Q2 2021 RadNet Inc Earnings Call
Ladies and gentlemen, the euro currently on hold for today's conference call. At this time are as shown in today's audience from times to be underway. Shortly thank you for your patience from please remain on the line.
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Ladies and gentlemen, you are currently on hold for today's conference call. At this time of assuming today's audience and plan to be underway. Shortly thank you for your patience from please remain on the line.
[music].
Good day and welcome to the Radnet, Inc. Second quarter financial results call. Today's conference is being recorded at this time I would like to turn the conference call over to Mr. Maxwell Burke Executive Vice President and Chief Financial Officer of Radnet, Inc. Please go ahead Sir.
Yeah.
Thank you.
Good morning, ladies and gentlemen, and thank you for joining Dr. Howard Berger and me today to discuss Radnet second quarter 2021 financial 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 S. Private Securities Litigation Reform Act of 1995 the.
Pacific Li.
The statements concerning anticipated future financial and operating performance Radnet 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 success.
Fully 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 on management's current preliminary expectations and are subject to risks and uncertainties, which may cause radnet. The actual results could differ materially from the statements contained herein.
These risks and uncertainties include those risks set forth in Radnet reports filed with the SEC from time to time, including Radnet Annual report on form 10-K for the year ended December 31.2020.
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.
Net undertakes no obligation to update publicly any forward looking statements to reflect the 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.
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 second quarter 2021 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.
Moving to participate in our conference call. This morning.
Before we start I would like to say on behalf of myself and the entire team at Radnet. We hope all of you and your loved ones are healthy and staying safe. We are extremely grateful for all of our stakeholders, including our employees business partners lenders and shareholders and wish you all well during these challenging times.
Let's begin.
I'm extremely pleased with our performance this quarter, our financial and operating metrics in the second quarter demonstrate continuing strengthening and improvement in our business that began in the third quarter of last year and is the result of the number of factors.
First the cost saving measures that we implemented during the COVID-19 period in 2020 and further cost containment actions. This year have lowered our operating expenses and created efficiencies within our regionally clustered centers.
Our procedural volumes have substantially recover as many of the municipalities and states in which we operate have loosened COVID-19 restrictions.
We are observing that patients are returning to more regular office visits utilizing healthcare with more normalcy.
Obviously with the rise of the new Delta variant, we remain vigilant and ready to take further protective actions should new restrictions or stay at home orders be implemented.
Lastly investments, we made last year and during the first 2 quarters of this year, both respect to capital expenditures and tuck in acquisition acquisitions are beginning to contribute to our financial results. We discussed previously the extraordinary of investments we made an upgrading of mammography systems during 2002.
<unk> to <unk> digital mammography or tomo synthesis.
While we do not believe mammography volumes have fully recovered from the COVID-19 impact we are experience enhanced reimbursement from the volumes. We are nonperforming on these newly upgraded <unk> systems.
Additionally, during the first quarter of this year, we acquired 10 facilities within the New York Metropolitan market and we completed an additional 5 tuck in acquisitions during the second quarter in other parts of New York, New Jersey and California.
The newly acquired facilities, you have unique cost savings and consolidation opportunities with existing radnet facilities, we expect significant improvement from the results later in the year when we have completed the integration processes.
As a result of all of these factors our results during the second quarter were the best of any quarter in the company's history.
As compared with last year's second quarter, which was impacted by COVID-19 revenue increased 75, 2% and EBITDA more than 150%.
Im, particularly proud of the margin improvement, we were able to demonstrate achieving an EBITDA margin of 17% higher.
By 5.1% of 2.1% from the second quarters of 2020 in 2019, respectively.
The margin improvement is the result of both the return of our procedural volumes enormously more normalized levels as well as many of the cost saving measures. We have put in place which has included consolidating underperforming sites and changing key operational processes, both at the center level and within our corporate support departments.
<unk>.
Adjusted earnings were also very strong in the quarter, we recognized adjusted net income per share during the quarter of 27.
This is in contrast to an adjusted net loss per share in last year's second quarter of 14.
As a result of the strong performance in this year's first and second quarters and the confidence we are feeling for the remainder of the year. We have elected to again increase most of our key financial guidance levels for 2021 market is repaired remarks will review of the increases we made to our revenue EBITDA and.
Free cash flow guidance, which were outlined in our earnings press release this morning.
As many of you have seen during the second quarter on April 26, we announced the completion of the refinancing of our term loan and revolving line of credit.
Based upon current and anticipated future leverage ratios, we expect to save up to $6 million annually in interest expense.
Additionally, we no longer are subject to restrictive maintenance covenants with respect to our term loan and have substantially more operating and financial flexibility under the new credit agreement. This.
