RadNet Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 6 speakers on the call.

Operator

Welcome to RadNet Inc. First Quarter 2023 Financial Results Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I would now like to turn the conference over to Mark Stauper, Executive Vice President and Chief Financial Officer at RadNet Inc.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning, ladies and gentlemen, thank you for joining Doctor. Howard Berger and me today to discuss RadNet's Q1 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 U.

Speaker 1

S. Private Securities Litigation Reform Act of 1990 5, 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 3rd party reimbursement for diagnostic imaging services, Successfully integrating acquired operations, generating revenue and adjusted EBITDA for the acquired operations as estimated among others 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 ks 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 And with that, I'd like to turn the call over to Doctor.

Speaker 1

Berger.

Speaker 2

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 Q1 2023 results, 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 Q4.

Speaker 2

It was the strongest Q1 in our company's history with record revenue and EBITDA. Relative to last year's Q1, our core imaging center segment revenue increased 13.9% And imaging center EBITDA increased 26.2% from last year's Q1. This strong performance resulted improved EBITDA margins increasing from 12.2% in the Q1 of 2022 to 13.6% In the Q1 of 2023, an improvement of 140 basis points. This improvement was 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.

Speaker 2

Aggregate procedural volumes increased 14.0% and Same center procedural volumes increased 9.3% compared with the Q1 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 2 to 3 times more frequently than patients under the age of 65.

Speaker 2

As baby boomers continue to age and life expense continues to increase. We expect this utilization trend to continue. 2nd, technology in our industry continues to 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 Lastly and perhaps most significant, we are benefiting from a shift in sight of care.

Speaker 2

More and more outpatient volumes are being shifted from 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 sight 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.

Speaker 2

We have seen a 12% reduction in Open positions since the end of Q4 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 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 sign in on bonuses. There has been no magic formula for success. However, these grassroots efforts are slowly paying dividends.

Speaker 2

As a result of the strong performance in this year's Q1 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-nineteen. 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 stronger 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.

Speaker 2

We currently have 13 de novo facilities in various stages of development, which will open for operations in the second half 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. 6 of these de novo facilities are scheduled to open in the second half of twenty twenty three and early twenty twenty four Another 7 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.

Speaker 2

Currently, 121 of our 360 3 centers or 33 percent 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 We'll continue to capture market share from hospitals as payers 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.

Speaker 2

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 next 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.

Speaker 2

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 Detecting cancer sooner allows for better patient outcomes through earlier treatment and innovation 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.

Speaker 2

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 Q1, which included liberal spending to fund our de novo centers in development, At first quarter's end, excluding the losses in our AR and our artificial intelligence reporting segment, Our leverage was 3.4 times net debt to trailing 12 month EBITDA.

Speaker 2

Our liquidity also remains strong. We ended the Q1 with $90,800,000 of cash and we were undrawn on our $195,000,000 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.

Speaker 2

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 in 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 Q1 2023 performance.

Speaker 2

When he is finished, I will make some Closing remarks.

Speaker 1

Thank you, Howard. I'm now going to briefly review our Q1 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 Q1 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.

Speaker 1

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 interest 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 Q1 2023 results.

Speaker 1

For the Q1 of 2023, RadNet reported revenue from its imaging center reporting segments Of $388,400,000,000 and adjusted EBITDA excluding losses from the AI reporting segment of $52,700,000 Revenue increased $47,300,000 or 13.9 percent And adjusted EBITDA excluding losses from the AI reporting segment increased $10,900,000 or 26.2%. Including our AI reporting segment revenue of $2,100,000 revenue was $390,600,000 in the Q1 of 2023, an increase of 14.3 percent from 340 $341,800,000 in last year's Q1. Unadjusted for AI Reporting Segment adjusted EBITDA losses of $4,500,000 in the Q1 of 2023 $3,600,000 in Q1 of 2022. Adjusted EBITDA for the Q1 of 2023 was $48,200,000 as compared with $38,100,000 in the Q1 of last year. Net loss for the Q1 of 2023 was $21,000,000 as compared with net income of $3,000,000 for the Q1 of 2022.

