Q2 2023 RadNet Inc Earnings Call
Pardon me, ladies and gentlemen, this is the conference operator today's call will begin at 10 35, a M. Eastern time that is approximately five minutes. We ask that you. Please stay on the line and once again today's call will begin with approximately five minutes. Thank you.
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Pardon me, ladies and gentlemen, this is the conference arthritis today's call will begin in just a few moments. We ask you. Please stay on the line and once again today's call will begin in just a few months. Thank you.
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Good day and welcome to the Radnet second quarter 2023 financial results Conference call.
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I would now like to turn the conference over to Mark Stolper, Chief Financial Officer. Please go ahead Sir.
Thank you.
Good morning, ladies and gentlemen, and thank you for joining Doctor Howard Berger and me today to discuss Radnet second quarter 2023 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.
Specifically 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.
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 on management's current preliminary expectations and are subject to risks and uncertainties, which may cause radnet actual results to differ materially from the statements contained here in.
These risks and uncertainties include those risks set forth in Radnet reports filed with the SEC from time to time, including Radnet to annual report on Form 10-K 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 publicly.
<unk> 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.
[laughter].
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 2023 results give you more insight.
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 for dedicating a portion.
Of your day to participate in our conference call. This morning.
I am very pleased with our performance in the second quarter. It was the strongest quarter in our company's history with record revenue and adjusted EBITDA.
Relative to last year's second quarter, our core imaging Center segment revenue increased 13, 8% and imaging center adjusted EBITDA increased 14, 7%.
This performance was driven in part by heavy demand in virtually all of our markets.
Procedural volumes increased 11, 4%.
Same center procedural volumes increased seven 1% compared with the second quarter of 2022.
Cause heavy demand is being driven by a number of factors that we have highlighted in recent quarters, which we believe will continue to create strong growth for years to come.
First within the health care delivery system. There is a growing focus on preventative noninvasive medicine with keen interest in the earlier and more accurate detection of diseases.
Managed care grows risk based provider models become more common in population health screening becomes more prevalent diagnostic imaging will grow and its importance.
Second as the population expands and ages diagnostic imaging is used with greater frequency in fact, Medicare lives utilizing imaging two to three times more often than younger commercial lives.
Third technology in our industry continues to evolve and improve creating additional medical indications for ordering diagnostic imaging tests.
Dances in MRI technology, and post processing software have shorten scan times increased throughput and capacity and improved imaging quality.
New contrast materials and radioactive my Ro pseudo calls are driving novel applications, such as P. M S.
Or prostate specific membrane antigen pet scans and Alzheimer's imaging.
While these factors explain the steady growth in our industry. There is also a market shift taking place within diagnostic imaging.
Awesome working in its favor increasingly patient volumes are being directed away from expensive hospital based imaging.
Facilities towards more cost effective ambulatory outpatient settings.
Freestanding outpatient centers offer more convenient and lower cost services that are preferred by patients, referring physicians and payors.
We believe these favorable trends will continue to help drive our future same center performance and present growth opportunities for years to come.
To address these trends we've opened one new facility and we currently have 12 de novo facilities in various stages of development, which will open for operation in the second half of 2023 and throughout 2024.
These facilities are located in markets, where we have patient backlogs require additional capacity. Although we currently lack access points to service patient populations in need.
While these projects require us to make capital investments above our normal spending we are confident these centers will be material contributors to our long term performance and growth.
While the labor market remains challenging 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.
We continue our efforts to grow our hospital and health system.
Partnership initiatives.
Currently 120, 363 centers or <unk> 33 per cent are held within <unk>.
Health system partnerships are partnerships or some of the largest and most successful systems in our geographies, including our WJ Barnabas Memorial care dignity Health Life Bridge University of Maryland.
Medical system.
This health system, Cedars Sinai and others do.
These and other health systems are seeking solutions for long term strategies around outpatient imaging and they recognize the cost effective and efficient freestanding imaging centers will continue to capture market share from hospitals as payers and patients migrate their site of care towards lower cost high quality.
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We expect by year end, our JV centers could represent closer to 40% of our total center count.
Our hospital and health system partners have been instrumental.
And increasing our procedural volumes through their relationship with physician partners.
Additionally, our JV partners are helpful in providing support if needed in establishing long term equitable outpatient reimbursement rates for our services.
As a result of the strong performance in the first half of this year and the confidence we are.
For the remainder of the 'twenty to 'twenty three period.
We have elected to increase key financial guidance levels in our core imaging center operating segments from 'twenty to 'twenty three.
Mark in his prepared remarks, we will review the increases we made to our revenue and adjusted EBITDA guidance levels upon releasing our financial results. This morning.
Lastly, we continue to make progress with our AI and digital health initiatives. You may have seen our recent press release announcing two additions to our executive team, who will be focused on driving growth in our digital health businesses to include both clinical and generative AI opportunities as well as opportunities in.
He read imaging informatics and related software businesses.
So soca and Sunjata, Missouri will.
We will be focused on commercialization partnerships product development and operations and our digital health platform.
Why do they assist us with continued progress of deep health aliens and quanta.
