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

Thanks to Mark for always taking the time to join us [indiscernible] up in the West Coast. I appreciate it. So by way of introduction, Mark Stolper, Chief Financial Officer -- Executive Vice President and Chief Financial Officer of RadNet with us. I'll turn over the floor to Mark who's going to kind of give us some introduction, then we'll get into the Q&A as always.

Good afternoon. Thanks for choosing to spend a portion of your day with me and learning more about the RadNet story. For those of you who are less familiar with RadNet, I'll give a little overview on who we are and then I'll do a bit of a deep dive into what our business is, where we get our revenue. I'll talk a little bit about the industry and the opportunity that we see that we think is quite exciting over the coming years, and then I'll end with some financial information. So we are the largest owner-operator of fixed-site diagnostic imaging centers in the United States. That's funny because this is the wrong presentation that's up there. We have 358 centers in the United States. Do you want me to give you... You got it? Okay. You're just trying to trick me. Okay. Thank you. So we have 358 locations. We were founded in the early 1980s by our CEO, Dr. Howard Berger. We've been a fast-growing company. We've quadrupled the size of the business since 2006. In 2021, we had north of $1.3 billion of revenue and over $218 million of EBITDA. We have a number of core operating tenets that we believe has allowed us to be successful in our industry, which has had numerous challenges over the years and which is why I think we've thrived in some of the other models -- business models out there have been challenged, particularly more recently. But the first of those operating core tenets is that we are geographically concentrated. So in our 358-some-odd centers are focused in 7 core markets. We're very much an East Coast, West Coast business with about 45% of our business in California. The remaining business is in New York, New Jersey, as well as the Mid-Atlantic region, Maryland and Delaware. More recently, last year, we entered the -- thank you. We entered the Arizona marketplace with -- yes, that looks good. We entered the Arizona marketplace with an acquisition that we did in conjunction with the Dignity Health system, and we have about 9,000 employees. The other main core operating tenet of ours is a multimodality strategy. So the vast majority of our centers are what we call centers of excellence that have the full breadth of operating capabilities from the routine imaging to the x-rays, the ultrasounds and the mammography, to the more advanced imaging, which is the MRI, PET/CT and CT. And I'll talk a little bit later on in the presentation on why we think that, that has been a big part of our success being a one-stop shop. We've also been a pretty active consolidator in the marketplace. We've done, I think, $330 million worth of acquisitions over the last 5 years. Our industry is highly fragmented. We'll talk a little bit about the industry later on in the presentation. It still remains fragmented. There's very few companies of scale. No one's more than half the size of RadNet on the fixed side of the business, and we think we'll continue to distance ourselves from others. We also do a book of business that we think we've pioneered in this industry called Capitation business, where we take risk on managing on an exclusive basis the imaging for about 1.9 million lives, predominantly in California where we get a per member per month fee, and I'll do a deeper dive later on in the presentation on how those contracts work. And more recently, we've been pioneering investments in the artificial intelligence space. We believe that AI is going to have a transformative impact in how radiology services are delivered, particularly around the professional component in our industry. And we bought three companies within the last 2 years, two of which we bought earlier this year based in the Netherlands, and they're focused around opportunities that we see for large-scale widespread cancer screening programs in the area of breast cancer, prostate cancer, lung cancer and colon cancer. So this page just shows you what we do. About 75% of our volume comes from routine imaging. This is the bread and butter of the industry, x-rays, ultrasounds, mammography. Technology has been around for many, many years. But this business and the relationships that we established with referring physicians through doing the bread and butter business also drives the high-end business or the MRI, CT and PET/CT, which is the other 25% of our business. We think that there's real value being a one-stop shop, often someone is referred into a RadNet facility for a routine imaging and exam. And based upon the findings of that exam is referred back to us for more advanced modalities. So I'll talk a little bit about the industry. It's a large and growing business or industry. If you believe the research out there, it's about $100 billion worth of services revenue each year here in the United States. There is a portion of this business that continues to be done in hospitals and the portion of that will always be done in hospitals. And then there's a portion of the business that's done in outpatient, freestanding centers. There's a huge differential in pricing between hospital-based imaging and outpatient imaging. And as you're probably aware, if you follow all of the trends of health care, that there is a significant migration of patient volumes -- outpatient volumes outside -- from the hospitals into the freestanding centers, where the pricing is anywhere between 1/2 the cost to 1/5 of the cost, and we've been a significant beneficiary of that. So when I first started in this business about 18 years ago, north of 65% of all imaging in the United States was done within hospitals. Today, that's more like 50-50. And given the push that the private payers are making with preauthorization processes as well as patients migrating their business to the lower-cost settings because of higher deductible health plans, we are seeing that more and more of the market share is being taken away from the hospitals in favor of freestanding centers that we operate. It continues to be a very fragmented business. As I mentioned, we have 358-some-odd centers. There's believed to be about 6,000 imaging centers in the United States, though we have considerable share in the 7 markets in which we operate, there's a lot of greenfield space for us to continue to grow this business. Business has been growing for a variety of reasons. First, population is growing and the population is aging. As the population grows, it obviously uses more imaging. As the population ages, it utilizes more imaging. There's been studies shown that Medicare lives utilize imaging 3 times more frequently than commercial lives. And so that's been a positive trend. Also, technology has been a major driver of the utilization of diagnostic imaging. Every year, the equipment advances, there's been tremendous advances in post-processing software, in contrast materials, and that