RadNet, Inc.

Ladies and gentlemen, you're currently on hold for today's RADnet third quarter 2020 financial results conference call. At this time, we are still admitting additional participants and do plan to be underway in approximately five minutes. We appreciate your patience and ask that you please remain on the line. Thank you. Ladies and gentlemen, again, you're on hold for today's RADnet Inc. Third Quarter 2020 Financial Results Call. At this time, we are submitting additional participants. We do plan to be underway momentarily. We appreciate your patience and ask you to please remain on the line. Thank you. Good day and welcome to the RadNet, Inc. Third Quarter 2020 Financial Results Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet. Please go ahead, sir. Thank you. Good morning, ladies and gentlemen, and thank you for joining Dr. Howard Berger and me today to discuss RadNet's Third Quarter 2020 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 and liquidity, our response to and the expected future impact of COVID-19, our ability to stabilize and continue to grow the business by generating patient referrals and contracts with radiology practices, recruiting and retaining technologists, consummating acquisitions and joint ventures, 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's actual results to differ materially from the statements contained herein. These risks and uncertainties include those risks set forth in RADNET's reports filed with the SEC from time to time, including RADNET's annual report on Form 10-K for the year ended December 31, 2019, and our quarterly report on Form 10-Q to be filed shortly. Undue reliance should not be placed on forward-looking statements, especially guidance on future financial performance, which speaks only as of the date it is made. RADNET undertakes no obligation to update publicly any forward-looking statements to reflect new information, events, or circumstances after the date they were made or to reflect the occurrence of unanticipated events. And with that, I'd like to turn the call over to Dr. Berger.

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 third quarter 2020 results, give you more insight into factors which affected this performance, discuss in some detail the progress we made during this COVID-19 period, and give details about our future strategy. After our prepared remarks, we will open the call to your questions. I'd like to thank all of you for your interest in our company and for dedicating a portion of your day to participate in our conference call this morning. 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. Let's begin. I'm very pleased with the performance of our business in the third quarter. Our significantly improved revenue and profitability relative to the second quarter is the result of recovering procedural volumes and the multitude of cost savings and cash conservation measures we instituted throughout the COVID-19 period. Our revenue increased 53.1% sequentially from the second quarter, with a procedural volume increase of 66.2%, driving this top-line performance. This was an increase of $101.2 million in revenue from the second quarter's results. Perhaps even more notable was our improvement in adjusted EBITDA and earnings. Our adjusted EBITDA more than doubled from the second quarter, increasing from $22.6 million to $45.8 million. This difference would have been even greater had we not recognized $25.5 million of CARES Act funds in the second quarter. By comparison, we recorded only $221,000 of CARES Act funds in the third quarter. As compared to the third quarter of last year, despite our revenue being essentially flat, our adjusted EBITDA increased from $41.0 million to $45.8 million or 11.7%. This resulted in adjusted EBITDA margins increasing by 14% in last year's third quarter to 15.7%. Because many of the COVID-19 cost reduction initiatives which drove the improvement in margins are ongoing and not one time, we have the opportunity for sustained margin improvement in future quarters. Adjusted net income per share was 15 cents this year's third quarter as compared to adjusted net loss per share of 16 cents in the second quarter of this year and net income per share of 6 cents in last year's third quarter. This is a sequential increase of 31 cents per share from the second quarter of 2020 and 9 cents per share from last year's third quarter. As a result of the increase in our procedural volumes throughout the third quarter, a strong liquidity position and a cautiously optimistic belief that procedural volumes will continue to recover, I am pleased to report that as of August 1st, we began bringing back substantially all of our employees from furloughs and restored the wages of those team members who took pay reductions as a result of COVID-19. We completed this process on October 1st. I want to thank all of our team members for their patience and commitment during this difficult period. Our frontline imaging center employees continue to be the true heroes, ensuring access to care in a safe environment for the benefit of our referring physicians and patient communities. Currently, we