RadNet, Inc. (RDNT) Q1 2013 Earnings Report, Transcript and Summary

Good day, and welcome to the RadNet Incorporated First Quarter 2013 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Mark Stolper, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and thank you for joining Dr. Howard Berger and me today to discuss RadNet's first quarter 2013 financial results. Before we begin, 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.S. Private Securities Litigation Reform Act of 1995, specifically, statements concerning anticipated future financial and operating performance; RadNet's ability to continue to grow the business by generating patient referrals and contracts with radiology practices, recruiting and retaining technologists, receiving third-party reimbursement for diagnostic imaging services, successfully integrating acquired operations, generating revenue and adjusted EBITDA for the acquired operations as estimated, among others, are forward-looking statements within the meaning of the Safe Harbor. Forward-looking statements are based upon management's current preliminary expectations and are subject to risks and uncertainties, which may cause RadNet's actual results to differ materially from the statements contained herein. These risks and uncertainties, include those risks set forth in RadNet's reports filed with the SEC from time to time, including RadNet's annual report on Form 10-K for the year ended December 31, 2012, and RadNet's quarterly report on Form 10-Q to be filed shortly. Undue reliance should not be placed on forward-looking statements, especially guidance on future financial performance, which speaks only as of the date it is made. RadNet undertakes no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the date they were made or to reflect the occurrence of unanticipated events. And with that, I'd like to turn the call over to Dr. Berger, President and Chief Executive Officer of RadNet.

Thank you, Mark. Good morning, everyone, and thank you for joining us today. On today's call, Mark Stolper and I plan to provide you with highlights from our first quarter 2013 results, give you more insight into the factors which affected this performance and discuss our future strategy. After our prepared remarks, we will open the call to your questions. I'd like to thank all of you for your interest in our company and for dedicating a portion of your day to participate in our conference call this morning. As many of you are aware, our business typically feels the effects of seasonality during the first quarter. Generally, we are impacted by winter weather conditions in the Northeast, which disrupt patient volumes during and after winter storms. Additionally, our industry, like that of other health care services sectors, in recent years, has been increasingly affected by first quarter other phenomenon related to higher patient participation in large deductible health plans. In some cases, the high deductible plans cause patients to delay big-ticket health care spending until later in the year when they have satisfied their deductibles. In other cases, the higher deductibles have reduced health care utilization in aggregate by causing insured populations to ration their health care spending. Over time, insurance companies have shifted increasing amounts of financial burden to patients in return for charging them lower monthly premiums. We believe our first quarter 2013 results suffered from these 2 factors, particularly within our East Coast operations, which today represents slightly more than half of our revenue. We experienced a general softening of procedural volumes in the East, which we believe is indicative of the general environment for and utilization of health care, as opposed to something that is specific to RadNet or RadNet's competitive position in our East…

Thank you, Howard. I'm now going to briefly review our first quarter 2013 performance and attempt to highlight what I believe to be some material items. I will also give some further explanation of certain items in our financial statements as well as provide some insights into some of the metrics that drove our first quarter performance. Lastly, I will affirm our 2013 financial guidance levels. In my discussion, I will use the term adjusted EBITDA, which is a non-GAAP financial measure. The company defines adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, each from continuing operations, and excludes losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishments, bargain purchase gains and nonequity compensation -- noncash equity compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to noncontrolling interest in subsidiaries and is adjusted for noncash or extraordinary and onetime events taken place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or loss attributable to RadNet, Inc. common shareholders is included in our earnings release. With that said, I'd now like to review our first quarter 2013 results. For the 3 months ended March 31, 2013, RadNet reported revenue and adjusted EBITDA of $179.8 million and $25.6 million, respectively. Revenue increased $11.3 million or 6.7% over the prior year same quarter, and adjusted EBITDA decreased $3.3 million or 12.2% over the prior year same quarter. As discussed by Dr. Berger, the comparison to the first quarter of last year was made more difficult by the additional workday last year and the unusually mild winter in 2012, each contributing to making last year's first quarter unusually strong. As a result, our same-center revenue decreased 7.1% from last year's quarter, with lower same-center…