drives new indications. There's a variety of drugs that are being developed that will continue to be developed that will rely on diagnostic imaging to approve the indication of these drugs as well as to potentially track the adverse side effects of certain therapies. For instance, Biogen recently has had a number of advances in the Alzheimer's area, which would cause anybody going into that therapy to rely on diagnostic imaging. It's a big opportunity for acquisitions. In our markets, we're able to acquire businesses at anywhere between 3x and 6x EBITDA, little bit more expensive to buy regional platforms, which is why we've continued to focus on penetrating existing markets. We -- there's been certain pressures on the industry. More recently, rising cost of interest, interest expense has put pressure on the mom and pops, the requirement to invest money back into new capital equipment and facilities has been more and more difficult, more pressure on the mom and pops. And we think that particularly in a difficult economy, which we possibly are now in and maybe moving into that, that's going to position us in a very positive position to continue to acquire these businesses. We're less levered than most of the other companies in our industry of scale. You'll see later on in the presentation we're between 3x and 3.5x levered. We've got $100 million of capital sitting on our balance sheet, and we've got full availability of roughly $200 million revolving credit facility. So a little bit about RadNet. So as I mentioned, we're in the East Coast, West Coast company. We're only in 7 markets, but in those 7 markets that represents about 30% of the United States population. So where the people are, these are densely populated markets. They're growing from a demographic standpoint. And our focus has really been to continue to penetrate these types of markets. There's a couple of reasons that -- why we've had this strategy as opposed to try to canvas the whole United States. First of all is when you operate densely clustered regional centers, you're able to operate at a low cost. We can have roving technologists. We're able to have centralized call scheduling department, centralized preauthorization departments, centralized marketing and you can build brands that have identity on a local scale. The second point is that the vast majority of our reimbursement comes from commercial insurance or private payers, which you'll see on a subsequent slide. Our ability to establish fair, equitable, long-term rates and even drive increasing reimbursement is based upon our leverage in those discussions, which is based upon how important we are as an organization to the provider networks that we serve. And in most of our markets, we've got a significant enough market share that if we were to elect to cancel a contract or go out of network, that would cause significant access issues, significant quality issues for the insurance companies, and much of the business would ultimately end up going back into hospitals at prices that are 2x to 5x our costs. So we are going to continue to deploy the strategy as we move forward. As I mentioned, multimodality company, as you see on the left side of the page that about 75% of our business is the routine imaging. But on the right side of the page where you look, where our revenue is driven from, about 60% of our revenue is driven from the 25% of our volume that is actually the advanced imaging, the MRI, the CT and the PET/CT. So clearly, the money, the revenue and the margin is in the more advanced imaging, which we believe that we're successful in driving because of our multimodality strategy. From a payer perspective, we have a diversified payer mix. The vast majority of our mix comes from commercial insurance. These are negotiations with the likes of the large national payors as well as regional plans. Medicare is 22% of our business, so we are a price taker on that book of business, just like every other operator in our industry, although we have some level of influence through lobbying efforts and so on and so forth. Capitation, which I'll talk about more in depth on the subsequent slides, is a unique part of our business. It represents about $170 million of our revenue on an annual basis. We're a risk taker. We take utilization risk on providing imaging on an exclusive basis to close to 2 million lives. Then we have some smaller books of business, personal injury, workers' comp. Capitation, it's a great part of our business in California, representing about 25% to 30% of our business in California. We contract with between 35 and 40 medical groups in California, who in turn contract with the HMOs and accumulate HMO lives, where those medical groups are now responsible for patient care under these capitated arrangements. And these medical groups approach RadNet or we approach them and we subcapitate or syndicate the risk for diagnostic imaging from these medical groups. We've been doing this business for over 25 years. It's incredibly sticky business. We have relationships with thousands of referring physicians who are obligated now to send us these capitated or HMO lives. And because of those relationships, they also feed us their fee-for-service business that they could send to any of the imaging centers. So it's a great way of locking out our competitors from large amounts of referring sources. It's a great book of business from a margin perspective because we have no cost of billing and collecting. We're just getting a check from each of these groups based upon the number of enrollees in these programs. We have no cost of carrying receivables because we get paid in the month that we render these services and we've had a great history of increases and very little bad debt associated with this book of business. We'd like to transport this business in a bigger way outside of California. And we think as the trends in health care continue, particularly around providers taking risk and insurance carriers willing to contract on a risk basis, we think that this is going to be a bigger part of our business moving forward. Joint ventures. So 30% of our 358 centers currently are held within joint ventures with some of the largest health systems in the United States as well as some of the larger regional community-based health systems. These are all outpatient facilities. They're all billing under the outpatient Medicare fee schedule. We're not arbitraging hospital rates. These are hospitals that have recognized that they are losing outpatient business to the outpatient players and that, that -- fighting that trend is a long-term losing battle, and many of these entrepreneurial health systems are looking to recapture some of that revenue and participate in that trend instead of fighting that trend. So we allow them to buy into our facilities. In some cases, some of these health systems own their own facilities and contribute them into the joint ventures. And we are growing this practice and ultimately think that this could be as much as 50% of our business in the next 3 to 5 years. Some of the bigger names in health systems in our markets are our partners, such as a statewide