Speaker 1

Net loss per share for the Q1 of 2023 was negative $0.36 Compared with a diluted net income per share of $0.05 in the Q1 of 2022 based upon a weighted average number of diluted There were a number of unusual or one time items impacting the Q1 including the following: $4,100,000 of non cash loss from interest rate swaps, dollars 959,000 Expense related to leases for our de novo facilities under construction that have yet to open their operations. $1,600,000 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 $7,600,000 of net pre tax expenses related to our AI division. Adjusting for the above items, adjusted loss from Imaging Center Reporting segment was $4,700,000 And diluted adjusted loss per share was negative $0.08 during the Q1 of 2023. This compares with adjusted loss from Imaging Center Operations Reporting segment of $7,600,000 And diluted adjusted loss per share of negative $0.13 during the Q1 of 2022. Also affecting net income in the Q1 of 2023 were certain non cash expenses and unusual items $12,200,000 of non cash employee stock compensation expense Resulting from the vesting of certain options and restricted stock, dollars 134,000 of severance paid in connection with headcount 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.

Speaker 1

For the Q1 of 2023, as compared with the prior year's Q1, MRI volume increased 16.7%, CT volume increased 16.8% and PetCT volume increased 20.9 percent. 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 Q1. On a same center basis, including only those centers which were part of RadNet for both the 1st quarters of 2023 And 2022. MRI volume increased 11.9%, CT volume increased 10.6% and PETCT 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 same quarter.

Speaker 1

In the Q1 of 2023, We performed 2,504,635 total procedures. The procedures were consistent with our multi modality approach whereby 75.5% of all the work we did by volume was from routine imaging. Our procedures in the Q1 of 2023 were as follows: 369,556 MRIs as compared with 316,784 MRIs In the Q1 of 2022,

Speaker 2

229,379

Speaker 1

CTs As compared with 196,461 CTs in the Q1 of 2022, 14,126 PETCTs as compared with 11,683 PETCTs in the Q1 of 2022 And 1,891,574 routine imaging exams compared with 1,672,257 of all these exams in the Q1 of 2022. Overall, GAAP interest expense for the Q1 of 2023 was $15,700,000 This compares with GAAP interest expense in the Q1 of 2022 of $11,600,000 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 $789,200,000 of net debt, which is our total debt at par value, less our cash balance. This compares with $693,800,000 of net debt at March 31, 2022. Note that this debt balance includes New Jersey Imaging Network's debt of $148,100,000 For which RadNet is neither a borrower nor guarantor.

Speaker 1

As of March 31, 2023, we were undrawn on our $195,000,000 revolving line of credit and had a cash balance of $90,800,000 At March 31, 2023, our accounts receivable balance was $176,400,000 An increase of $10,000,000 from year end 2022. The increase in accounts receivable is mainly the result of the increase in our procedure 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 of $75,700,000 This total includes $19,800,000 spent under capital leases And the remainder spent in cash. Additionally, the total includes approximately $38,000,000 spent to purchase Imaging equipment already in service, which we were renting on operating leases.

Speaker 1

Note that each year, we frontload the majority of our decisions into the 1st 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 4th quarter and year end 2022 results. We amend our previously announced guidance levels as follows. For revenue, we increased both the low end and the top end of our For adjusted EBITDA, we increased the bottom and the top ends of our guidance our previously announced guidance ranges by $5,000,000 to $225,000,000 to $235,000,000 For capital expenditures, We're increasing our low end and high end ranges by $5,000,000 to $110,000,000 to $120,000,000 for the year.

Speaker 1

For cash paid for interest, we're increasing the low and high ends of our range by $10,000,000 to $45,000,000 to $50,000,000 And for free cash flow generation, we're decreasing our guidance ranges at the low end and the high end by $5,000,000 to $65,000,000 to $70,000,000 For our artificial intelligence segment, our guidance levels remain unchanged. We've increased our guidance ranges for revenue and adjusted EBITDA to reflect the Q1's strong financial results as compared with our original budget. Though we remain vigilant about the economic environment, supply chain disruptions, inflation the possibility of further variance of COVID-nineteen, 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 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 the first half of twenty twenty four. With respect to Medicare reimbursement for 2023, there is nothing to report at this 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, We'll provide CMS our industry's feedback.

