RadNet - Earnings Call - Q4 2020

Transcript

Speaker 0

Good day, and welcome to the RadNet, Inc. Q4 and Full Year twenty twenty Financial Results Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet Inc.

Please go ahead, sir.

Speaker 1

Thank you. Good morning, ladies and gentlemen, and thank you for joining Doctor. Howard Berger and me today to discuss RadNet's fourth quarter and full year twenty twenty 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's ability to continue to grow the business by generating patient referrals and contracts with radiology practices, recruiting and retaining technologists, receiving third party reimbursement for diagnostic imaging services, successfully integrating acquired operations, generating revenue and adjusted EBITDA for the acquired operations as estimated, among others, are forward looking statements within the meaning of the safe harbor. Forward looking statements are based 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 included those risks set forth in RadNet's reports filed with the SEC from time to time, including RadNet's annual report on Form 10 ks for the year ended 12/31/2020, 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 Doctor. Berger.

Speaker 2

Thank you, Mark. Good morning, everyone, and thank you for joining us today. On today's call, Mark and I plan to provide you with highlights from our fourth quarter and full year twenty twenty results, give you more insight into the factors which affected this performance and discuss our future strategy. After our prepared remarks, we will open the call to your questions. I'd like to thank all of you for your interest in our company and for dedicating a portion of your day to participate in our conference call this morning.

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 this challenging time. Let's begin. I am very pleased with our performance in the fourth quarter. Continuing with the recovery of our procedural volumes that began in the third quarter, we recorded the highest quarterly revenue and adjusted EBITDA in the company's history this fourth quarter.

The turnaround of our business has been quite remarkable from its low point in mid April when our procedural volumes dropped by 72% from pre COVID levels. In the fourth quarter, our revenue grew by 2.5%, which was the result of several factors. First, during 2020, we significantly expanded our three d mammography program on both coasts. As a result, our mammography volumes increased by 11.7% during the fourth quarter relative to the same quarter in 2019. Much of the increase in mammography volumes brought an associated reimbursement premium for the ThermoSynthesis three d technology.

Second, the increased revenue was the result of reimbursement increases from private and capitated payers as well as improved collections, particularly around patient co payments. In addition to the record revenue performance, our adjusted EBITDA in the 2020 was $50,700,000 as compared with $46,800,000 in the fourth quarter of twenty nineteen, an increase of 8.1%. While the increase in revenue attributed to contributed to the growth in adjusted EBITDA, the improved adjusted EBITDA performance was also the result of cost saving measures we instituted during the COVID-nineteen period. Since the onset of COVID-nineteen, we aggressively focused on reducing expenses, consolidating underperforming sites, and changing key operational metrics both at the center level and within our corporate support departments. The operational improvements we made will continue to benefit the business into the future and are reflected in the 2021 guidance ranges we announced earlier today in our financial results press release.

From a margin perspective, our adjusted EBITDA margin was 16.4% in the 2020 as compared with 15.6% in the fourth quarter of twenty nineteen, an improvement of 0.8% or 80 basis points. Our adjusted earnings were also very strong. Adjusted for one time and extraordinary events during the quarter, our adjusted net income was $10,200,000 or 20¢ per diluted share as compared with 9,900,000.0 or 19¢ per diluted share in the fourth quarter of twenty nineteen. Throughout the COVID nineteen period, we have focused on strengthening our balance sheet by managing our liquidity and financial leverage. At year end 2020, we had a cash balance of $102,000,000 and our net debt leverage ratio was reduced to under four times adjusted EBITDA, a little similar to that of year end 2019 prior to the onset of COVID nineteen.

We believe that our strong balance sheet positions us to be aggressive in 2021 with respect to growth initiatives will include tuck in acquisitions, de novo centers, and continued capital spending to drive same center performance. While it is noteworthy to highlight the strong financial performance of our last two quarters as our business began to recover from the worst of COVID nineteen impact throughout 2020, we made some significant progress in furthering our long term operating plan. Here are some of the highlights. In March, we completed our acquisition of DeepHealth, a leading artificial intelligence and machine learning company initially focused on solutions for the medical interpretation of mammography exams. DeepHealth's development has focused on screening mammography, specifically three d breast imaging, where the large volume of cases and the difficult nature of their interpretation place significant demand on radiologists.

We are more certain today than ever before that artificial intelligence will transform the diagnostic imaging and radiology industry. Machine machine learning, big data applications, and automation algorithms will allow us to deliver our services more cost effectively, efficiently, and accurately. We spend almost 20% of our globally billed net revenue to the radiologist interpretation of our images. We believe AI will create workflow efficiencies and improve the accuracy of image interpretation in mammography and in other modalities we perform, which can materially benefit all of the RadNet stakeholders. In the fourth quarter of twenty twenty, we submitted for FDA approval of our first AI mammography product, which is screen triage product for radiologists.