This includes lowering our annual required amortization amortization payments by over $30 million and adding over $110 million to our cash balance, which will enable us to accelerate growth.
Yes.
The success of this refinancing can partially be attributed to our strong operating performance and the effect of deleveraging of our balance sheet.
As of the end of this quarter, we had $633.3 million in net debt trailing 12 months EBITDA of $198.6 million.
And a resulting leverage ratio of 319 times net debt to EBITDA. This is the lowest leverage we've had in our company's history.
Pro forma for recent acquisition. This ratio is even lower which is indicative of our further expected deleveraging in the coming quarters.
While we are committed to growing and expanding our business. We will also continue to follow the most.
Methodical and disciplined approach to managing our financial leverage.
Lastly, before I hand, the call back over to Mark I'd like to provide an update as to where we stand with our efforts in artificial intelligence during the second quarter on April 19th we announced that our artificial intelligence subsidiary of <unk> received FDA clearance for its AI mammography triage soft.
Where sage Q.
<unk> is the screening workplace prioritization tool that enables radiologists to more efficiently manage their mammography cases with the use of artificial intelligence.
Details of powerful new AI technology identifies suspicious screening exams, they may need prioritize the attention, allowing.
The allowing radiologists to optimize the workflow for efficiency and accuracy.
This technology is the first FDA cleared triage product that supports both <unk> and 2 the mammography images.
With over $1.5 million mammography exams were performing annually in our markets.
We are in the process of deploying this technology to our breast imagers nationwide I am pleased to report that as of today, our northeast and mid Atlantic Mammography now utilizing sage Q, we expect by the end of the third quarter, our California breast Imagers will also be utilizing this technology.
The early feedback we are receiving from our radiologists is excellent. While we are observing improved productivity. Most importantly, we are providing our patients and pay orders with better accuracy fewer patient callbacks and the possibility of detecting.
Disease, 1 to 2 years earlier than might otherwise be possible. We continue to evaluate further areas of artificial intelligence that can both decrease our costs and drive new revenue streams through providing innovative cost effective screening programs.
Insurance companies, who are interested of new population health models to improve patient care.
At this time I would like to turn the call back over to Mark to discuss some of the highlights of our second quarter.
2021 performance when he is finished I will make some closing remarks.
Thank you Howard.
I'm now going to briefly review, our second quarter 2021 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 second quarter performance.
I will also provide an update to 2021 financial guidance levels, which were released in conjunction with our 2020 year end results in March and which we amended in may upon releasing our first quarter financial results.
In my discussion I will use the term adjusted EBITDA, which is the 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 extinguishment and noncash equity compensation.
Adjusted EBITDA includes the equity in earnings in <unk>.
Unconsolidated operations and subtract allocations of earnings to non controlling interests in subsidiaries and is adjusted for noncash or extraordinary and onetime events taking 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 second quarter 2021 results.
Yeah.
Revenue increased $143.4 million or <unk> 75, 2%.
And adjusted EBITDA increased $34 million or 157%.
The significantly improved performance there as the result of increased procedural volumes.
Cost reductions instituted during the COVID-19 period of.
Additional revenue from our migration to <unk> digital mammography and the contribution from tuck in acquisitions, we completed during the first 2 quarters of this year.
Adjusted earnings for the second quarter of 2021 was $14.2 million or 27 cents per diluted share as compared with adjusted net loss of $6.9 million or negative <unk> 14 per diluted share for the same period in 2020.
On adjusted for onetime of items net income for the second quarter 2021, with $2.9 million or <unk> <unk> per diluted share. This compares to a net loss of $10.6 million or negative <unk> 21 per diluted share in the second quarter of last year.
These per share values are based upon weighted average number of diluted shares outstanding of $53.1 million shares in the second quarter of 2021 at $50.7 million shares.
Outstanding in the second quarter of 2020.
Affecting net income in the second quarter of 2021 were certain non cash expenses and nonrecurring items, including the following.
$8.9 million of noncash employee stock compensation expense.
$268000 of severance paid in connection with headcount reductions related to cost savings initiatives.
1.6 million dollar gain on the disposal of certain capital equipment.
1.2 million of non cash loss from interest rate swaps.
$6 million of.
From that restructuring and extinguishing as a result of our recent refinancing transaction and.
$812000 of amortization of deferred financing costs and loan discounts related to our existing credit facilities.
For the second quarter of 2021 as compared with the prior year second quarter MRI volume increased 88, 1%.
<unk> volume increased 67, 6% and pet Cte volume increased 28, 8%.