Speaker 1

At the time of our Q2 financial results call, We will be in a position to comment on CMS' proposal and its impact, if any, upon RadNet's future results. I'd now like to turn the call back to Doctor. Berger, who will make some closing remarks.

Speaker 2

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 Improved contrast materials and radioactive pharmaceuticals for PET scanning are being advanced. Significant progress has been made in post processing software.

Speaker 2

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's 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 We now have algorithms to address 3 of the top 4 most prevalent cancers.

Speaker 2

We expect to have tools that lower the cost and increase the accuracy and early detection of cancer diagnosis in a form that can We created to influence widespread population health initiatives. While this Artificial intelligence can serve to lower our costs 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 work Flow improvement with the adoption of generative AI through chat GPT algorithms.

Speaker 2

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.

Operator

Thank you. We will now begin the question and answer Our first question comes from Brian Tanquilut with Jefferies. Please go ahead.

Speaker 3

Hey, good morning, guys. Congrats on a really, really solid quarter. I guess, Mark, I'll start or maybe for Howard too. Volumes are obviously strong. I see this trend also specifically in advanced imaging.

Speaker 3

Is this the proof that side of service shift is really accelerating now? And I know, Howard, you This is something that you expect will continue. So maybe without going to like a long term guidance situation, any color, any way you want us to be thinking about Kind of like how we should be modeling organic growth maybe on a 2 to 3 year horizon? Thanks.

Speaker 2

Good morning, Brian. Thank you. Yes, I think that part of the significant increase that we had in our Q1 volume, Well, it's due to many factors. Given the conversations that we're having with payors, We see a definite and more active effort on the part of virtually every commercial payor trying to shift business Away from hospitals. And I might add that I don't think this is just a issue about Reimbursement differences.

Speaker 2

I think it's also the preference of patients who prefer the more The more stable and less Complicated environment of outpatient imaging centers to enhance the patient experience. So I think patients are becoming more aware of the difference both in the quality of service as well as the cost, Which is being made abundantly clear by the commercial payers. So I think what portion of increases From that, I don't know. I think this is a slow process because it still requires interaction with the referring physicians who By and large control for the most part where patients are directed for their outpatient imaging, But clearly these efforts on the part of commercial payers through planned design which we're seeing more and more to encourage the patients into outpatient centers is being Accelerated. So I expect this process to continue for quite some time, both because it will be a slow process As one that is almost inexorable and I think the continued growth of our Joint venture strategy with our hospital systems is indicative of the fact that they recognize that this is an inevitable change.

Speaker 2

And by partnering with RadNet, they provide themselves an outpatient strategy to at least benefit From that transition of those services as well as bringing them into an environment which has better cost controls on Managing these patients rather than in hospital settings.

Speaker 1

And I would just add to that, Brian, that it's not only just the Payers, the differential in pricing and the plan design that Payers are instituting that might have different co pays for hospital based imaging versus freestanding outpatient imaging. But they're also doing it through pre authorization processes where today most utilization is managed Either internally with pre authorization processes at the payors or through 3rd party services such as radiology benefit managers. And once the pre authorization occurs, they are directing the patients to the lower cost sites of care, meaning the freestanding centers. And the patients also, we've heard a lot of anecdotal stories from patients about how I mean more and more over the last 5 to 10 years, many more patients have elected to go into higher deductible programs. And when the patients themselves are shouldering more of the burden of their healthcare costs, they Really experience the benefit of coming into outpatient freestanding settings where the cost could be anywhere between Half the price and a quarter of the price.

Speaker 1

So the patients are over time and this is part of the slow process that Doctor. Berger just mentioned, the patients are getting educated over time as to the differential in this In the pricing discrepancy, just as much as the payers have been become educated on that.

Speaker 3

Got it. And then maybe shifting to AI, obviously a key emerging part of your story. Maybe Howard, if you can give us Color or updates on where things stand. I know you've had some announcements and some FDA approvals recently. But also in your prepared remarks, You touched on business processes and that's kind of new to me.

Speaker 3

So any color and any updates you can share would be great. Thank you.