We hope to receive approval sometimes towards the middle of the year. By the end of the year, we anticipate submitting for FDA approval a second product for more advanced mammography diagnostics and look forward to keeping you informed with our progress on these drugs. Related to our DeepHealth acquisition in August, we announced a collaboration with Hologic to advance the development of artificial intelligence tools in breast health. The collaboration will enable new joint market opportunities and further efforts to build clinic clinician confidence and develop and integrate new AI technologies. As part of the collaboration, RadNet has upgrading has been upgrading its entire fleet of the logic mammography systems to feature the Hologic Clarity HD and Quorum three d imaging technologies and will share with the logic certain data produced by RadNet's fleet of high resolution mammography systems.

In 2020, we furthered the expansion of our health system joint venture businesses. In October, we established a partners partnership with Adventist Health to create an outpatient imaging joint venture in Simi Valley, California to initially include three outpatient facilities. In addition, we assumed operational management of Adventist Health's Nancy Reagan Breast Center. Also in October, Radnor announced its third joint venture with Dignity Health, CommonSpirit in Phoenix, Arizona. Initially established with eight acquired facilities, we plan to significantly expand our offerings in the greater Phoenix area in the coming years through a combination of new site development and the acquisition of existing radiology providers.

The process of expansion has begun, and we anticipate allocating significant focus and financial and management resources on this new market over the coming years. In August, we completed an amendment to our credit agreement to increase the amount of the revolving commitments there under by $57,500,000 to a total of 195,000,000. Well, this was done out of an abundance of caution and a concern for our liquidity position during the global pandemic. The expansion of our available credit positions allows us to have funds at our disposal to grow the company more aggressively in the coming years and are available for accretive acquisitions. At this time, I'd like to turn the call back over to Mark to discuss some of the highlights of our fourth quarter and full twenty twenty performance.

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

Speaker 1

Thank you, Howard. I'm now going to briefly review our fourth quarter and full year 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 fourth quarter and full year 2020 performance. I will also provide 2021 financial guidance levels, which were released in this morning's financial results press release. 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 non cash equity compensation. Adjusted EBITDA includes equity and 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. With that said, I'd now like to review our fourth quarter and full year 2020 results.

For the three months ended 12/31/2020, RadNet reported revenue of $308,500,000 and adjusted EBITDA of $50,700,000 Both were the highest quarterly levels in our company's history. Revenue increased 7,700,000 or 2.5% over the prior year same quarter and adjusted EBITDA increased $3,800,000 or 8.1% over the prior year same quarter. The increase in revenue and adjusted EBITDA was the result of a combination of better reimbursement from the expansion of our three d mammography offerings, improved reimbursement from private and capitated payers, enhanced cash collections and significant cost reductions as detailed by Doctor. Berger in his earlier remarks. For the fourth quarter of twenty twenty, as compared with the prior year's fourth quarter, aggregate MRI volume decreased 1.8%, CT volume increased 2.4% and PETCT volume decreased 2.8%.

Overall volume taking into account routine imaging exams inclusive of X-ray, ultrasound, mammography and other exams decreased 0.5% over the prior year's quarter. In the fourth quarter of twenty twenty, we performed 1,977,086 total procedures. The procedures were consistent with our multi modality approach whereby seventy six point seven percent of all the work we did by volume was from routine imaging. Our procedures in the 2020 were as follows. Note that the CT volumes for 2019 have been restated to account for a change we made as of 01/01/2020 and how we account for one of our CT CPT codes.

The comparative numbers that follow are on an apples to apples basis. 276,482 MRIs as compared with 281,646 MRIs in the fourth quarter of two thousand nineteen. 172,728 CTs as compared with 168,706 CTs in the fourth quarter of twenty nineteen, 11,063 PETCTs as compared with 11,381 PETCTs in the fourth quarter of twenty nineteen, and 1,516,813 routine imaging exams compared with 1,524,608 of all these exams in the fourth quarter of twenty nineteen. Adjusted net income, which is net income adjusted in each period for onetime or extraordinary items, was $10,200,000 for the fourth quarter of twenty twenty or $0.20 per diluted share as compared with $9,900,000 or $0.19 per diluted share for the same period in 2019. These per share values are based upon weighted average number of diluted shares outstanding of 52,200,000.0 shares in the 2020 and 50,600,000.0 shares outstanding in the fourth quarter of twenty nineteen.

Affecting net income in the 2020 were certain non cash expenses and non recurring items including the following: 2,300,000 of non cash employee stock compensation expense, dollars 2,700,000.0 of severance paid in connection with headcount reductions related to cost savings initiatives, dollars 657,000 loss on the disposal of certain capital equipment, dollars 750,000 of noncash gain from interest rate hedges, dollars 4,200,000.0 loss on the impairment of intangible assets associated with trade names the company has discontinued, $4,000,000 gain on the extinguishment of certain debts, and $1,100,000 of amortization of deferred financing costs and loan discount related to our existing credit facilities. With regards to some specific income statement accounts, overall GAAP interest expense for the 2020 was $12,400,000 This compares with GAAP interest expense in the 2019 of $11,500,000 Cash paid for interest during the period, which excludes non cash deferred financing expense and accrued interest, was $8,300,000 as compared with $10,200,000 in the fourth quarter of last year. For the full year of 2020, the company reported $1,098,104,000 of revenue, which is inclusive of $26,200,000 of provider relief funding we received under the CARES Act. Adjusted EBITDA was $139,500,000 and net loss was $14,800,000 Due to the impact of COVID-nineteen, revenue decreased $56,100,000 or 4.9% and adjusted EBITDA decreased $24,700,000 or 15% as compared with 2019.