Overall volume taking into account routine imaging exams inclusive of X Ray ultrasound mammography and all other exams increased 92, 7% over the prior year second quarter.
On a same center basis, including only those centers, which were part of Radnet for both the second quarters of 2021 and 2020.
MRI volume increased 73%.
<unk> volume increased 54, 9% and pet Cte volume increased 26, 5%.
Overall same center volume taking into account all routine imaging exams increased 85% from the prior year same quarter.
In the second quarter of 2021, we performed 2 million 191868 total procedures.
The procedures were consistent with our multi modality approach whereby 75, 8% of all of the work we did by volume was from routine imaging.
Our procedures in the second quarter of 2021 were as follows.
321779, mris as compared with 171047 mris in the second quarter of 2020.
197375, Cts as compared with 117730 <unk> in the second quarter of 2020.
11508, pet Cts as compared with 8935 pet Cts in the second quarter of 2020.
And $1 million 661206 routine imaging exams, compared with $1 million 137281 of all of these exams in the second quarter of 2020.
Overall GAAP interest expense for the second quarter of 2021 was $12.2 million. This compares with GAAP interest expense in the second quarter of last year of $10.8 million.
Cash paid for interest during the period, which excludes the noncash deferred financing expense and accrued interest was $5.5 million as compared with $12.9 million from the second quarter of last year.
The lower cash paid for interest in this year's second quarter is the result of the timing of interest payments, mainly due to our refinancing transaction in April.
With regards to our balance sheet as of June 32021, unadjusted for bond and term loan discounts, we had $633.3 million of net debt, which is our total debt at par value less our cash balance.
This compares with $608.6 million of net debt at June 30 of 2020.
Note that this debt balance includes the new Jersey imaging network's debt of approximately $49.1 million for which Radnet is neither a borrower nor a guarantor.
As of June 32021, we were undrawn on our $195 million revolving line of credit and had a cash balance of $149 million.
At June 32021, our accounts receivable balance was $157.3 million, an increase of $27.2 million from year end 2020.
The increase in accounts receivables, mainly the result of the significant increase in our procedural volumes and revenue.
This year relative to 2020 relative revenue.
Our days sales outstanding or DSO remains near the lowest levels of our company's history.
Despite the increase in aggregate accounts receivable DSO was just 46 days at June 30 of 2021.
Through June 32021, we had total capital expenditures net of asset dispositions and the sale of imaging center assets and joint venture interest of $48.3 million.
At this time I'd like to update and revise our 2021 financial guidance levels, which we released in conjunction with our fourth quarter and year end 2020 results and the amended after reporting our first quarter 2021 financial results.
For revenue.
Our original guidance level was $1.250 million to $1.300 million.
Our new guidance level, we've increased both the low end and the top end of that guidance level by $50 million to $1.3 billion to $1.350 million of revenue.
For adjusted EBITDA, Our original guidance level was 100 to 100 excuse me of 180 million to $190 million.
We've increased both the low end and the high end of that range by $20 million to 200 million to $210 million of EBITDA.
For capital expenditures, our original guidance range with 70% to $75 million.
We've increased that to $80 million to $85 million.
For cash interest expense.
Our original guidance level was 39% to $44 million.
We decreased our cash interest expense guidance to $35 million to $40 million, which is reflective of the newer lower the lower interest cost based upon a refinancing transaction in April.
And for free cash flow, our original guidance level was $60 million to $70 million, we've increased that to reflect our hyatt higher EBITDA.
Our projection to $75 to $85 million.
As just noted we have increased our guidance ranges for revenue adjusted EBITDA and free cash flow. Additionally, we have raised our higher.
Our capital expenditure level to reflect additional investments in growth opportunities. We've identified in several of our core regional markets.
Each quarter, we reevaluate our actual and projected performance against guidance levels. We will continue to update these levels as appropriate throughout the remainder of the year.
I'll now take a few minutes to give you an update on 2022 reimbursement and discuss what we know with regards to 2022 anticipated Medicare rates.
As a reminder, Medicare represents about 20% of our business mix.
With respect to Medicare reimbursement several weeks ago, we received of matrix for proposed rates by CPT code, which is typically part of the physician fee schedule proposal that is released about this time every year.
We have completed an initial analysis and compared those rates to 2021 rates, we volume weighted our analysis using expected 2022 procedural volumes.
As you May recall last year CMS move forward with increased reimbursement for evaluation and management CPT codes, which favor certain physician specialties that regulate bill for the services, particularly primary care doctors.
CMS proposed doing so with budget neutrality, meaning that the proposed to reallocate reimbursement from physicians, who rarely bill for <unk> M codes to physicians, who regularly bill for these codes.