Speaker 2

Well, good question, Brian. And I think I'll touch on it somewhat in this closed call, Earnings call. But we'll have more to say about it in the very near future. But it's clear That artificial intelligence is on everybody's lifts and minds these days. And I think despite the fact that maybe there are some aspects about artificial intelligence that People are concerned and leery about inside healthcare and particularly in the imaging space.

Speaker 2

I see it as a evolutionary development in the delivery of Radiology and Imaging Services. And really it falls into 2 different categories that we're broaching, One which we've already made substantial progress in and that is clinical applications, particularly in the field of Cancer screening with breast, lung and prostate for which we believe much like Mammography, there will be screening tools for these three cancers that will be used far more regularly in the future As we and others roll out opportunities for both men and women to get these tests And diagnose cancer at an earlier stage, which ultimately leads to a better outcome for the patients as well as the healthcare system. As we noted recently, we had another FDA approval in our prostate screening tool So they're 3.0 level software and the significance of that is that it's now ready for Better adoption by our radiologists to improve their accuracy and workflow and we are working aggressively On that inside of RadNet where we do more prostate MRI scanning Than any other organization in the country and which as we showed you in our results, our MRI and PETCT volume have increased dramatically, primarily as a result of the increased prostate Screening and detection tools.

Speaker 2

But in addition to that, this lays the framework for us To advance the prostate tool much as we have with breast and which we are doing With Wang into a screening tool for men and women who want to come in and Test for early high risk patients for both prostate and lung cancer. So I think you can and we'll see a lot more from that both in terms of the development as well as the adoption Of these tools as they roll out to our patients in our regions. But the other side, which We now are getting equally excited about is really generative artificial intelligence. It appears to us that there isn't anything that we do on the operational side that couldn't be improved With the adoption of generative AI and otherwise known as For this discussion at least as Chad GPT, whether it's scheduling of patients or Reporting tools, coding, workflow, sales and Marketing, every part of what we do could be improved by artificial intelligence. And I think as We'll be talking about later in the later part of the second quarter here.

Speaker 2

We will be positioning ourselves to take advantage of what we've been doing for The last 15 years in developing our own internal information systems and expanding those onto new platforms That not only are far more efficient in their use, but then we'll be adopting some of these New tools to improve our workflows and processes, which in and of itself will help us address Some of the workflow as well as labor shortages that we have. So this is a big focus of the company, which as I mentioned, And for the entirety of the radiology and imaging community.

Speaker 1

Yes. On that front, Brian, we just got some very good news this morning that the U. S. Preventative Services Task Force, which advises CMS and other payers are now recommending that mammography should start at the age of 40. They had come out with a pretty controversial decision in 2,009 to recommend that women over the age of 50 should Start getting mammography exams.

Speaker 1

So this is a big deal because we think that Well, what they're saying is that this could lower the mortality for breast cancer by over 20% By recommending that women age 40 and over get their annual screenings and I think it's going to obviously be very positive for our

Operator

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

Speaker 4

Hey, good morning. I just wanted to probe a little bit on your guidance for the rest of the year. It seems Like you didn't really raise your EBITDA outlook for the next three quarters. Should we think about that as conservatism or is there something factoring into the algorithm that we haven't thought about in our model?

Speaker 2

I think it's conservative, John. We are very pleased with our Q1 results. Part of those results were helped by Less weather related issues in the Northeast and Mid Atlantic that we generally experience. And I think before we become More aggressive, we want to see what the Q2 looks like, which is one that is generally not challenged weather conditions. So we felt that it's prudent to show upward direction both on the revenue side and On the EBITDA side and feel that if we can continue the trends that we've seen here in the Q1, I believe we can look forward to continuing to increase our Guidance at the end of this Q2.

Speaker 1

And I'll add, we are Seeing the same strength in April that we experienced in the Q1. So We're pretty optimistic and upbeat.

Speaker 4

Great. The second question I have is just Trying to find a correlation, maybe it does or doesn't exist. I know most of what you do is diagnostic, but it's Hard not to notice that your jump in revenue starting in the Q4 and continuing also correlated with the big upsurge in 1st quarter across the board with surgeries, particularly orthopedic surgeries. So is there a line we can draw All the positive tailwinds and volume, do you think the uptick in people just getting screened for orthopedic and other surgeries is also helping your volume story?

