-service business, the non-capitated HMO patients as well as Medicare patients, personal injury, workers' comp, all the other payer classes. And because we have the relationship with them on the capitated side, they tend to send us their discretionary or fee-for-service business as well. So it's a great way to lock our competitors out of significant numbers of the referral sources. I mentioned we have a joint venture strategy. There's been a tremendous migration and you're probably seeing this in other businesses that you look at outside of radiology of volumes leaving the hospitals in favor of ambulatory outpatient settings because of the cost as well as patient convenience. And that's happening in radiology as well. In most of our markets, the hospitals with whom we compete for outpatient business generally charges anywhere between 2x and 5x the cost of getting a procedure done at a RadNet facility. The payers have become very aware of this over the last 5-or-so years. And they are getting more and more aggressive with regards to trying to drive their business out of the hospitals in favor of ambulatory settings. Aetna -- excuse me, United, Cigna and Anthem have all come out with requirements that if there are outpatient imaging centers in the markets where hospitals reside that patients have to get outpatient imaging done in the freestanding centers. And that's helping to drive more and more business into our facilities. And some of the hospital systems who are losing this business are deciding that it's better to -- instead of fighting this trend to try to partner up with us and actually participate from this trend of the migration of patients. And so today, we have about 102 of our 351 facilities held within joint ventures with some of the largest hospital systems in the nation and in our markets, the likes of Dignity Health, Adventist Health, University of Maryland, Cedars-Sinai as well as many others. We think that this offering can grow to about 50% of our business in the next 3 or 4 years. It brings a lot of value to us particularly in 2 areas. The first is that these hospitals are instrumental in driving incremental patient volumes into our facilities. A lot of these hospitals have relationships with community-based physicians that are loyal to the hospital and now the hospital directs those physicians to drive the business into our jointly owned facility. So volumes have picked -- definitely pick up when we put these into the joint venture relationships. And then the other thing that these hospitals provide is further leverage with the health plans in terms of establishing long-term stable pricing. The hospitals -- although we're still getting outpatient pricing and we're not trying to arbitrage hospital-based pricing, the private payers know that because we are hooked up with these hospitals that they just can't dictate price to us. I'll talk a little bit about technology because we are a technology-based business. We do own our own IT backbone. We call it a eRAD. It runs the front-end system, or what we call a radiology information system as well as our image management solutions on the back end that take the images off the equipment and then through Worklist technology, pipe them to the appropriate radiologists to do the read. That has been a key to our success. All of our centers are on this 1 platform. We do sell and license this platform to about 200 other imaging centers outside of the RadNet family. So we do use that. It is an IT solution that we use both internally and license to the outside world. And more recently, as I mentioned in my earlier remarks, we've gotten into artificial intelligence. Over the last 3 years, we spent upwards of $150 million acquiring and investing in 3 businesses that we believe will have a transformative impact regarding the way cancer and cancer diagnostics is managed in this country and worldwide. First, we bought a company about 2 years ago called DeepHealth, which has the industry-leading mammography artificial intelligence. It was FDA approved last year. We have a second, more advanced AI product through DeepHealth that is pending approval through the FDA, which we expect to happen sometime either in the second or third quarter of this year. And we believe that, that will be a differentiator of our sites with respect to the diagnosis of breast cancer. There was an article -- a study done that was published in Nature magazine last year that showed that our AI technology when pitted up against a group of fellowship-trained breast imagers, could identify breast cancer up to 2 years earlier than a fellowship-trained radiologist. So computer, machine learning is really going to have an impact on our industry and should help us lower the cost of delivering our services, lower the cost and reliance that we have on human capital, meaning radiologists as well as create tremendous patient benefits in terms of the accuracy of the reads. Earlier this year, in January, we bought 2 Netherlands-based AI companies, one called Aidence; the other called Quantib. Aidence has a product that is going through the FDA right now to detect lung nodules and lung cancer early with low-dose CT screening. Today, less than 10% of folks who should be having annual lung cancer screening exams because they're high risk, either they're current smokers or past smokers are getting this scan done. And so we think that by driving down the cost of offering the service that we think that the payers will start pushing this much more with their membership. Quantib is a company that has an FDA-approved solution for prostate screening for MRI, a much more effective test than the PSA, which is the standard of care. And we believe by getting the cost of offering this service using AI tools that we can get this down to a price where we think that every man over the age of 50 will ultimately be allowed to have an annual or biannual prostate screening exam, just like women have with breast cancer. So we're extremely excited about AI, and we're trying to drive the industry towards these solutions. Performance has been strong, even in the midst of COVID and the Omicron variant that we all faced in early January. Our first quarter revenues were up nicely relative to last year, over 8%. EBITDA increases despite labor shortages and labor issues and some challenges with the Omicron variant in the first quarter was still up over 4%. We're growing the business both organically and inorganically. Our same-center volumes were up 6.6% in the first quarter. We've told investors that we believe on a long-term basis, we can continue to drive same-store center performance in the 3% to 5% range. Although the last year, we've greatly exceeded that. And part of it is the driving of the business out of the hospitals in favor of the ambulatory setting. So we've been growing this business nicely over the past couple of decades, and we don't see any real ceiling to how we can grow this business. We've got a fair bit of liquidity. We ended the first quarter with $71 million of cash. We have full availability of a revolving line of credit of $195 million. We have had strong cash flow. We're expecting to do $80 million to $90 million of free cash flow to the equity, which is almost 8%, 9% free cash flow yield to our equity value. And we're in the process of expanding through a de novo strategy of building 15 centers that should come on later this year and early in 2023, that will represent significant growth drivers for '23 and beyond. We increased our guidance after the strong first quarter results. We're expecting to do anywhere between -- close to $1.4 billion of revenue this year, adjusted EBITDA of $208 million to $218 million. We are going to be spending liberally this year on CapEx, partly because of these 15 de novo centers that we're building. So we're expecting to spend close to $90 million of CapEx. But we -- but in spite of that, we're going to have a significant amount of free cash flow that we'll use for acquisitions as well as reinvestment in the business and deleveraging the capital structure. Over the long-term, we've been a pretty consistent performer. We've grown the business at an 8% -- over 8% compound annual growth rate over the last 13 or 14 years. Our EBITDA has gone up very consistently but for the COVID year. And our procedure volumes continue to grow. From a valuation perspective, our stock has come in very significantly over the last few months, partly due -- and really due to the overall market. We're trading about 8.1x the midpoint of our 2021 -- excuse me, 2022 EBITDA guidance. So relative to other health care services and multisite facility-based companies, we're trading, I think, at an attractive price and an attractive free cash flow yield. We do, as I mentioned, have a fair bit of firepower. We're fairly modest leverage with about 3.3x trailing leverage, and we have a fair bit of free cash flow and liquidity to continue to grow the business. And we also have a significant net operating loss carryforward. So we're not a federal taxpayer at this time. I've left a couple of minutes for your questions and happy to entertain anything that you'd like to ask about. I suppose I was so comprehensive in my prepared remarks that I've been -- I pre-answered all your questions. But anyway, thank you so much for choosing to spend part of your day with me, and I appreciate your interest in the company.