As a result, radiology and most other specialties are experiencing cuts in reimbursement during 2021.
The cart that we are currently absorbing this year would have been higher if implemented as initially proposed last year, but congressional action at the very end of last year, partially mitigated the sky.
Yes.
In this year's proposed rule governing 2022 reimbursement Medicare appears to effectively be phasing in the remainder of the cut avoided last year.
The cut proposed for 2022 results from a decrease of the conversion factor in the Medicare fee schedule by about 3.8% along with additional decreases in technical and professional RV use of certain radiology CPT codes, mostly focused on MRI and <unk>.
Yeah.
Our initial analysis of the proposal for next year implies that radnet on roughly $1.3 billion in revenue would face of approximately $13 million revenue hit in 2022 from its Medicare business.
Because of the proposed cut in the conversion factor of effects all physicians not just radiologists. There are many lobbying groups from the various medical specialties aggressively opposing the proposed cut including radiology has 2 main lobbying forces the association for quality imaging or AQR and the.
American College of radiology the ACR.
At this time, our experts believe there is the possibility that the final rule to be released in November will be less severe than the current proposal.
Furthermore, it remains a possibility of that congressional action. This December could also mitigate these proposed cuts like it did last year, particularly in light of the continuing COVID-19, and Delta variance situation.
Yeah.
In November during our third quarter financial results call, we hope to have more to update you on about this matter.
I would now like the turn the call back to Dr. Berger, who will make some closing remarks.
Thank you Mark.
Today Radnet is more faceted.
Multifaceted than any other time in our history, we are growing our business and all of the 7 states in which we operate all of which have attractive demographics and a multitude of local market opportunities. We are now partnering on both coasts with some of the largest and most prestigious hospital and health systems and <unk>.
Joint ventures that encompass approximately 25% of our facilities, we control our own it infrastructure with our own suite of <unk> products and services that we sell and license to other industry participants and we are making significant investment in the development of artificial intelligence, which we.
We believe.
We will have the transformative impact on our business and the diagnostic imaging industry in general.
Multifaceted business is healthy and growing and we are exceeding the expectations that we originally set forth in our initial guidance levels, which we increased after the first quarter's results and further increase today.
Growth is coming from virtually all areas of our business with patient volume returning to more normal levels and through implementing aggressive cost cutting and cost containment programs are same store growth and performance model has returned.
The investments we made in <unk> digital mammography technology are paying dividends with respect to increase reimbursement and improve patient care new.
The new advances in Chris the equipment contrast materials radioactive isotopes post processing visualization software and many others will continue to drive new applications and patient indications.
Big pharma the development for Alzheimer's and other diseases in the future bring the promise of greater utilization of diagnostic imaging.
Most exciting to us is that our investments in artificial intelligence has the potential for driving growth like we have never experienced.
Using artificial intelligence to create cost effective screening programs for a variety of disease processes can uniquely impaired population health. We are currently making inroads with breast cancer in mammography utilizing.
Artificial intelligence and.
We envision similar potential for prostate lung and colon cancer in the near future.
We are evaluating further investments in artificial intelligence and look forward to updating you as they materialize.
Furthermore of the refinancing transaction in April positions us with significantly more available financial resources as a result of the over $110 million, we were able to fund to our balance sheet.
The lowering of our annual interest costs and the substantial reduction of required amortization.
This liquidity in combination with the lowest financial leverage in our company's history, and our strong free cash flow yield positions to us that are unique.
And give us the ability to execute on our growth opportunities, both organic and external ones.
Strategic acquisitions will also continue to be an important aspect of our growth.
We routinely have a pipeline of acquisitions that we are evaluating and processing.
Today, the arbitrage between Radnet enterprise value and the multiples for which we can purchase targets is more attractive than ever.
As long as there's multiple arbitrage exists we can continue to contribute to the equities that equity value of radnet through an acquisition strategy.
We remain able to acquire smaller operators in our core markets at 3 to 5 times EBITDA.
While the larger targets might cause us to stretch beyond this evaluation level, they usually afford us more operating and cost synergies that once achieved served to lower the acquisition multiples into this range over time.
We'll execute on these opportunities with this level of discipline when targets are available and in instances when we have motivated sellers.
In conclusion, we are excited enthusiastic about the opportunities that lie ahead for Radnet and we look forward to updating you further in the upcoming quarters regarding our progress.
Operator, we are now ready for the question and answer portion of the call.
Thank you if you'd like to ask a question at this time, please signal by pressing star 1 on your telephone keypad. Please ensure your mute function on your telephone is switched off to allow your signal to reach our equipment is that anytime you would like to remove yourself from the queue. Please press star 2.