It sounds like we'll also be launching a number of initiatives in generative AI designed to improve efficiency and lower cost of many of our corp.
This processes such as.
Contact centers scheduling insurance verification front office functions reporting tools revenue cycle and many more.
General way I should be as transformative to the core functions of our imaging center business as clinical a predictive AI it will be to the delivery of our professional radiology radiology services and population health screening.
In the coming quarters, we will share the initiatives that we are undertaking a number of which we have been have been prioritized to help us address the challenges of the current labor market.
I'm also pleased to announce that Doctor, Greg Sorensen, the founder of detail. The first AI company. We purchased over three years ago has assumed the role of Chief Science Officer, and he has joined the board of directors of Red.
The investments we are making in digital health technology and personnel underscore our commitment to our digital health initiatives and highlight their growing important to RASM future strategic direction and priorities.
We are experiencing strong growth with our digital health platform and the first.
Six months of this year, our AI revenue grew 109% from last years same period, driven predominantly by the launch of our enhanced breast cancer detection E. B C D mammography offering, which we continue to implement across our networks.
We expect this growth to accelerate in the second half of this year as we expand.
A b C D to more of our womens centers throughout our markets, particularly within our West coast operations.
The results of the program and the feedback we are receiving from our patients referring physicians and hospital partners have been excellent.
The inception of the a B C. D program, we have diagnosed over 450 breast cancers that without the intervention of.
Artificial intelligence might have gotten otherwise undetected.
Detecting cancer sooner allows for better patient outcomes through earlier treatment and intervention and reduces cost in the health care system.
Furthermore, we are reducing the callback rates for patients through the use of it yeah it might be more definitive with the initial screening exam.
We currently are experiencing an approximately 30% of enrollment and the ABTS P. D. Mammography screening program and believe we will see greater uptake as we improve communicating and marketing the benefits to our patients and their referring physicians.
Finally, I would like to comment on rabbit, radnet liquidity position and financial leverage.
On June 16th we completed an equity offering where we raised $246 million of net proceeds to deleverage our balance sheet and position us to accelerate growth.
Offering along with strong operating performance resulted in a net debt to adjusted EBITDA.
Ray show of approximately two times at quarter at weaker.
We currently have the lowest leverage and strong liquidity position in our company's history.
As of June 30th we had $357 million of cash on our balance sheet and we're undrawn on our $195 million revolving line of credit.
Our days sales outstanding Dsos at June was 35.4 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.
Low leverage lower cost of capital and strong liquidity relative to many of our other industry operators position us to capitalize on acquisition opportunities and other business opportunities where capitalization is advantageous.
We remain patient and disciplined in our approach to acquisitions focus first on our core markets, where we bring unique synergies and cost savings.
At this time I'd like to turn the call back over to Mark to discuss some of the highlights of our second quarter 'twenty to 'twenty three performance. When he is finished I will make some closing remarks.
Thank you Howard.
I'm now going to briefly review, our second quarter 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 second quarter performance.
I will also provide an update to 2023 financial guidance levels, which were released in conjunction with our 2022 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 a non-GAAP financial measure 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 extinguishment.
And noncash equity compensation.
Adjusted EBITDA includes equity and earnings of unconsolidated operations and subtract allocations of earnings to Noncontrolling interest 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 2023 results.
For the second quarter of 2023, Radnet reported revenue from its imaging centers reporting segment are $401.3 million and adjusted EBITDA of $63 $7 million, which exclude revenue and losses from the AI reporting segment.
As compared with last year's second quarter, Radnet revenue increased $48 $5 million or 13, 8% and adjusted EBITDA increased $8 $2 million or 14, 7%.
Yeah.
Including our AI reporting segment revenue was $403 $7 million in the second quarter of 2023, an increase of 13, 9% from $354.4 million in last year's second quarter.
Including the losses of the AI reporting segment adjusted EBITDA was $64 million in the second quarter of 2023 and $51 $3 million in the second quarter of 2022, an increase of 17, 7%.
For the second quarter of 2000, and twenty-three Radnet reported net income of $8 $4 million as compared with $7 $9 million for the second quarter of 2022.
Diluted net income per share for the second quarter of 2023 with 12, <unk> compared with a diluted net income per share of <unk> 13 cents in the second quarter 2022 based upon a weighted average number of diluted shares outstanding of $60 9 million shares in 2023 and 57.
Shares in 2022.
There were a number of unusual or onetime items impacting the second quarter, including the following.
$4 $2 million of noncash gain from interest rate swaps.
1 million dollar expense related to the change in valuation of contingent consideration related to completed acquisitions.
$759000 of expense related to leases for our de novo facilities under construction that have yet to open their operations.
And $8 $7 million of pre tax losses related to our AI reporting segment.
Adjusting for the above items adjusted earnings from the imaging centers reporting segment was $14 $9 million and our diluted adjusted earnings per share was 24 cents during the second quarter of 'twenty three.
This compares with adjusted earnings of $8 $6 million and diluted adjusted earnings per share of 15 cents during the second quarter of 2022.
Also affecting net income in the second quarter of 2023 were certain noncash expenses and unusual items, including the following.