Speaker 2

Well, I think if anything, John, that may be more a reflection of post COVID returned to normal. As you're probably aware, elective surgeries were Put off throughout the past 3 years and many people delayed getting Elective surgeries, particularly orthopedic surgeries, which generally tend not to be as Urgent as some others. So I think now that people are returning back to more normal Physician visitation, more active, whether it's through sports or other Activities that got somewhat curtailed. I think we're seeing the after effects of that and we would expect that Volume to continue to increase. I might say that there is more and more reliance on particularly for sports Injuries and orthopedic issues, more and more reliance on MRI scanning.

Speaker 2

And as the Quality of the MRI scans improve as well as the scanning time shortened for better Patient experience, we're finding more and more people are willing to undergo these procedures, which have become very Small in the total cost of care for orthopedic conditions.

Speaker 4

So just a ballpark, I mean, for every 100 scans that you do across all your modalities, what Yes. Approximately what percent of those would you say are kind of pre surgical scans versus just kind of routine or ongoing diagnostic scans like the breast cancer scans?

Speaker 2

Well, if you're talking about advanced imaging and in particular MRI scanning, I would say that the Preponderance of what we do are neurologic and musculoskeletal applications, probably, I'm going to say about 80% of what we do Falls into one of those two categories. And the rest of the MRI scanning, which comprises maybe perhaps 20% It's for the rest of the body. Of that 80% that is either neurological or musculoskeletal related, I'm going to guess That's probably 2 thirds, Musculoskeletal and 1 third, neuro application. So, it is a huge part of this Of the industry in terms of its overall value in the Treatment of musculoskeletal problems.

Speaker 4

Okay. And I'm probably looking for a problem that doesn't exist, but has this uptick in Utilization pressured any of your capitation economics in California?

Speaker 2

No, our capitation contracts Are something we negotiate regularly and are a reflection of utilization. Capitation It's really as much as anything else a form of payment that makes it easier both for Our contracted parties and ourselves to reduce billing costs and whatnot. But as utilization increases, that cost eventually gets Pass on to our capitation party. So it may lag a little behind and I think there's more We're more aggressive about it now than we used to be, and we're having very good success in those conversations.

Speaker 4

A couple more kind of model stuff. Exactly, as we think, let's just pick Q4, for example, How should we think about the core labor inflation once you sort of have lapsed your catch up payments for lack of a better word? How are you thinking about Core labor inflation, once we get through the full reset?

Speaker 2

Well, we've built into our modeling, John, An increased cost of our labor expense, as it relates to Our employees, both physician and non physician. What we're hoping for is even though we've built The continued cost of using temporary agencies and some overtime, we hope that the Improved labor conditions that will allow us to fill open positions will And even if those come at higher costs, which we believe they will, we will have some offset of that to the lowering our Plus and dependence on overtime and temporary agencies. So we've built that in and in our Q1 model, We were pretty accurate with our prediction of our employee expense costs. Yes. I guess

Speaker 4

what I'm getting at, should we think about like a maybe a mid single digit kind of underlying core inflation rate absent all the puts and takes with temp staffing? Or we're just looking for a number there.

Speaker 2

I would as it relates to employees and salaries, John, is that what you mean?

Speaker 5

Yes, yes,

Speaker 2

yes, yes. I think that's reasonable. But again, we very much hope because we've built into our model Continued use of temporary agencies. We hope that is somewhat offset, but I think that Kind of increase is certainly reasonable.

Speaker 4

And I know there's probably not one answer here, but let's say we again look same Sure. If you were to do, say, 5% to 7% growth in underlying volume, What's the variable cost associated? I know it's probably a fair step and depends on the capacity in the digital center, but we're just trying to think about the operating leverage versus variable because you really haven't operated at this level of volume growth before. So I don't know that we have a real roadmap.

Speaker 2

Yes. It's a good question and one that we continue to wrestle with all the time because of increased Costs that were experienced that we did in the past. What I would point you towards, which we're very pleased with is the Significant improvement in our margin in the Q1 where we went from 12.2% to 13.6% in our EBITDA margin. We do have significantly higher costs in our Q1 as most companies do Related to employee expenses and from withholding and other benefits As well as most of our bonuses for the year are expense in our Q1. So That number will go down.