It is star 1 if you would like to ask the question. The calls for just a moment everyone at opportunities to take note of your questions.
Or we can take our first question now from Brian Chen of <unk>.
Please please go ahead.
Hey, good morning, guys congrats on the strong quarter.
I guess Howard My first question for you you know obviously a lot of discussion recently on the Delta there yet and what it's doing to just.
Operations for health care.
Obviously in New York, and California saw the state sort of probably a bit more aggressive with the.
So with the measures against the Delta. So just curious what are you seeing in terms of.
Any impact on your.
Referral flow or or volume flow right now and also you mentioned in your prepared remarks, something about preparing to lockdown.
Lockdowns are mandated again that you are preparing to make move so just curious how you guys strategizing around it and what would be different this time around.
Good morning, Brian Thank you.
Well firstly.
I think we had seen in the second quarter, a robust return to the pre COVID-19 volumes.
And there was anticipation still is that the third quarter will continue the.
This recovery.
What we are seeing.
Is that the 1.
1 area, we're focused on very keenly as far as the company strategy, meaning mammography and breast cancer seems to be a little slower to return. We think this is because of 2 primary reasons number 1 there are people that are still reluctant.
To get elective procedures.
And visit healthcare facilities, given not only the.
Concerns that they have about vaccinations and protective measures, but also as we now see the increase in the.
The increase in the <unk>.
The amount of Covid positive results.
There is that hesitation, secondly, and perhaps uniquely with mammography there have been a number of reports that women who are vaccinated do have a reaction often in the axillary region on the or.
From that was injected and there has been some.
Recommendation that the wait 2 to 3 months after the vaccination so that the potential inflammatory response, that's often seen in the lymph nodes near in and around the breast.
I have a chance to subside. So we believe that these are the primary reasons why it might be a little slow to recover and return to.
To the.
Other factors we have now.
Mandated mask wearing for all of our employees and all patients in all of our centers across the United States.
In addition to that all of our centers have been practicing social distancing either in the.
Waiting room itself, making certain that patients feel comfortable.
And our separated as well as having the <unk>.
Barriers are.
Uh huh.
Reception desks.
And often with some of our unique E red.
The message for screening patients patients often wait outside and then our.
The reminded when they are ready to come directly into the exam room for their procedures. So those are the recommendations that we have been following now and policies for several months. So if there is a continuation of the surge.
We believe that most of the measures that we put in place for safety measures and protective equipment.
Simply can be fall in and I don't believe we should have.
The problem with managing the health and safety of our patients that do choose to come.
That is a risk though that as the surge continues.
It may influence patients to hold off on elective procedures. We also have to be mindful of the fact that in some of the states. Fortunately that we don't have a tremendous presence the increase of the surge has also resulted in.
Using up the availability of hospital in ICU beds, and if that were to occur primarily in California, and New Jersey.
And in New York than there might be a further shutdown of elective procedures, which quite often have imaging associated with them.
Uh huh.
So far through the months of September and.
Early August.
We have not seen that impact noticeably in any of our regions, but we're monitoring it very closely.
Yes, thanks for those Scott, It's Howard I guess, Mark shifting gears, a little bit you know margins were really strong in the quarter and I know you cited that the.
The carryover impact of moves that you made last year, but as.
As I think about the ability to sustain margins here going forward.
I know theres the Theres the balancing act between utilization picks back up of revised picked back up there's the capitation side of the business and 1 head of then obviously just the flow through to your fee for service business. So how are you thinking about margin.
Going forward and your ability to drive incremental margin expansion.
Sure.
If you look at our new newly revised guidance measures we are assuming.
The increased margins relative to where we were.
At the end of last year thinking about 2021 the results so.
I think that given the changes that we made in our cost structure last year, the consolidation of the number of <unk>.
The different centers.
The.
Implementation of <unk>.
Things like what Dr. Berger.
Mentioned virtual waiting rooms, and other operating protocols to drive through.
Throughput in our facilities some advances in equipment, particularly.
So the investments we made in digital <unk> mammography that is.
The resulting in higher reimbursement per scan on the mammography side.
Are seeing we have experienced a structural change in our in our margins and improvements of over a 100 basis points relative to where we were in 2019 and 18 I'm not going to compare it to last year, because it was such an extraordinary year with with the.
The Covid impact.
So.
We think that that this is sustainable another reason for our <unk>.
Proved result, our improvements and investments we made in our revenue cycle in terms of collecting more of our cash upfront getting better yields in general from our AAR. Our dsos are at the lowest point in the company's history.
At around 40 days and.
Our cash collections have been extremely strong which has also helped with deleveraging the balance sheet.
And providing us liquidity so we.