$4 $9 million of non cash employee stock compensation expense, resulting from the vesting of certain options and restricted stock.
One $9 million of severance paid in connection with headcount reductions related to cost savings initiatives.
$77000.
The disposal of certain capital equipment.
And $748000 of noncash amortization of deferred financing costs and loan discounts related to financing fees as part of our existing credit facilities.
For the second quarter of 2023 as compared with the prior year second quarter MRI volume increased 11, 8%.
C T volume increased 11, 3% and pet C T volume increased 18, 3%.
Overall volume taking into account routine imaging exams inclusive of X Ray ultrasound mammography and all other exams increased 11, 4% over the prior year's second quarter.
On a same center basis, including only those centers, which were part of Radnet for both the second quarters of 2023 and 2022 MRO.
MRI volume increased seven 3%.
C P volume increased six 3%.
And pet C T volume increased 18, 8%.
Overall same center volume taking into account all routine imaging imaging exams increased seven 1% over the prior years same quarter.
In the second quarter of 2023, we performed 2 million 551382 total procedures.
The procedures were consistent with our multi modality approach whereby 75% of all the work we did by volume with from routine imaging.
Our procedures in the second quarter of 2023 were as follows.
387619, mris as compared with 346598 mris in the second quarter of 2022.
235138, Cts as compared with 211221 C. Ts in the second quarter of 2022.
15000, thirty-six pet Cts as compared with 12710 pet Cts in the second quarter of 2022.
And 1.913 million 589 routine imaging exams as compared with 1.719 million 647 of all these exams in the second quarter of 2022.
Overall GAAP interest expense for the second quarter of 2023 was $16 million. This compares with GAAP interest expense in the second quarter of 2021 of $11.4 million.
The higher interest rate is higher interest expense is predominantly the result of the Upsized, New Jersey imaging network credit facility completed in October of last year in conjunction with N J and the acquisition of Montclair radiology.
Cash paid for interest during the period, which excludes noncash deferred financing expense and accrued interest was $17 $8 million.
Cash paid for interest net of interest earned on our cash balance and interest rate swap payments received was $12 $4 million for the three months period ended June 32023, and $29 $9 million for that same period last year.
With regards to our balance sheet as of June 30th.
Unadjusted for bond and term loan discounts, we had $518 $9 million of net debt, which is our total debt at par value less our cash balance.
This compares with $662 $1 million of net debt at June 32022.
Note that this debt balance includes new Jersey imaging network debt of $146 $3 million for which Radnet is neither a borrower nor a guarantor.
As of June 32023, we were undrawn on our $195 million revolving line of credit and had a cash balance of $357 million.
At June 30th 2023, our accounts receivable balance was $174 $5 million, an increase of $8 $1 million from year end 2022.
The increase in accounts receivable is mainly the result of the significant increase in our procedural volumes over the last quarter.
Our days sales outstanding or DSO remains near the lowest levels in our company's history at $35 four days as of June 32023.
Through June 30th 2023, we had cash capital expenditures net of asset dispositions and sale of imaging center assets and joint venture interests of $86 $9 million.
This excludes $8 $4 million of cash capital expenditures at our New Jersey imaging network joint venture.
At this time I'd like to update and revise our 2023 fiscal year guidance levels, which we released in conjunction with our fourth quarter and year end 2022 results and amended after reporting our first quarter 2023 financial results.
For total net revenue, we have increased our guidance range by $25 million at the low end and $10 million at the high end to 1.575 billion to 1.1 billion $610 million.
For adjusted EBITDA, we've increased both the low end and the high end of our guidance by $7 million to 232 million to $242 million.
We have left our capital expenditure of cash interest expense and free cash flow guidance levels unchanged as amended after the first quarter results.
And for the artificial intelligence segment due to the delay that Dr. Berger spoke about in our implementation of that program.
We have lowered the guidance the revenue guidance by $5 million, both at the low end and the high end to $11 million to $13 million.
And our adjusted EBITDA loss projection for the year has increased by $2 million at both the low end and the high end to $11 million to $13 million.
Loss for the year.
Yeah.
And of course imaging Center reporting segment, we have increased our guidance ranges for revenue and adjusted EBITDA to reflect the strong financial results with the first half of 2023 as compared with our initial budget.
We have lowered our guidance ranges for revenue and adjusted EBIDTA for the AI segment and as Dr. Berger mentioned, we have been refining the a b C. D program and had been testing different levels of pricing various service offerings, new marketing collateral local market sales and marketing strategies.
We estimate that this optimization process has resulted in a 90 to 120 day delay in the progress of the program.
So the new revenue guidance levels fall short of our original estimate estimates on it.
It represents almost a tripling of our business from 2022 levels.
We remain incredibly excited about the growth in AI and we continue to believe that we can break even in the AI segment before the end of 2024.
I'll now take a few minutes to give you an update on 2020 for reimbursement and discuss what we know with regards to 2020 for anticipated Medicare rates.
As a reminder, Medicare represents about two to one at about 22% of our business mix.