Thank you, Mark. In short, our strategy is to continue to execute on the principal business tenets that we feel are necessary for future success in our industry. The first is scale. In our highly fragmented interest industry, which is suffering from lower reimbursement, decreasing utilization and availability of capital, size matters. Our cost structure, leveraged with suppliers and payors and industry relationships with powerful joint venture partners, will continue to set apart RadNet from other industry players. We will continue to make strategic acquisitions in our regions if they fit our criteria with respect to price and strategic importance. We will also continue to opportunistically leverage our scale and expertise to partner with large local health systems and hospitals. The second tenet of our business, focus is on efficiency and cost containment, which is partially driven by our multi-modality and geographic clustering approach. We will continue to be the largest one-stop shop for all imaging needs in our regions. This allows us to manage our operations with greater efficiencies than many of our other competitors and distinguishes ourselves in the eyes of regional payors and referring physician communities. We will also continue to advance key initiatives that can help mitigate any reimbursement pressures that may occur in the future. Examples of these are the implementation of our eRAD RIS and PACS systemwide, voice recognition transcription, effective purchasing of supplies and equipment maintenance and the elimination of unnecessary expenses with respect to newly acquired operations. We will continue to identify other avenues to save costs and achieve efficiencies within our business in the future. And finally, our strategy continues to be, diversify our product offering. This has included our entry into radiology software, teleradiology and professional services and medical oncology niches that are heavily imaging dependent. We are leveraging these capabilities to provide a continuum of services to joint venture partners who seek an imaging partner who can provide solutions to all their diagnostic needs. Furthermore, each product offering represents a unique growth opportunity in and of itself, and these offerings are far less capital intensive than our core business. We continue to believe our strategy is the correct long-term strategy for our industry, and we are confident that we will be able to overcome the pressures that are currently challenging diagnostic imaging. Few would disagree with the statement that diagnostic imaging will remain a critically important part of the health care delivery system of our country. Operator, we are now ready for the question-and-answer portion of the call.

[Operator Instructions] And we'll go first with Darren Lehrich with Deutsche Bank.

A couple of things. I wanted to just ask about the opportunity you mentioned to refi the high-yield notes and just make sure I'm hearing you correctly. Do you think that as you build cash and prepare for that, that, that alters the level of M&A activity this year? I just want to make sure I understand what you're saying. Are you just calling out that that's coming eventually? Or you're going to have a different priority for cash flow this year as a result of that?

Darren, well, 2 comments. Number one, with the repricing and the financing that we just completed, if we are continuing to pursue M&A activity, we will have full availability of our revolver. So that is one source of cash, along with the substantial free cash flow that the company is generating which was enhanced also by the repricing. At the current time, there are no larger acquisitions in the pipeline that we are seriously considering. And while I think that there will always be smaller tuck-in acquisitions, they will not use up a substantial amount of our cash. So while I don't say that we're out of the M&A market here, we are going to be focused perhaps more on cash generation and build-up, unless there is something so strategically compelling that it requires us to reconsider that. By and large, I'm saying that we do want to be in a good position come next April, to look at all the options that we might have in regards to the bonds.

And then I guess, just a question for you, Howard. Several years back, there was this discussion that a lot of the managed care companies and even Medicare were pursuing the accreditation as a way to really sort of bifurcate the industry. I guess, can you just update us on that and what kind of impact you've seen in your markets, whether that's limited the opportunities for some of the smaller centers you compete with, and how that's all played out?

Well, I don't think, at this point, Darren, the accreditation process has had that much of an impact within the industry, at least in terms of weeding out the smaller or less-state-of-the-art players. That's generally a long process and one that is not that particularly expensive for individual operators to qualify for. What will happen over a period of time is really more a result of the lack of investment that we are seeing. And I'm saying that because of conversation that -- conversations that we've had with all the manufacturers, OEMs, that are sewing [ph] and telling us of enormous decrease in outpatient imaging sales. So at some point, the older equipment will lose its accreditation and therefore, I think, force further consolidation. I don't believe that the smarter operators are going to wait until that axe falls. They're likely to either sell or consolidate with other players in the markets, which I believe we are seeing now happening at a much brisker pace than perhaps any time that I've seen in the history of being in this business. I think, if anything might put a little bit of a squeeze is the potential legislation for the self-referral loophole in Stark that is currently part of the Obama budget to be implemented. If indeed that does pass in its current form and while it will only affect arguably Medicare and perhaps Medicaid payments, I think that, that could be the depth [ph] now for the in-office exemption of imaging and which could have a very substantial benefit to the existing players because that volume, while there's probably quite a bit of overutilization, will still need to be seen somewhere for that, which is appropriately ordered. So I think, over the next 3 to 5 years, all of these impacts, the lack of capital spending, the probable and likely closing at some point of the in-office exemption, as well as just overall controls on utilization, are going to have substantial impacts in the industry and cause only the strong to survive, which is where RadNet has positioned itself.

That's helpful. And then last question, I guess, just Mark, maybe not an exact number or breakdown, but if you could just help us think about the breakdown in your revenue base between patient service revenues and some of the other things, management fees and other things, activities, that are going on outside of the imaging centers. Just a helpful update there, what that breakdown is on the revenue.