We think that that we can sustain the margins.
That that we've been producing so far in the first and the second quarter.
And with the advent of or with the implementation of AI, which Dr. Berger also mentioned on the mammography side and hopefully if we get into other areas of AI, along other screening tools and the other modalities.
That can also structurally lower our cost of performing the radiology services, but also drive new revenue streams.
That can that can significantly benefit margins. So we're at this point, we're very optimistic.
Awesome last question from me I think and Dr. Berger's prepared remarks, he talked about investing more in the expanding in AI.
The new areas.
Anything you can share with us in terms of your AI strategy beyond mammography I know you've talked about prostate in the Gi, but just anything you can share with us if there is the.
AI strategy, where you can take that.
Yeah.
Yes, Brian Thanks again.
Yes, I think as I have mentioned on previous close calls.
The Radnet believes that imaging really is the gateway of population health and within that context, we believe that there should be aggressive and.
The active efforts on screening tools, primarily for cancer and related to the 4 major cancers are comprised of about 80% of the diagnose cancers on an annual basis that was being breast prostate lung and colon.
Given the fact that in.
In our particular business, where we do such a large volume of mammography already and we believe we are technologically and strategically positioned to do screening for lung cancer.
Colon cancer.
Prostate cancer.
We are exploring avenues that will ramp up the ability for us to perform the screening tools on a mass scale not only for the regions, where radnet own centers, but the development of networks, perhaps across the country.
Perhaps outside of the country, where we believe these tools will have the same benefits for population health.
I can't comment on any specific avenues.
This moment.
Rest assured that we are aggressively looking at both internal as well as external ways for us to ramp up the development of these tools, which we think will continue to have radnet. The leader for this not only of radiology, but also on a national scale.
I can't emphasize enough how passionately and strongly we feel about this both as far as the benefits to society as a whole in terms of health care and managing the cost but also of the unique position that radnet is in 2 of both.
Develop these internally or perhaps continue acquisitions under our <unk> umbrella like like we did last year. So.
I think this will be more and more of.
Opportunity for us to demonstrate <unk> commitment to this as well as some of the unique tools given that we also own our own.
Infrastructure and enormous amounts of data, which are critical for the development of these tools to leverage on so we hope to be able to update you on the progress towards these perhaps as soon as our.
The next quarter's earnings call or sooner if something material is sufficient for us to announce publicly.
Awesome, Thanks, again, and congrats again guys.
Thanks, Brian Thanks, Brian.
We can now take our next question from John Ransom Raymond James. Please go ahead.
Okay.
Hey, good morning.
Couple of things from me.
Mark.
M&A is that having any material effect on your outlook in the back half of our margins.
So we've been fairly active this year in M&A in the first quarter, we purchased.
We did 5 small tuck in transactions and then in the second quarter here, we did 10 additional <unk>.
Facility acquisitions.
And as we've said publicly we're.
<unk> opportunistic in how we approach our acquisition strategy, we have of defined set of criteria by which we look for targets and acquire businesses. We do not go out and knock on any doors proactively we have a business development team that consists of 1 per.
And we only take essentially inbound calls because we're looking for motivated sellers in our markets.
Where we can acquire them in the valuation range that we've historically been successful in affecting these transactions, which is in the 3 to 5 times range and.
We will.
We'll stretch at times for highly strategic acquisitions or acquisitions that are a little larger, but those generally come with greater synergies and ultimately we can average down those multiples.
Through time, and better performance and through the synergies.
So a part of.
Why we increased our our.
Our guidance level with from the increasing procedure volume that we're seeing both on the same center basis, as well as with new centers, including those acquisitions as.
As well as the cost savings. So yes, those those facility acquisitions do contribute will contribute to our financial profile for the portion of the year that they within the Radnet umbrella those are going to have more impact next year as we will get the full impact of of all of those.
Centres in next year's results and also it generally takes a quarter to 2 depending upon the size of the acquisition and the complexity for us to integrate the.
Acquired operations effectively into the Radnet the.
Net way for lack of the better term. This includes getting them on our <unk> backbone. It includes the operational protocols clinical protocols.
Right sizing them.
The <unk>.
Given our.
Operational expertise and so yes, we will see some contribution but it will be more significant next year.
So if we're thinking about kind of an early bridge. The next year, you've got the $13 million headwind you mentioned, what's the.
The approximate kind of EBITDA contribution full year next year from these acquisitions versus a partial year. This year, how much of that a good day.
Yeah, I mean, we Havent John.
We haven't.
Disclose the EBITDA of any of these acquisitions publicly but if you look at our cash flow statement for the first 6 months. There is a line item that says purchase of imaging facilities and other acquisitions, it's about $65 million.