With respect to Medicare reimbursement several weeks ago, we received a matrix for proposed rates by CPT code, which is typical.
As 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 2023 rates.
The volume weight, our analysis using expected 2020 for procedural volumes.
Okay.
As you May recall three years ago, CMS moved forward with increased reimbursement for evaluation and management CPT codes, which favor certain physician specialties that regularly bill for these services, particularly primary care doctors.
CMS proposed doing so with budget neutrality, meaning that they proposed to reallocate reimbursement from physicians, who rarely bill for E. N M codes to physicians, who regularly bill for these codes.
As a result, radiology and most other specialties experienced cuts in reimbursement during 2021, 2022, and 2023 cuts meant to be favor phased in over several year period.
The cuts we faced in 2023 were substantially mitigated by legislation that was passed at the end of last year as part of the consolidated Appropriations Act.
In this year's proposed ruling governing 2020 for reimbursement Medicare appears to effectively be phasing in.
Any remainder of the E and M code related cut avoided last year as a result of the consolidated Appropriations Act.
The proposed for 2024 results from a decrease in the conversion factor in the Medicare fee schedule by about three 4% from $33.89.
To $32.75, along with certain minor changes to the RV use the relative value units or certain radiology CPT codes.
Our initial analysis of the proposal for next year implies that radnet on roughly $1 $6 billion in revenue with face an approximately $7 million to $9 million revenue hit in 2024 from its Medicare business.
But because the proposed decrease in the conversion factor affects all physicians not just radiologists. There are many lobbying groups from the various medical specialties aggressively opposing the cut including radiology has two main lobbying forces the association for quality imaging R. A T y.
And the American College of Radiology D. A C R.
At this time, our experts believe there is a high probability that the final rule to be released in November will be less severe than the current proposal as a result of congressional action that could take place later this year similar to what happened last year.
In November during our third quarter financial results call. We hope to have more of an update to give you about this matter.
While the $7 million to $9 million cut to Radnet to revenue next year is not insignificant we have reimbursement increases completed or scheduled from capitate, it and commercial payers that will fully mitigate this Medicare reduction, which should go into effect.
In the currently proposed period.
I'd now like to turn the call back to the Doctor Berger, who will make some closing remarks.
Thank you Mark.
Technology has always been a driver for change in our industry.
This appears to be true today than ever before.
The official intelligence, both clinical and generative.
He is in its nascent stage within the field of radiology.
Everything that we do today, it will be impacted by technology and innovation.
And artificial intelligence in the coming years, our business is in information technology business almost every process, we perform including collection of patient information.
Italy, Preauthorization insurance benefits.
Nation creation of radiology reports billing and collecting medical coding and processing of patient payments can be enhanced by data algorithms and management tools.
Artificial intelligence and informatics, either already play or will play important roles in all of these business processes.
Well that has always been on the leading edge of technology, which has been a key to our success.
In the past, we have both adopted solutions from others that benefit in our business and created our own solutions in areas, where we felt were imperative for us to control.
This philosophy has not changed in 2010, we began a journey to design their own radiology information system.
The image management system, which has become core to our gain to work so much.
What we do at the operating level and the efficiencies we have created an operating or 363 centers have been the result of our ability to control our I T infrastructure.
As we move into the next generation of innovation, driven primarily by AI, we see even more opportunity to bring efficiencies cost savings and improved margins to radnet through investments in our digital health initiatives.
As demonstrated by our second quarter results. Our crew operating core operating business is healthy and growing supported by heavy and expanding procedural volumes.
The next stage of Red and its growth and development will be to bring these technological solutions to our business and to the broader radiology marketplace that make servicing this accelerating demand possible.
I believe we have assembled many of the components, including the management talent to take our business and industry to the next level of innovation.
Radiology and diagnostic capabilities to an even more important and critical role in health care delivery.
We are excited to keep our stakeholders informed of our progress in these areas, while continuing to execute on driving growth in our core business through a focus on same center performance Hospital and health system partnerships tuck in acquisitions and de Novo expansion.
Operator, we are now ready for the question and answer portion.
On the call.
Thank you.
Ask a question. Please press Star then one on your telephone keypad.
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We will pause momentarily to assemble our roster.
And today's first question comes from Brian .
With Jefferies. Please go ahead.
Hey, good morning, guys I.
I guess my first question for Howard and maybe Mark to you know obviously the core business is strong and volume performance was really compelling just curious how you're thinking about the sustainability of the.
Strong demand trends and your ability to maintain a healthy organic growth rates going forward.
Good morning, Brian .
Thank you.
I think the key to sustaining our growth is really the investment that I've talked about in our digital health platform.
The advent of generative AR AI as well as the faster and easier development of new algorithms.
Will allow us.
Two.
<unk> formed all of the processes that we use to operate our imaging centers.
Suitably more efficiently.
And with less dependence on the.
The labor issues that we currently face much as everybody in health care and for that matter the general economy. So.
We expect the growth.
In the imaging sector of our business to continue to grow.
But that.
The ability for us to scale up and perform the necessary tasks and demands that we have will be imperative for us to use these tools that can create these efficiency and less lessen our dependence on already.