joint venture with the RWJBarnabas system in New Jersey, Dignity Health, Adventist Health, University of Maryland, Cedars-Sinai, MemorialCare and the like. And it provides significant benefits to us. Many of these hospitals are influential in their markets and can be very helpful in driving incremental volumes to our jointly owned centers that we otherwise would not have seen or would have been referred into their hospitals. And they also are very helpful in reimbursement discussions, providing more leverage with the private payers to get pricing increases or to avoid any types of negative reimbursement impacts from the private payers. And from their perspective, it's a way for them to recapture some of the revenue that they would -- they are and will continue to lose in their four walls from the loss of imaging. One of the things we're very proud of is our information technology platform. We bought a company in 2008 called eRAD that has an industry leading or has two industry-leading electronic systems that allow for the efficient management of our facilities as well as the image management on the back end. We've grown this business to have over 200 customers outside of RadNet, which more than pays for the continuing development, and we believe that we internally are able to operate our business at a lower cost because of the ability to create customized IT solutions that help our workflow. So I mentioned in my opening remarks, artificial intelligence is going to have what we think is a transformative impact on our business going forward, both in terms of lowering the cost of delivering the radiologist read, making a radiologists more productive and more accurate but also in terms of driving new revenue opportunities for the company, which we think is the big opportunity with artificial intelligence. We bought 3 companies in the last 2 years, focused around 3 of the 4 biggest cancers. If you look at breast cancer, prostate cancer, lung cancer and colon cancer, they represent over 70% of all cancers here in the United States. Only one of those utilizes diagnostic imaging as a widespread screening program, meaning mammography. Most -- there's over 40 million women each year that come in over the age of 40 to get an annual mammography exam in the United States. We do about 1.4 million of those 40 million exams. Our AI, DeepHealth AI in studies and in published studies, you can go to Nature magazine and google that, has been shown to detect breast cancer up to 2 years earlier than a fellowship-trained radiologist. The success of mammography in identifying breast cancer, we believe will be analogous to the success of a large spread screening program for lung cancer for high-risk patients, meaning patients who are current smokers or past smokers as well as screening for prostate cancer and colon cancer. And we just recently acquired a business in the U.K. that works with the national health system there that is rolling out a 4-country U.K. program around lung cancer and that business, HLH, Heart&Lung Health is partnered with our Aidence AI product and is the leading provider under the NHS system. We think that, that program can be exported to other countries in Europe and ultimately come here to the United States. So we're very, very excited about potential huge revenue opportunities for screening for using diagnostic imaging by using AI to make those screening exams both more accurate and most importantly, more cost-effective so that the payors will buy into this and look at the cost benefit analysis of providing screening programs work into what they're already paying for, for mammography. All ends in the next few minutes, and I'll open the floor for some questions. We've had a good year, although we've been challenged like all other companies around the labor aspect of the business. Revenue has been very strong in the third quarter. Our revenue was up over 5%, our same-store sales. We're up almost 4%. Procedure volumes up 5.7%. Our net debt is fairly low relative to most other industry players. We're at about 3.2x net debt. We've got a lot of liquidity on the balance sheet. We launched a new program this quarter, actually subsequent to quarter end called EBCD. It's our or Enhanced Breast Care Diagnostics that's now utilizing our AI technology and allowing women for an out-of-pocket charge of $59 to have AI read their exam. It offers a potential second read for suspicious exams. It offers them an 800 number for -- to talk to a clinician about their findings and it gives them a lifetime risk score for developing breast cancer based upon a variety of different factors that we take in terms of the patient's history, family history as well as their scans. We're going to be rolling out that program over the next 2 quarters throughout the entire United States. We think it's a big revenue and margin opportunity for us as we move into 2023. As I mentioned, we acquired Heart&Lung Health, and we'll be rolling out a program with the national health system around lung cancer screening in the U.K. And recently, we expanded our joint venture with Dignity Health to include three additional centers in Arizona that Dignity is contributing, and we're about to open our largest center nationwide also in Downtown Phoenix with Dignity. Our guidance for this year, we've got 1 quarter left, we'll do somewhere over $203 million of EBITDA, anticipating about $1.4 billion of revenue. We've invested more heavily this year in CapEx because of -- we've opened or will be opening 15 de novo centers in the coming quarters, which will add to growth next year. And we expect that this year, we'll have produced about $60 million to $70 million of free cash flow to the equity. This is after debt service after CapEx. Over the long term, we've had success in growing this business consistently. We've consistently averaged about an 8% compound annual growth rate over the last 13 years. EBITDA has been 5.5% to 6% over that same 13-year time period, and we've been successful in growing volumes very consistently out as well. I'll end with some statistics from an equity, although most of you are debt folks. From an equity standpoint, we're trading about 8.1x EBITDA, which is a pretty significant discount to most health care service providers out there. We think that there's a lot of opportunity for our enterprise value to expand. From a debt standpoint, we're fairly low leverage at 3.2x for health care services. We've got a lot of liquidity, no near-term maturities. Our term loan matures in [ 2008 ]. Our revolving credit facility matures in [ 2006 ]. And we're happily swapped. We put swaps in place on $500 million of our roughly $700 million worth of debt in 2019, although for the first couple of years of those swaps, we lost our [ shorts ]. Today, we're incredibly happy to have swapped our debt LIBOR at around 2% given where LIBOR rates are today, so we're pleased with that. And we also have a hidden asset on our balance sheet, which is a pretty significant net operating loss carryforward, so we don't project ourselves to be a cash taxpayer for some years to come. So with that, we have a couple of minutes for some questions. Thank you.