have reopened all but 19 imaging centers, the majority of which are routine imaging satellite locations designed to alleviate the traffic in our larger more advanced multimodality facilities. As procedural lines continue to recover, we hopefully move beyond the COVID-19 period. We reevaluate opening facilities. The coronavirus pandemic allowed us a unique opportunity to focus on all aspects of our business, including center level, back office, and administrative operations, to create efficiencies and reduce costs. Prior to COVID-19, we spent several years significantly increasing the scope and breadth of our business through organic growth and acquisitions. While this expansion has been beneficial to our business in virtually every market in which we operate, COVID-19 allowed us to focus on ways to most effectively reduce expenses and conserve cash at a time when growth was not a priority. This optimization process over the last six months has brought great value to RADNET, value that not only was demonstrated in the third quarter, but that will continue to pay dividends into the future. The cost and liquidity saving measures, along with increasing procedural volumes, CARES Act funds, and Medicare advances, resulted in an $89.7 million cash balance at the quarter end, and are being undrawn on our $195 million revolving credit facility. This is the strongest liquidity position in the company's history. I'd like to also recognize the support we received from our relationship banks. At the end of August, we completed a $57.5 million upsize of our revolving credit facility. While our cash balance continues to be strong, The additional capacity provides us further financial flexibility to grow our business and execute our strategic plan. Along with our increased liquidity and improved financial results, our leverage declined by over a quarter of a turn in the quarter to under 4.25 times net debt to EBITDA. We expect that our leverage will return to under four times net debt to EBITDA in the coming quarters. Throughout the COVID period, our capitation business has remained an important feature of RadNet. Our capitation revenue increased 13.8% from the third quarter of last year. Because we get paid a fixed capitated amount per enrollee managed by the medical groups with whom we contract, our capitation revenue and the associated cash flow is dependent upon enrollment in these health plans. Throughout COVID-19, enrollment for these HMO patients with our contract with medical groups has remained intact as patients and their employees, even for those who have been furloughed, have continued to pay health care premiums. Subsequently, to the end of the third quarter, we announced a new partnership with Adventist Health, one of the largest health systems on the West Coast and Hawaii, to create an outpatient imaging joint venture in Simi Valley, California. Under the new joint venture, RadNet will contribute two of its imaging two of its Simi Valley Imaging Centers, Alamo Advanced Imaging and Simi Valley Advanced Imaging, and Adventist Health will contribute its Aspen Imaging Center. Redmond will also assume the operational management of Adventist Health's Nancy Reagan Breast Center. Adventist Health's assets in Simi Valley include the ownership of the Leading Hospital, an urgent care center, a clinical laboratory, home care services, and various family and specialty physician practices. The partnership is scheduled to begin operations in January. Two weeks ago, we announced the creation of a new operating platform in Phoenix, Arizona through a partnership with Dignity Health, Common Spirit Health. While this is our third venture with Dignity Health, this has ran its first entrance into a new geography since 2013 when we entered New York City. In conjunction with establishing the partnership, we've completed the acquisition, of AZTEC MRI and radiology and eight location multimodality radiology practice in Phoenix. We are extremely excited about the strategic expansion into Arizona. Phoenix in particular is a rapidly growing market and is home to almost 5 million people. Under venture, Radnet and Dignity will develop a network of multimodality outpatient centers, expanding the geographic coverage of the acquired locations through a combination of new site development and acquisition of existing radiology practices. Dignity Health is a leading health system in Phoenix and owns and operates multiple hospitals, medical groups, specialty care locations in this marketplace from which we can leverage our operations. Our focus will be to aggressively expand our footprint in order to both effectively service the Dignity-owned and affiliated physician groups and capture other patient volumes from competitive outpatient operators. We are committed to developing significant management focus and financial resources to drive the density and geographic concentration in Phoenix that has made it successful in our other core markets. At this time, I'd like to turn the call back over to Mark to discuss some of the highlights of our third quarter 2020 performance. When he's finished, I will make some closing remarks.