Overstretched are stretched our labor market.
So.
As as we move into the latter part of this year and certainly by the first quarter, we will be able to perhaps talk a little bit more specifically about these initiatives.
But.
As we demonstrated in the.
The press release that we made about a week or so ago.
With the new executives added to this team we feel that we are in an excellent position to drive this transformational change and control the processes that have allowed us to operate all 363 of our centers on a single platform.
Godless of what market that we're in so.
Well I like to think that we can.
Do you proud of what we've achieved to this point I think the best is yet to come in terms of the technological innovation entrance transformation, which radiology and imaging are probably better suited for than virtually any other specialty.
The health care industry.
And Brian I'll, just add one one other thing here at yet another key to our continued growth and success is the ability to incur.
Increase our capacity and and you know the 12 de Novo centers that we have currently under construction I think five of which will open by year end or should open by year end. The other seven sometime in 2024 will also be instrumental in our ability to create the capacity that we need to.
Better service the heavy demand that we have right now and in virtually all of our markets, where we're experiencing significant backlogs, which is obviously a high class problem, but you know one that you know it is still indeed, a problem you know as we try to get patients into our centers.
Expeditiously and try to provide great service to our referring physician community. So I think that the de novo strategy and driving that level of capacity. In addition to the technology advances that Dr. Berger talked about as well as some additional technology that we licensed that allow for.
Shorter scan times for MRI scanning with post processing software that allows for greater throughput and and obviously greater capacity at our center. So all these things are important to continue to to be able to grow that like.
Like we have been because the demand for imaging services is there and that's that's that's clear in all of our markets.
I understand I appreciate that and then I guess my second question as we think about AI and I think I understand the.
The reasons for the delay or pushing some of the.
Target out I guess two questions as I think about it.
Mark You said, you think you'll still hit breakeven.
But by the end of 2024, I mean, if you can remind us how does that compare to your original outlook for the business and then second maybe.
Step back how are you thinking about you know or where does your confidence come from and your ability to get.
The AI side of the business, where you want it to be.
In the time frame that you've outlined.
Hum.
Hi, Brian .
I'll take that one mark can fill in if he.
I think sorry, I Miss anything like you did some nicely just in the question.
For this but.
I took where as consonant and perhaps even more confident.
And our vision for.
For two reasons number one we we have been successful.
And about 30% of our screening mammography cases.
Having our patients enrolled in what is increasingly being recognized.
It's very valuable.
Addition to the breast screening process and this is since we're going direct to consumers. Since there is no reimbursement for AI at this point in time.
This is a different strategy than most anything that we've.
Attempted in the past, although our prior effort and this was also successful some eight years ago I think it was win too.
<unk> mammography got converted to three D mammography and we had a.
A similar.
Process that we implemented to have patients paid for this before it was reimbursed we expect a similar process.
Process to unfold here, so that the direct to consumer we hope is just a us stopped.
Stopgap here until its adopted by.
Not only more and more of the payors, but more and more employees employers I should say recognize.
This kind of wellness screening can certainly benefit them as well as their employees, but I'd like to.
Good on that that while that's been.
Slow learning process for us.
I don't think we'll be slow will be the generative AI side of the initiatives that we have already begun embarking on that we think can be transformative in a way that.
Radiology.
Practice and in managed and I think that in some respects may even become more important in the short term here given a number of the issues as I mentioned in my opening remarks.
With difficulties that we have in the labor market.
So I think you'll see from us in upcoming quarters more specifics.
About how these tools can be implemented and perhaps one of the more exciting things.
Mess.
Methods that.
The new AI tools on the generous side are capable of is that we don't have to rewrite everything all at one time, we can take specific.
Core needs that we have like our contact centers and scheduling and insurance verification.
And focus on them as segments that we can layer on when they're ready rather than have to retool the entire.
Platform that we have and this is a huge difference from the way that.
We and others have operated in the past that.
Give us a lot of.
Our enthusiasm about the impact that we can have on our.
Operational processes here in the very near future and in fact.
We hope that some of these may be implemented as early as the first quarter of 'twenty 'twenty four.
And I think what you'll hear more and more from US is the continued efforts that we make not only in our.
Breast screening program, but also in lung screening and prostate screening as we become more comfortable with the.
Self pay and direct to consumer marketing.
As well as the <unk>.
Initiatives to.
Take control of our operational processes through general AI algorithms.
Two.
Not only create efficiencies, but to create a better patients.
Experience for all of our.
People that choose to get their scans done in the yeah. The radnet locations.
Got it and then maybe Mark last question for me I mean, thank you for giving color on your view on reimbursement.
Find me.
If I'm thinking this correctly. This is about the same level that you see in terms of proposed cuts every year and am I right in thinking that Congress has stepped in to kind of like blocker mitigate this over the last three or four years.
Yes. So this we believe is the result that they proposed cut as a result of the phase in of the <unk>.
Budget neutrality aspect of increasing that E N M codes.
That primary care docs and family practice Medicine, Docs, Bill under which occurred several years ago and they've been phasing in the.