Of.
Of enterprise value. So if you assume let's say that's done out of <unk>.
<unk> 5 times EBITDA that can approximate give or take what the contribution of these acquired operations may look like next year.
So just the Orion I won't say net on an annual basis.
So the show up miles any math skills.
You are buying about as much EBITDA as youre, losing from Medicare.
I know, you'll get a parcel of year this year, but.
You're bridging almost of the poll.
EBIT GAAP from M&A from <unk>.
Yes.
Yeah, I hadn't thought about that John because that wasn't necessarily our intent in these acquisitions, but but yes.
And we have other cost mitigates that from.
The from operational changes, maybe some consolidation of of additional centers that we think will fully mitigate the cut next year and we're hopeful as I said in my prepared remarks.
That the final rule will be a little bit less severe given the COVID-19, and other variance that are impacting all providers.
Furthermore, there is the the opportunity.
<unk> potentially that Congress roles.
These cuts back like they did last year given the.
Pressure, that's being put on them because remember when they lowered the conversion factor as it is in this proposed rule that's not just impacting radiology, that's impacting all medical specialties. So on this particular cut it's not just the radiology lobbying groups.
That will be putting pressure on Congress, it's essentially the entire AMIA, maybe less of the primary care physicians, who are getting the increase in the <unk> codes.
Gotcha.
And then just a couple of other cleanups for me your.
You mentioned in your AI strategy detail is that kind of make any difference in your.
For Reed coffees and the.
In the intermediate term or is that more of a longer term efficiency tools.
Okay.
Good morning, John.
I think that's more of a long term benefit the immediate benefits that we're realizing now are.
Primarily improvements in the accuracy and efficiency with which our mammography are now able to read.
A mammogram.
There are other developments.
In our pipeline of our pathway for mammography that we think will streamline the process and ultimately allow our mammography offers to read a greater volume of.
The mammograms.
They are currently capable of so I believe some of these new tools will probably start emerging next year and when fully integrated with our platform.
I believe give us some of these efficiencies these efficiencies by and large are not just designed to reduce our professional cost, but really to allow the shortage of mammographer as that exists on a national scale to handle larger volumes.
Of mammograms that we expect to be able to drive into our centers centers as a result of other compliance tools.
Contracting that we wanted to do directly with the pay oars in the.
Facilitating greater efforts on their part true plan designs and other outreach programs to get somewhere between the the 50 to maybe as many as of 100% of the women who are not getting annual mammography. So part of this efforts on artificial intelligence.
<unk> is not only the raise quality, but to address the the demand for really well qualified breast imagers that.
We remain a huge shortage on the national scale, not just for Radnet and radiology.
Radiology partners.
And then thanks for that and then Mark just.
You know your capitation contracts I know was the smaller smaller piece of every year as you buy more fee per service, but.
You know are they generally.
Hoping as volume has turned a little bit lower or the performing more or less of the month.
Yeah. So I mean competition has remained fairly steady in the 11% to 12%.
<unk> of our business mix.
And that has been scaling along with the rest of the company as we've been growing the fee for service business and we continue to think that there is more opportunity within capitation.
Both for new contracts as well as potential increasing.
Penetration of managed care in California, and other places that will drive more risk taking risk based contracts, which we enjoy very much as it is it helps to cover a lot of the fixed cost of our facilities it establishes relationships with.
Many many referring physicians, who are obligated to send us. These HMO patients that have either fee for service business that can be sent to our centers because of that relationship and also the financial benefits from capitation.
In terms of.
No dsos.
In terms of.
Low.
Low.
Very low if any bad debt associated with these contracts.
And other financial benefits so.
We think that this can take can continue to be a growth engine for the company.
Obviously as patients.
Have returned to a more normal or.
Or regular way of utilizing health care and visiting their primary care and other specialists that they go see we have seen utilization increase as expected with these contracts, but they haven't been.
Increasing to any extraordinary levels of lot of people have asked me John do.
Do we feel like we're benefiting in our business from a pent up demand that might have existed during COVID-19 and the best and our answer is no. We think it's more we may we may have seen a little of that in the third and the fourth quarter last year, but we.
We see it's really more towards a normal use of health care services in the way we judge that is through our capitation contracts, where we can't we see all of the.
Exams that of patient population utilizes because it's the closed patient population and so it's.
We have we've seen increased utilization, but no unusual spikes I would say.
Great.
I'll still in California, Mark the capitation contracts.
The vast majority of them are in California of the of the roughly 1.9 million lives for which we are responsible on an exclusive basis under these capitation arrangements for providing diagnostic imaging.