Speaker 2

We're confident that we can continue to improve our margins. But I will tell you that I believe part of The improvement in margins we're hoping can come from increasing in our reimbursement rates, which we're Actively pursuing in every market that we're in. So I think some of these increased costs are just A fact of life for every business today, but I think we have tools to offset that. And I'll harken back To the comments I made about artificial intelligence, which I think can have both improvement in our efficiencies With our radiologists and our patient throughput as well as Attacking and approaching virtually every aspect of our business through algorithms related to generative AI.

Speaker 4

Great. Thanks so much.

Speaker 2

Thank you, John. Thanks, John.

Operator

Next question comes from Larry Solow with CJS Securities. Please go ahead.

Speaker 5

Great. Thanks. Good morning and congrats on a good start to the year. Just a few follow ups, I guess on the margin question for starters. How much does mix and I realize it's probably a slow improvement, but obviously mix and turn to much Higher margin advanced imaging including rapid growth in PETCT in the last couple of quarters.

Speaker 5

How much does that play into margin? And Maybe over time, I know it's been pretty slow improvement over the last few years, but could that potentially pick up as Especially like this PetCT, which is growing really rapidly, continues to drive more of your revenue contributions?

Speaker 2

Hi, Larry, and welcome to the family.

Speaker 5

I appreciate it.

Speaker 2

I think we have to look at this in a couple of different ways. When we talk about mix, There's 2 and I think you're talking about modality mix

Speaker 5

Correct.

Speaker 2

Versus pay or mix, right? Correct. Because payer mix has remained pretty stable for a long time with us. I think you're right that The modality mix is shifting, but even if there's an increase in Some of these exams like the PETCT, huge increase that we saw particularly related to Prostate screening and scanning. It still represents a relatively small percentage of our total volume.

Speaker 2

I think, Art, correct me if I'm wrong, it's maybe It's under 1%. Under 1%.

Speaker 1

Representing about 5% to 6% of our revenue.

Speaker 2

Yes. So that will also be a slow adoption. The margins on that are Higher to be sure, but we see opportunities there not just from what we're doing today, but what we Back to due tomorrow. We're hopeful that the Alzheimer's adoption, which we believe is a great tool, Not necessarily for just diagnosing Alzheimer's, but monitoring the treatment of the new drugs, which all seem to have Potential neurologic and primarily brain impact, But we see those as increasing. And to that end, we have upgraded a substantial number and we'll continue to upgrade substantial number of our PETCT scanners, both to improve the quality, but more importantly, And much like we're seeing with CT and MRI, the new equipment and new Software that can be adapted to these has had a substantial improvement in scanning time.

Speaker 2

So What we may wind up seeing is that the shift is not so much Because we're getting a lot more demand, but we're able to access our backlogs by improving our Throughput on our equipment with the investment that the capital investment we're making in hardware and software to Shorten scan times and to improve the image quality. Both of those in and of itself Could have a significant impact on our margins given the fact that the relative cost of Our overhead remains pretty flat as we can improve our patient throughput. So I think it's a very dynamic Issue that we'll continue to monitor and given some early results of how effective It has been to reduce the scan time, particularly with MRI. We have accelerated Some of the software, which are relatively nominal costs to us relative to the total Cost of an MRI system for greater adoption in the second half of this year.

Speaker 5

Got it. Appreciate all that color. And then just a second question, just a follow-up on the enhanced breast cancer detection. You mentioned you're In that program a little bit, some new pricing. Could you just give us a little an update on where you stand there?

Speaker 5

I think if I'm not mistaken, I believe you guys are charging The $50 to $60 per patient there. And can you also just I think you mentioned 20% sort of penetration at the centers You're now offering this at. Can you sort of just update where we stand there? Is it just on the East Coast today? And when do you expect to have it across 2 centers?