This cut in in it not just write radiology, but every specialty in order to pay for those N M increases and so we face this cut for the last few years. It was a little bit higher the last couple of years, but then with the ultimately mitigated by this.
Appropriations Act that was passed in December of both December of last year in the December the prior year was a bipartisan bill that was sponsored by two.
Congressmen, one Republican one Democrat from both California, and Indiana. This is barren b shine and so a lot of our.
Experts in lobbyists, you know not only within radiology, but within healthcare in general because remember this cut as being face not just by radiologist being placed by everybody.
That you know there's a lot of support to try to get these cuts you know either reversed or mitigate it. So we we we have some level of confidence that again this year. Some of the proposed cut here in the in the Medicare communication that we we got several weeks ago well.
Likely be mitigated, so, but regardless of whether it's mitigated or not and we're estimating that the total impact to be $7 million to $9 million range in our revenue.
We've got more than that in terms of.
Reimbursement increases that have either already gone into place.
In 2023 that will increase our reimbursement in 2024 or that will be scheduled to go into place on both within our capitation contracts as well as our commercial contracts. So regardless, we're not overly concerned about this level of reimbursement cut but we do have some.
A level of optimism that part of the Medicare cut will be mitigated.
Brian and lumpy.
Brian Let me add one other thing, which I'm sure you're aware of which may make.
The drive away from hospitals are even stronger than it is right now.
I'm sure you're right.
As you've seen that's a new hospital outpatient prospective payment.
Our system has increased the reimbursement to hospitals for their Medicare patients further widening.
<unk>.
Reimbursement that's paid to hospitals for the same services that we provide on them.
Freestanding outpatient basis.
I think.
It's interesting to see that very thing that has.
<unk> been a big driver and moving the patients away from hospitals into outpatient centers, which was primarily from the commercial payers in the extraordinary difference in reimbursement is now being seen also on the Medicare side of it.
And in the times that we exist with inflation on expenses going up it'll be even more imperative.
For our patients to be very mindful of where do they get there.
The place of service.
To that point Bryan the HOPPS schedule now has over a 30% premium relative to the outpatient Medicare fee schedule, which makes no sense whatsoever, particularly because Medicare supposedly is interested in sight.
Site neutrality, you know with respect to its reimbursement so.
As as the spread widens I think you're going to have more and more Medicaid Medicare patients, particularly ones that have you know a 20% copay or co pay which is <unk>.
Very typical in the Medicare fee for service landscape start directing their business out of hospitals, just like the private payers and commercial insurance plans are doing.
Got it thank you guys.
Thank you and our next question comes from Nathan <unk>.
With Raymond James Please go ahead.
Hey, you got on late here stepping in for John So just first on the labor environment environment Lastly, heard contract labor costs were running at about 50% of last year's level. So any update on on contract labor and anything you can quantify there and then just more broadly on the labor environment.
Has that and will that continue to improve.
In the second half and then.
In the foreseeable future.
Sure Hi, Nate I'll I'll take this one.
What we've said.
In the first quarter, what we did say in the first quarter.
Is that our reliance on contract labor as well as our reliance on paying our own employee base overtime is about.
50% of what it was last last year, it's not that the cost of of outside labor.
All of these of these staffing companies has gone down by 50%. Its just that were relying less on them as we've become more successful in filling open positions. If you if you remember.
Our number of open positions hit its height in September of last year and throughout last year, we were mightily struggling with.
Feeling a stack.
Staff.
At our facility at the facility level and keeping our centers open long enough to service the heavy demand we've been much more successful this year.
And there has been some stabilization in general and Nova in the labor market in and being able to staff our centers appropriately to keep the the centers open to Phil you know more of this backlog. So it's not that the pricing has gone down it's just a reliance on outside services that's gone down.
Got it thanks for that and then you know just on seasonality here.
Assume that this year features kind of similar trends.
It was kind of pre pandemic periods. So maybe I don't know 24, 25% of a poorly but on an <unk> and then a bit of a step up there in <unk>.
Well, we typically do see seasonality in our business the first quarter tends to be our most challenged quarter primarily for two reasons.
The first being a winter weather conditions on the in the northeast or in the United States, We're roughly 35% of our business is.
And you know where we're impacted by you know storms that closed facilities or power lines going down power outages things of that nature and the second reason that the first quarter is a little slower is that the reset of patient deductibles tends to create a phenomenon where.
<unk> Ah patients, who utilize health care services less at the beginning of the year and then our more more liberal with their spending as they move through their deductibles towards later part latter parts of the year. So we tend to see the first quarter and the first half of the year little lighter than what we see in the.
Our third and fourth quarters also our summer vacations tend to impact the second quarter and then the fourth quarter as patients have moved through deductibles tends to be high utilization high utilization quarter. And then you also have higher utilization of mammography and the <unk>.
Fourth quarter, which coincides with.
The October month, which is breast cancer awareness. So I would expect all things being equal, though although we can never really tell them that the second half of the year tends to be stronger than the first half and in 2023 should be no different.
Awesome. Thanks, and then just squeeze in one more here on the equity in earnings of joint Ventures line.