Thanks, Mark. I'll just ask one quick question, to see if anyone in the audience. But you made reference and you made reference in the presentation on your call about payers driving volumes out of the inpatient setting. Is that message -- has that become more enhanced, has that got more aggressive the last -- kind of pre-COVID, post-COVID? And is it contained or ring-fenced to a couple of large payers that we know and love, if you will?

Sure. Sure. Yes. You've had some of the large national payers explicitly come out with plan design and policies such as Aetna, United and Cigna about their desire and ability to drive the outpatient portion of the hospital-based volumes to the freestanding centers. And we're seeing that. And I would tell you that there's a lot of regional payers that are following suit. It's a slow grind. We're seeing in certain markets that some of these payers have backed off based upon pressure that they're seeing from very powerful hospital systems. But the writing is on the wall, and it's not an accident that 2 or 3 years ago, 15% to 20% of our centers were held in joint ventures and today, 30% of our centers are held in joint ventures with hospital systems because even the hospitals themselves are recognizing that, trying to keep this outpatient business in their four walls is a long-term losing strategy. So the answer is, I don't know that COVID has impacted this trend. I think it's been steady throughout COVID. I think the one thing that COVID has done is that patients, I think, are more likely to try to drive their own business out of the hospitals. If they realize that they have a choice between outpatient sites and going into a hospital where they've been treating COVID patients or are you going to be at risk of staph infection, difficult access, difficult parking, the patients themselves as they migrated more and more to these higher deductible programs are taking their business elsewhere.

Any questions in the audience? We've got time for maybe one more question.

I wasn't that close to RadNet story, and I wonder if you can help us better understand how like reimbursement works in terms of like the professional technical versus global reimbursement because you heard a lot of, I think, shift industry trends around these reimbursement models.

Sure. 100% of our revenue is billed under a global fee schedule. So by virtue of our hospital partners, we are able to bill under their medical provider numbers under the global bill, which includes both the professional and the technical component. RadNet collects 100% of that money. And then we have a management service agreement with our radiologists that pays them a portion of those collections. So in our business, the vast amount of -- the money that RadNet makes and the margin that we make is really on -- from the technical component, not the professional component. Most, if not all, of the professional reimbursement under this global bill is essentially passed on to our radiologist partners for their professional services and interpreting the exams. And that might differ from some other models out there where like the hospital-based models where they're billing just for the professional under the practice PPM model.

I think with that, we should probably go ahead and wrap up. Thank you, Mark. And thank you everyone for joining.

Thank you very much.