Sure. I -- the revenue that we consider outside the core business of imaging, and we actually include things like management service fees that we receive from our joint ventures and management fees that we receive from our physician groups who were staffing hospitals and paying us to manage those contracts and billing-collect for them, we include that in our imaging center side. So really, when we analyze the business and look at that which is kind of outside the core of owning and operating imaging centers, it's really only our IT, our Breastlink and our teleradiology businesses. And those are totaling really in the $30 million to $40 million range right now in terms of total revenue.

Got it. And that's annualized?

And with the majority of that being oncology, our Breastlink operations as well as our Imaging On Call subsidiary, which is our teleradiology business. The IT revenue is really in the $5 million range, so it's not really material at this point.

And we'll go next to Henry Reukauf with Deutsche Bank.

Just a question, Howard, on the -- or Mark, on a follow-up to the comments about considering a redo of the bond. I think it's -- there's a little confusion out there that you may consider it sometime, consider -- it seems that -- it seems to me, like, you consider it a good idea. But you just said you'd -- now you'd probably only consider it when the ball -- bond became callable in April. So is it something you might consider a little bit earlier? Or is it really something that's off the table until April of next year?

Henry, that's completely driven by economics and whether there's a financial model. I mean, obviously, before -- prior to the callability of that, there's a make-whole premium. And we would only really consider taking out the bonds early if, financially speaking, the bonds were trading at a level where it made sense to do so by paying the make-whole or making some offer to the bondholders. So our mindset right now is preparing really for April and being in the best financial position to take care of the bonds in April. But we would consider doing something earlier if they were in our best interest financially. Okay?

And I'll just make another comment on that, Henry. As we get closer to the callable date of next April, which is, like we said, 11 months to go, the dynamics could change because of the ability at that time to have certainty about what the price of that would be. And I wouldn't be surprised if one of our investment bankers came in with a great notion of the timing and the wisdom of doing it sometime of -- sometime ahead of that period, but it will be very much driven, as Mark said, by economic factors. But again, time is somewhat on our side, because as we get closer to the callable date, whatever the price at that time is, it's going to be less than it is today. The good news is our bonds...

Cost, the cost. Yes.

The cost, I'm sorry. Yes, the cost. The good news is our bonds are trading very, very positively and well, well above par. And that's the bad news, too. But I'd rather have them be where they are right now than below par. So I think we're in a good position to carefully monitor the credit markets as well as opportunities. I'm sure that will be presented to us between now and next April.

Okay. I got on a little late, so just a comment on the volumes. I think you mentioned that things had picked up in March and April. I just want to know if that's kind of continuing. And then as I look to what you report on a same-store kind of volume growth last year, I think the first quarter was a very, very tough comp, and now second quarter actually becomes a much easier, easier comp. I think that maintains itself throughout the year. Do you think you can put up kind of same-store organic growth as we move throughout the year, just with a lot easier comps?

Yes, Henry -- yes, you're absolutely right. The first quarter of last year was a very tough comparison for a couple of the things that you might not have heard earlier on the call predominantly because of weather conditions last year. It was one of the most -- it was one of the mildest winters we've seen in recent history, in 2012. So we were benefited by having really no site closures and no weather issues last year, where this year, it was a more typical winter where we had some of those issues. And then last year was also benefited by having 1 extra workday during the quarter in 2012 because of the leap year. So for that reason, you're right, last year was an extraordinarily good first quarter to compare ourselves with this year. Having said that, we think that we did have some softness in our first quarter volumes, but we are seeing picking up -- on the East Coast, really. West Coast performed according to our internal budget during the first quarter of this year. So we're putting a lot of focus and energy into spending more time and resources on our East Coast operations. And we're seeing some -- we saw some benefits in March and we're seeing a little bit of a pickup in April. So...

And in May. May has started out very strong.

So we're still optimistic about the rest of the year. And as you said, the comparison to the second quarters next -- of last year and the third and fourth quarters of last year is going to be a much more fair comparison as we progress through the year. So we're still optimistic that we'll be within our guidance ranges that we set forth at the end of last year for -- or at the beginning of this year for 2013. And whether that means we can comp positively on an organic basis, that kind of remains to be seen. It's still a very difficult operating environment. We've seen a focus on these higher deductible health plans where consumers are being more judicious about how they're spending their own dollars. So we're seeing some decrease in utilization throughout the system. But we're still optimistic. We're -- it will -- I think we've got a chance for positive organic growth for the second half of the year, but we'll have to see.