Looks like that came in lighter than our model and it was about a one and a half million in this quarter kind of a bit of a deviation from historical trends. So anything to read through there in terms of you know JV consolidation or just the overall JV strategy and not just how to think about that line item moving forward and that's all I got thank you.
Yeah.
Yeah, nothing I can think of that would be you know what trends you know, obviously, one quarter a trend doesn't make them. So I would expect that line to you.
To even out I'm not I'm I have to go back to see what are what impacted the quarter in that and in that respect that at our unconsolidated JV levels, which is what you know what you're talking about in terms of equity in earnings, but yeah, I wouldn't I, there's nothing that's gone.
On there that would make that sustainable that change.
Yeah.
Thank you and our next question today comes from yarn Z with B Riley Securities. Please go ahead.
Good morning, Congrats on another strong quarter and thank you for taking our questions first a follow up on Brian's question, maybe more for Mark I noticed the same center volume year over year growth rate was seven 1% versus nine 3% last quarter.
What are the overall volume growth was 11.4 versus 14% last quarter. This might be a repeat from the last question, but especially the claim for your plan do you think these three items, we are modeling assumptions.
Do you anticipate the volume grows in the second half to be similar to what you have observed being to Q and it will be great. If you can comment on what do you have all observed so far regarding the patient flow in July . Thank you.
Sure sure. Thanks, Joanne nice to talk to them. So we have had very strong same center performance for the first half of the year and we've always said historically that we felt over the long run given the you know the the growth in the industry and our growth in.
Our markets and taking share away from.
Competitors that we felt that we could sustainably grow in the 3% to 5% same store sales growth over the over the long period of time.
As there has been a significant growth not only in the industry from some of the newer technologies such as you know P. SMA that Dr. Berger spoke about on the prostate side and.
Other things that are driving new applications and new indications for ordering these tests the industry, it's been growing nicely.
And and and we've been growing faster because we're we're also benefiting from the shift in hospital based product from hospital based outpatient imaging to freestanding center imaging. So our growth over the last year or two has been exceeding that kind of 3% to 5% range.
That we've talked about now in the first quarter, we had extraordinary growth as you mentioned at nine 3% and we talked about it then and I'll I'll emphasize this now we don't believe nine 3% isn't necessarily a sustainable number we were impacted positively by two things in the first quarter that was extra.
Ordinary the first being that we had a much more.
More mild winter this year relative to the winter in the first quarter of 2022 and that benefited us in the first quarter.
And then second extraordinary impact was that the first quarter of 2022 was impacted by the army crime variant of Covid, we're not only Ah.
Patients were impacted extensively, but you know our employee base was also impacted to the tune of having over 8% of our employee base on Covid leave you know for the first couple of weeks of January of last year. So you know the nine 3% this year in the first quarter, which was better than <unk>.
Normally what would have been but for those two situations.
Situations, which I just described.
The first the second quarter here it was a much cleaner what I'd call same store sales comparison with last year, where we werent impacted by weather, we werent being impacted by Omi crime and in 2022 and you know it was it was I think a more fair comparison, so when when to see your quest.
<unk> directly about the second half of the year, you know I would hope that we could.
Exceed or be towards the high end of that 3% to 5% growth in same store sales growth that we've talked about in the past.
And we'd hope that it would look more like the second quarter going forward because of all the reasons that I've talked about which is driving our growth.
Carl just maybe a quick follow ons here.
Would be great. If you can comment on what do you have observed so far obviously patient flow in July .
July was it was a good month for us.
July is always a bit of a.
Challenge given the July 4th holiday and what day of the week It falls on which this year. It fell on a Tuesday, which is not necessarily most advantageous for us given that the Monday is almost like an extension of the holiday weekend and also the vaca.
<unk> schedule, but.
Relative to last year's July volumes were.
Pleased with what the.
The early results in July look like and where our August appears at least for the first week appears to be also a holding holding well with our within our expectations.
Got it thanks for the additional counters here and maybe Oh.
Howard or Mark can you provide more color on your capacity right now for MRI and pet scans.
The current procedure close to you are 90% of all your capacity I'm asking because you know the comments from Bob Biogen Eisai.
I'll get into trade 10000, Alzheimer disease patients by the end of March 'twenty 'twenty four assuming there is you know this increasing demand I'm curious what do you view as the rate limiting factors for you to meet this demand such as you know the numbers of imaging instrument.
Do you have the staffing to support the procedure or even the supply all imaging agent. Thank you.
Great question I'll be happy to answer that one.
On the demand that we have.
Is not exceeding the capacity of our equipment is succeeding the ability.
All of us to staff up to levels that allow us to use our equipment.
On the extended hours and times, where we can see these patients.
That's our biggest challenge and it's particularly apparent.
In the MRI.
Modalities.
And what we're doing to address that which again is somewhat novel to the radnet.
Core strategy and platform is that there's there's new technology called the remote operation command centers that allow.
Yeah.
Technologists to operate more than one MRI equipment piece of equipment remotely and what we have found is that in certain markets.
For example, in Florida, or Arizona, where the shortage is not as serious as it is let's say in New York.
We are.