Speaker 2

Yes. Thanks for the question, Larry. We have intentionally delayed rollout To really get a sense of what we need to do to make this new technology And this clinical tool, if you will. And I want to emphasize that it's a clinical tool and not just an artificial Intelligence tool because it involves utilizing our radiologists to look at the results Of artificial intelligence and compare it with their initial reading and make certain that everybody I guess a sense of what the most accurate diagnosis at that moment in time should be. And As a result, we're finding that by looking at focus groups, looking at various comments back from The patients that we see, that this is not something that everybody is just going to come in and adopt, Given that there's an educational process to this that we have found both for the patients as well as their referring physicians.

Speaker 2

So We've intentionally delayed the rollout. We might be a little bit behind that. We currently have it rolled out In about 80% of our markets on the East Coast, 2 of our biggest opportunities we've For the rollout on the East Coast, we've delayed based on some initial feedback here. And we think that the Price point on this is somewhere between $60 $75 that patients who enroll in it are very comfortable with and actually Some are surprised that we're not charging more. I think part of what we're also doing is trying to provide other tools In this early breast cancer detection that will further enhance the risk assessment that Patients have for getting cancer well before it may even be diagnosed by artificial intelligence.

Speaker 2

So We're excited about this. The announcement today that the U. S. Public Service Task Force Has finally lowered the recommendation for when women begin getting their screening mammals From 50 to 40. And the importance of that is that that's what a lot of the commercial payers have adopted.

Speaker 2

So they're clearly going to change and now put an emphasis And there's 20 more 20,000,000 women between that age group that now should be getting their Mammography, some of which already have. So I don't want to say that it's been that black and white. But clearly now as it gets adopted into Health plans and preventative health for our patients, we expect that an increase, a substantial increase in our mammography screening business and therefore greater adoption of artificial intelligence and clinical tools For assessing early breast cancer detection. And I can't emphasize enough of how valuable and how important that is. And I'll Emphasize something that we've talked about.

Speaker 2

When breast cancer is diagnosed In the earliest stages, however you want to find it, stage 0 or stage 1, there's a 99% 5 year survival rate. And effectively, if everybody that should be getting mammography screening was getting it, Nobody would die from breast cancer because it's not a fatal disease if it's caught early. And it's One of those things that modern medicine with its diagnostic tools is whether it's treatment tools has had an enormous impact and should have an even greater one going into the future with the adoption of artificial intelligence. So we think we're on the cusp of something That not only will be, I think, very transformative for breast cancer, but also for prostate and lung cancer. And it's getting everybody on board with the value that these tools can provide that ultimately will lead to a better outcome For all the stakeholders in the healthcare system.

Speaker 5

Got it. Great. I appreciate that. And then just lastly on the just on de novos. Can you just clarify?

Speaker 5

I think you had 15 that I think lined up right, 2 I think opened late in 2022 and then you have still the 6 And then the remaining 13, 6 respectively open, I guess, more like back half of this year or next year and then the remaining 7 in 24, is that right?

Speaker 2

Yes, yes, that's right, Larry. Yes.

Speaker 5

Okay. So it feels like I thought it was a little bit I thought somewhat we expect to open up a little bit earlier this year. Regardless, I guess your guidance hasn't changed. So this is probably net net not a bad thing, but is it a little bit slower the ramp of these or maybe I was just missing?

Speaker 2

Yes. Everything has become more complicated. Post COVID, most of the building department in virtually every market that we're in have reduced staff or Right. Are slower to turnaround permits, slower to get inspection. So unfortunately, some of the projects Have been delayed.

Speaker 2

But that won't deter us and we're actually looking beyond 2024 At other de novos that we're going to start talking about and become actionable, primarily because This is taking us longer than we anticipated. And the need for greater capacity to scan not only The cases that are being asked of us today, but as we increase screening for various cancers and increase the amount Business there, we don't want to let what should be a fundamental shift in the treatment Diagnosis and ultimately treatment of cancer be delayed because there isn't enough capacity of equipment and personnel. So these are things that we're Actively looking at every day.

Speaker 5

Got it. Great. I appreciate all that. Thanks so much.

Speaker 2

Thanks, Larry.

Operator

Mr. Howard Barger for any closing remarks.

Speaker 2

Again, I would like to take the opportunity to thank all of our shareholders for their And the employees of Redneck 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 We'll have more information about the continued success and growth of the company as it exists now as well as other

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Earnings Conference Call
RadNet Q1 2023
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