And we'll go next to Elie Radinsky with Cantor.

Can you just discuss the arrangement that you have with Barnabas and how that's now changed in this quarter and the potential financials surrounding that change?

Elie, well, the Barnabas arrangement or relationship takes on several different forms, and I'll try to describe them individually. The first part is that we are in a joint venture with Barnabas essentially 50/50 on 2 centers right now and soon to become 3. So there's a joint venture ownership of our centers, and those centers are currently benefiting from improved pricing that we were able to negotiate with the help of Barnabas that is better than what we see in the wholly-owned RadNet stores. So that's one part of the relationship. The second part of that...

Did the improved pricing begin in the second quarter? Or was that there in the first quarter as well?

No, it's really begun here in the second quarter. So we were not -- the joint ventures basically were -- the stores that were joint ventures, if you will, were somewhat handicapped by being open and ready for business but not having all of the final negotiations done with the payors, that just finished in April. So the revenue was very small, but the expenses, as you would imagine, were high. And that will have a substantial turnaround here in the second quarter. The second part of our relationship is that we provide management services through the joint venture for both RadNet wholly-owned centers and Barnabas inpatient and outpatient facilities. That will generate additional revenue into the joint venture as a result of very specific projects that we're focused on, namely improving pricing in the other centers of RadNet, number one; and number two, specifically identify projects generally at Barnabas hospitals, as well as their freestanding facilities that could transition into -- and probably will into the joint venture as we begin to reorganize and rationalize the imaging services on the Barnabas hospital campuses. A third part of our relationship with them is providing utilization management and, essentially, a capitation arrangement for about 30,000 employees and dependents which started, I believe, in April 1, and which, RadNet gets management fees for doing utilization management, as well as participating in the savings that we help drive by lowering the cost of the imaging services for this approximately 30,000 employees. The fourth way is that we are continuing to look at other hospital systems and markets inside of New Jersey. And we're currently under discussions with 2 of them, which I can't disclose right now, which will create additional joint ventures and opportunities for us with existing centers of RadNet, as well as the sites that those hospitals themselves are operating, which will provide us even more extensive coverage in New Jersey and further develop what we want in the way of a state-wide network of own...

So specifically, let's say, for example, let's take your Clifton site, New Jersey, which is probably out of the based operating area where Barnabas has -- so in other words, that site may joint venture with another hospital theoretically, as -- and as opposed to be included in the Barnabas venture?

Actually, in that example, which is a good one, Elie, what we would do is that center would still be part of our relationship with Barnabas, but we might joint venture with another hospital system that would then own a piece of a new joint venture, call it newco, which would include that hospital plus the Barnabas joint venture. Does that make sense?

Yes, it does. Now, well, I guess the last call -- or last time I spoke with you, you mentioned that Lenox Hill, your very strong relationship there when you made the acquisition. You were planning on growing the New York, especially the Manhattan, area. Does this preclude you from doing that? Or is that still your expectation to do so?

No, no. We have some rather high levels of interest in the Manhattan marketplace for further growth and development. But generally, that'll be one-off centers here and there that will help complete a more extensive network for the Manhattan marketplace. But we are in talks with people who are -- currently about opportunities there.

Okay. Maybe, Mark, you -- can you just remind us what your ability is to buy back bonds from the open market? And also remind us of your ability to add additional term loan at these very, very cheap levels.

Sure. We have -- we're -- we have a basket in our senior credit facility of roughly 20 -- I'm going by memory here, I want to say, $20 million or $25 million, to be able to buy back either our stock or any junior capital such as bonds, so that would be some of the basket we would use to do -- to repurchase any junior capital, whether it's bonds or repurchase stock, make a dividend, et cetera.

And what about additional capacity at the term loan levels, are there any restrictions from you adding traditional term loan debt?

No. I mean, we're -- we've got a...

The bonds were within convents.

Well, right. We have a -- the covenants of -- that's in the bonds of 2 to 1 interest coverage for incurring additional debt, so the bond incurrence test we'd always have to comply with. But...

Sure. But assuming you take out sort of the bond debt with term loans, that should be much beneficial for you?

It could be. I mean, obviously, it uses our senior capacity to be able to do that, but that's correct.

It appears there are no further questions at this time. Dr. Berger, I'd like to turn the conference back to you for any additional or closing remarks.

All right, thank you. Again, I would like to take the opportunity to thank all of our shareholders for their continued support and the employees of RadNet for their dedication and hard work. Management will continue its endeavor to be a market leader that provides great services with an appropriate return on investment for all its stakeholders. Thank you for your time today. And I look forward to our next call.

And that does conclude today's conference. We appreciate your participation.