Gaining better acceptance.
And hiring of technologies that can run those systems remotely from other of our markets are.
That is probably the near term ability for us to address some of these additional capacity issues as Mark mentioned, we're also building more centers.
Add capacity and in some cases a week.
Have begun to buy our own mobile.
Anders.
How is particularly more so on the west coast.
To move those around the areas that are particularly challenged so we do have a lot of tools in the toolkit.
Not the least of which also is that the newer MRI scanners or upgrades that we can make to existing scanners have had a remarkable impact on reducing the scan time, which for many of our mris and has been reduced from 20 to 30 minutes down to.
10 minutes or in some cases, even less has allowed us to increase our throughput at capacity are in that manner. So there's a number of ways to address these problems are and all of it by and large it was really driven by the use of technology both from.
Artificial intelligence standpoint, and some of these other remote tools and other algorithms that just help us increase our capacity without.
Necessarily having to increase our staff.
And you Wanna I'll address the second part of your question, which was specifically about Alzheimer's it imaging and what you're hearing out of Biogen and Lilly and others.
So you use the initial pet C T, which is our one of the key ways of detecting the presence of these amyloid plaques, which is necessary to get these patients onto the newer therapies that have come out by some of these pharmaceutical.
Companies.
That.
It could be a huge opportunity for diagnostic imaging and obviously for us and with respect to capacity, which I think was that the question that you had asked as it relates to Alzheimers imaging. We currently have 67 pet scanners that are doing on average.
Well do what we're doing in total 60000 scans per year give or take when you do the math over 255 work days each pet C. T. Scanner that we have is doing less than four pet C. Ts per day, the rest of the day those scanners are very busy doing routine.
T work.
If we had if there were a flood of.
Pet C T demand.
In relation to these Alzheimer's drugs, what we what we would do whereas he is to utilize our existing pet C T capacity.
And in each pet C. T I, a busy pet C. T can be doing 13, 14, 15 scans a day. So we have a lot of pet C. P capacity in our existing install base and the challenge. We would have at that point is then moving routine C. T work to either other scanners expanding hours are having to buy additional C. T.
<unk> to take over that level of volume, but we do have you know a fair bit of pet C. T capacity, even with it within our own installed base at this point.
Got it appreciate all the housework hunters here. Thank you.
Thank you and our next question today comes from mature around Gopal.
Please go ahead.
Yes, hi, good morning, Thanks for taking the questions. Most of mine have already been answered, but I just had a quick one in terms of the cash on the balance sheet in light of the equity raise how should we think of capital allocation priorities in terms of growing the company via M&A de novo's investments in technology and personnel versus maybe looking to reduce.
Given the high interest rate environment.
I would say all of the above [laughter] might be the best way for me to answer Mitra.
One of the.
<unk> of the equity raise that we accomplished was giving us the.
Opportunity to look at ways that we can deploy that capital.
In the best interest of the company's growth as we we said you know one of our shorter term possibilities.
Pay down of some of our debt but.
Given the company's projected cash flow for the rest of this year and next year I think you'll.
You'll find that we'll be investing in.
And the de novo's upgrading technology of existing equipment, replacing older equipment with newer equipment, we used to use in the past operating leases.
As a way of minimizing the amount of cash outlays we.
Have essentially eliminated that in our 10 cash for virtually all of our capital.
Equipment investment so.
I think that will also help our margins and help to grow the company.
Lastly, we look we're looking to use the capital we raised to invest in a new digital health initiatives, which we can play out.
The best returns on investment given the long term prospects that were.
Tending towards a capital light business that can have substantially better margins than the imaging center sector. So well.
We will look to.
To continue to utilize our capital in any way that can help the business grow them and we'll look forward to discussing some of those with more detail.
As the rest of this year unfolds.
When we complete it when we completed the equity offering because you can imagine.
Prospective investors were very interested in this very question you know what we said was part of the reason why we're raising the money was that.
In October of this year, one of our interest rate swaps roll off and gives us more exposure to floating rate debt and we we intend and that's all that's $100 million of notional exposure that rolls off in October of this year and so our intention is to take $100 million from our.
Cash balance at that time and repay debt. So that we don't have more floating rate exposure, that's still our intention to do that and the only reason why we wouldn't do that is if there were some.
Extraordinary use of proceeds before that time like a like a M&A opportunity.
That would take its place and.
That's not the intention in terms of utilizing it for M&A at this point.
There's nothing that's a foregone conclusion.
Yeah, Thanks, and congrats on a great quarter again.
Excellent. Thank you.
Thank you and ladies and gentlemen. This concludes our question and answer session I would like to turn the conference back over to.
The management team for any final remarks.
Right.
Again, I would like to take yourself with a phone call all of our shareholders for their continued support and the employees of Radnet for their debt.
Dedication and hard work.
And it will continue its endeavor to be a market leader that provides great services with an appropriate return on investment for all stake holders. Thank you for your time today and I look forward to our next call.
Good day.
Thank you Sir This concludes today's conference call. We thank you all for attending today's presentation.
You may now disconnect your lines and have a wonderful day.
Okay.