Thank you, Howard. I'm now going to briefly review our third quarter 2020 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 third quarter 2020 performance. 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 extinguishments, and non-cash equity compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling interest in subsidiaries and is adjusted for non-cash or extraordinary and one-time events taking place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or loss attributable to RadNet Inc. common shareholders is included in our earnings release and our current report on Form 8K filed with the SEC. With that said, I'd now like to review our third quarter results. For the third quarter of 2020, RadNet reported revenue of $291.8 million and adjusted EBITDA of $45.8 million. As Dr. Durberger discussed in his remarks, this performance was a significant improvement from these metrics in the second quarter and is reflective of a major recovery of our business from the impacts of COVID-19. Compared to the second quarter of this year, revenue increased $101.2 million, or 53.1%, and adjusted EBITDA increased $23.2 million, or 102.8%. Relative to last year's third quarter, a quarter that was not impacted by COVID-19, revenue decreased only by $916,000, or 0.3%, and adjusted EBITDA increased $4.8 million, or 11.7%. Our adjusted EBITDA margin increased 385 basis points, or 3.9%, from the second quarter of 2020, and exceeded last year's third quarter by 169 basis points, or 1.7%. The increase in adjusted EBITDA and adjusted EBITDA margin relative to last year's third quarter is primarily the result of the cost savings measures we took during COVID-19, many of which should aid our business into the future. For the third quarter of 2020, as compared to the prior year's third quarter, MRI volume decreased 6.1% CT volume was flat, and PET CT volume increased 0.4%. Overall volume, taking into account routine imaging exams inclusive of the x-ray, ultrasound, mammography, and all other exams, decreased 5.7% from the prior year's third quarter. On a same-center basis, including only those centers which were part of RADNET for both the third quarters of 2020 and 2019, MRI volume decreased 5.8%, CT volume decreased 0.9%, and PET-CT volume increased 2.3%. Overall, same center volume, taking into account all routine imaging exams, decreased 5.6% compared to the prior year same quarter. Relative to the second quarter of this year, aggregate procedural volumes, inclusive of all modalities, increased In the third quarter of 2020, we performed 1,890,156 total procedures. The procedures were consistent with our multimodality approach, whereby 76.5% of all the work we did by volume was from routine imaging. Our procedures in the third quarter of 2020 were as follows. Please note that the CT volumes for last year have been restated to account for a change we made as of January 1st of this year in how we account for one of our CT CPT codes. The comparative numbers that follow are on an apples to apples basis. 266,049 MRIs as compared with 283,221 MRIs in the third quarter of 2019. 167,005 CTs as compared with 167,078 CTs in the third quarter of 2019, 10,886 PET CTs as compared with 10,847 PET CTs in the third quarter of 2019, and 1,446,216 routine imaging exams which include nuclear medicine, ultrasound, mammography, x-ray, and all other exams, as compared with 1,544,026 of all these exams in the third quarter of 2019. For the third quarter, RodNet reported net income attributable to RodNet Inc. common shareholders of $6.2 million, an increase of approximately $3 million from the third quarter of 2019. Because sequentially relative to the second quarter of this year, net income increased $16.8 million. Net income per share for the third quarter of 2020 was 12 cents compared to net income per share in the third quarter of 2019 of 6 cents based upon weighted average number of diluted shares outstanding of $52 million in 2000, excuse me, 52 million shares in 2020 and 50.4 million shares in 2019. Adjusting for the non-cash impact of the company's interest rate hedges in this year's third quarter, adjusted net income was 15 cents per share. This compares to adjusted net loss per share of negative 16 cents in the second quarter of 2020. Affecting net income in the third quarter of 2020 were certain non-cash expenses or non-reincurring items, including the following. $2.1 million of non-cash employee stock compensation expense resulting from the vesting of certain options and restricted stock. $571,000 of severance paid in connection with headcount reductions related to cost savings initiatives. $342,000 loss on the sale or disposal of certain capital equipment, $2 million of non-cash impact from