A little over $1.7 of those existing California, and Thats really do John to the structure of how managed care contracts with large primary care physicians.
<unk> patient care here in California, where they are passing on the burden and the financial responsibility for essentially non hospital based care to these large patient populations to these large medical groups.
And then we sub capitate with these large medical groups too where they shift the the utilization.
Responsibility for diagnostic imaging to us for a piece of the per member per month fee that they're receiving from the various H M. OS. So yeah. It's very much Inc. California phenomenon. There are other states in the United States that do contract under the structure with Hmos.
We see it a lot in Florida, you see it a lot in.
In new.
The new Mexico, Nevada, and that's catching on across the country.
We of risk tastes from taking risk sharing population health is becoming more active and we do have a very significant contract in New York with a division of the emblem health.
For New York Metropolitan lives with their advantage care physician group that that Hasnt.
It has been a very successful contract for both us and Amazon.
Thanks, so much appreciate it.
Thank you.
As a reminder, if you'd like to ask a question. Please press star 1.
We'll take our next question now.
From Gabelli.
Please go ahead.
Yes, hi, good morning, and thanks for taking the questions just a couple from me.
Just curious on the increased Capex, if maybe you can provide some color on some of the additional growth opportunities youre seeing there.
Good morning Mitra.
Yes, most of that comes as a result of the acquisitions, we did in the first and second quarter, it's not at all uncommon for us that in many of the acquisitions that we do they have deferred or delayed.
Capital investment so given the fact that we've done through the year, some 16 or 17 acquisitions.
Do want to.
Best in those sites for example, in new mammography systems too.
The elevate or.
Sure.
The increase their mammography capabilities, particularly with 3 D mammography, which we've been able to enable the demonstrates some very significant return on investment. So that's the primary reason that youre seeing the.
Capital expenditure increase.
Okay. Thanks.
And on the procedure volume increases.
I think most of it is.
Net of demand from Covid, but I was just wondering if you're maybe seeing some of that volume coming from.
More procedures in the outpatient setting as the United and Cigna sort of.
Increasingly seek the shifts those procedures outside of the hospital and maybe also just from a competitive landscape.
Covid probably.
She took up the.
As it relates to <unk>.
Some of your competitors.
Yes, I believe some of the increased volume is coming from that Mitra of their COVID-19 seems to have really galvanize the.
Ensures the health care insurers.
The to really focus on the shift away from the more expensive hospital based imaging to the freestanding facilities.
Some of this is slow to adopt as it has been but.
We are getting more inbound calls from.
Our net.
Insurance companies to help them facilitate those through planned design and other scheduling and authorization tools that were trying to ramp up for them. So I believe that there will be a component of the increased volume.
We see on a normal basis.
Moving.
At the expense of some of the hospital systems. We also believe that as we implement more and more of artificial intelligence.
We will be giving the insurers additional justification for making the net.
Those changes.
I think there is a number of items that I think we'll be able to look back perhaps at the end of this year when we look at.
The contribution to our fee for service business from the <unk>.
Insurance companies and how that has changed but the.
The got here based on the calls that we're getting and the participation that they're asking from us at this point indicates that that should be.
The we should be quite a beneficiary of that in our existing markets.
Okay. Thanks, and then the final 1.
Probably getting ahead of this but how.
As it relates to the share.
The reimbursement for the 2002, assuming it goes through.
How comfortable are you more as it relates to <unk>.
Being able to get that impact just from the.
The improving and elsewhere, but.
Additional cost measures.
Ability to implement.
Well I think that there will be of.
Some measures on the cost cutting side of that that we will always look to try to implement whether or not those.
The reimbursement cuts are affected or not.
But I think given some of our unique capabilities, where as we've demonstrated perhaps consolidation opportunities I believe that will certainly help us mitigate that of going into 2022. Additionally, we shouldnt.
The fact that this reduction in reimbursement is not unique to radnet and that this impact will be felt throughout the system and we expect that.
While it may take a little while some of our competitors.
In the markets that we're in right now where perhaps other markets that will.
Take a look at more aggressively.
We'll feel the need to begin further serious consideration on consolidation so perhaps as the prior questioner was asking Mark we believe that some of the mitigation may indeed come through the more opportunistic acquisition.
That we think will ramp up actually in 2022.
Okay. Thanks, again for taking the questions.
Thank you Mitra take care.
Okay.
We have no further questions at this time I would now like to hand, the call back to Dr. Berger for any additional or closing remarks.
Right.
Thank you operator.
I would like to take this 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 stakeholders. Thank you for your time and I look forward to.
To our next call stays safe and good day.
This concludes today's call. Thank you for your participation you may now disconnect.
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