interest rate hedges, and $1.1 million of amortization of deferred financing costs and non-cash interest on loan discounts related to our credit facilities. Overall gap interest expense for the third quarter of 2020 was $11.1 million. This compares with gap interest expense in the third quarter of 2019 of $11.9 million. Cash paid for interest during the period which excludes non-cash deferred financing expense and accrued interest is $8.4 million as compared with $12.8 million in the third quarter of last year. With regards to our balance sheet, as of September 30, 2020, unadjusted for bond and term loan discounts, we had $591.7 million of net debt, which is our total debt at par value less our cash balance. Note that this debt balance includes New Jersey Imaging Network's debt of approximately $54.5 million, for which RadNet is neither a borrower nor guarantor. This compares with $687.3 million of net debt at September 30, 2019. As of September 30, 2020, we were undrawn on our $195 million revolving line of credit and had a cash balance of $89.7 million. As Dr. Berger mentioned in his prepared remarks, we upsized our revolver commitment with our relationship banks by $57.5 million in August of this year. While we have not needed to access this liquidity, the larger revolver provides us additional operating flexibility and funds available for future growth should we require it. At September 30, 2020, our accounts receivable balance was $137.4 million, a decrease of $17.4 million from year-end 2019. The decrease in accounts receivable is mainly the result of the decline in our procedural volumes and revenue during the COVID-19 period and our significant cash collections on previously existing accounts receivable. Our Days Sales Outstanding, or DSO, was 39.2 days at September 30, 2020, lower by approximately 5.4 days as of year end 2019. The lower DSO is primarily a function of a return to more normalized revenue during the last two months of the third quarter. As revenue and accounts receivable normalize post-COVID-19, we expect DSOs to return to the low to mid-40s level. Through September 30, 2020, we have total capital expenditures, net of asset dispositions of $71.8 million. This excludes $5.5 million of capital expenditures of New Jersey Imaging Network, our joint venture with RWJBarnabas. I'll now take a few minutes to give you an update on 2021 reimbursement. and discuss what we know with regards to 2021 anticipated Medicare rates. As some of you may recall from our second quarter financial results call, with respect to Medicare reimbursement, we received a matrix for proposed rates by CPT code in August, which is typically part of the physician fee schedule proposal that is released about that time every year. We completed an initial analysis and compared those rates to 2020 rates. We volume-weighted our analysis using expected 2021 procedure volumes. CMS moved forward with an 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 it proposed to reallocate reimbursement from physicians who rarely bill for E&M codes, such as radiologists, to physicians who regularly bill for these codes, such as primary care physicians. In the proposed rule, CMS initiated a 10.6% decrease in the conversion factor used to calculate Medicare reimbursement for all specialties in 2021. For radiology, CMS made a material upward adjustment to the technical RVUs in the reimbursement formula. These RVUs are multiplied by this now lower conversion factor to determine our reimbursement. Our analysis of these opposing forces showed that Radnet will suffer approximately $11 million revenue hit in 2021 from our Medicare Book of Business. There are many lobbying groups from the various medical specialties aggressively opposing the budget neutrality aspect of the E&M code reimbursement changes, including Radiology's two main lobbying forces, the Association for Quality Imaging, or AQI, and the American College of Radiology, or ACR. Late last month, U.S. Representative Vera a Democrat from California, and Bouchon, a Republican from Indiana, introduced bipartisan legislation to provide relief to physicians responding to the COVID-19 pandemic who are scheduled to receive these Medicare payment cuts next year. The bill would provide a temporary additional payment in the amount of the difference between 2020 and 2021 Medicare reimbursement for two years for the specialties like radiology that are facing the Medicare cut. We should know more in December when the final rule is released and when it is determined if the Vera Bouchon bill will be attached to federal funding bills expected to be put in place in mid-December. I'd now like to turn the call back to Dr. Berger who will make some closing remarks.