For the year ended 12/31/2020, as compared with 2019, MRI volume decreased 11.9%, CT volume decreased 6.8% and PETCT volume decreased 4.1%. Overall volume, taking into account all routine imaging, decreased 12.9% for the twelve months of 2020 as compared with 2019. In 2020, we performed 6,867,021 total procedures. The procedures were consistent with our multi modality approach whereby seventy six point one percent of all the work we did by volume was from routine imaging. Our procedures in 2020 were as follows.

Again, like the assumption of the comparison of the fourth quarter procedure volume, the CT volumes for 2019 have been restated to account for a change we made as of 01/01/2020, and how we account for one of our CT CPT codes. The comparative numbers that follow are also on an apples to apples basis. 976,633 MRIs compared with 1,108,496 MRIs in 02/2019, 06/20547 CTs as compared with 665,539 CTs in 02/2019, 41,567 PETCTs as compared with 43,341 PETCTs in 02/2019, and 5,228,274 routine imaging exams as compared with 6,068,928 of all these exams in 2019. Net loss for 2020 was $14,800,000 or negative $0.29 per diluted share. This compares to net income of $14,800,000 or $0.29 per diluted share in 2019.

These per share volumes are based on weighted average number of diluted shares outstanding of 50,900,000.0 shares in 2020 and 50,200,000.0 shares in 2019. Affecting net income in 2020 were certain noncash expenses and nonrecurring items, including the following: $12,400,000 of noncash employee stock compensation expense dollars 4,400,000.0 of severance paid in connection with headcount reductions related to cost savings initiatives, dollars 1,200,000.0 loss on the disposal of certain capital equipment, $6,000,000 of noncash loss from interest rate hedges $4,200,000 loss on the impairment of intangible assets associated with trade names the company has discontinued dollars 4,000,000 of gain on the extinguishment of certain debt and $4,400,000 of amortization of deferred financing costs and loan discounts related to our existing credit facilities. Regards to some specific income statement accounts, overall GAAP interest expense in 2020 was $45,900,000 Adjusting for the noncash impacts from items such as amortization of financing fees and accrued interest, Cash interest expense was $39,500,000 in 02/2020. This compares with GAAP interest expense in 2019 of $48,000,000 and cash paid for interest of $46,300,000 in 02/2019. With regards to our balance sheet, as of 12/31/2020, unadjusted for bond and term loan discounts, we had $563,700,000 of net debt, which is total debt at par value, that's our cash balance.

Note that this debt balance includes New Jersey Imaging Network's debt of approximately $53,000,000 for which RadNet is neither a borrower nor guarantor. This compares with $672,400,000 of net debt at December 3139. As of year end 2,020, we were undrawn on our $195,000,000 revolving line of credit and had a cash balance of $102,000,000, which was which was substantially up from $40,200,000 cash balance at year end 02/2019. At December 1220, our accounts receivable balance was $129,600,000 a decrease of $25,200,000 from year end 2019. The decrease in accounts receivable is mainly from improved cash collections, including additional efforts and resources dedicated to patient collections at the time of service.

Our DSO was thirty six point two days at 12/31/2020, lower by eight point five days when compared with forty four point seven days as of that date one year earlier. Throughout 2020, we had total capital expenditures net of asset dispositions and the sale of imaging center assets and joint venture interest of $86,000,000 This amount excludes $7,400,000 of capital expenditures of New Jersey Imaging Network. Approximately all of our capital expenditures were paid for in cash and we recognized $828,000 in proceeds from the sale of equipment. Capital expenditures in 2020 were higher than we originally budgeted as a result of additional investments we made in three d mammography capacity in conjunction with the Whiterabbit AI rollout and some opportunities we saw to take market share away from some of our competitors in selected markets during the COVID-nineteen period. At this time, I'd like to review our twenty twenty one fiscal year guidance levels, which we released this morning in our financial results press release.

For total net revenue, our guidance range is 1,250,000,000.00 to $1,300,000,000 For adjusted EBITDA, our guidance range is $180,000,000 to $190,000,000 For capital expenditures, our guidance range is $70,000,000 to $75,000,000 For cash paid for interest, our guidance range is 39,000,000 to $44,000,000. And for free cash flow generation, which we define as our adjusted EBITDA, less capital expenditures, less cash paid for interest, our guidance range is 60,000,000 to $70,000,000 These guidance levels are built on a number of assumptions.

Speaker 0

First,

Speaker 1

we entered 2021 on the strength of a strong recovery from COVID-nineteen as indicative of our performance levels during the second half of twenty twenty. For the second half of twenty twenty, we exceeded $600,000,000 of revenue and $96,000,000 of adjusted EBITDA. Our guidance ranges for 2021 are built with this run rate in mind and the assumption that our business will continue to strengthen as COVID-nineteen restrictions are lifted in the states in which we operate. We believe there is upside to our guidance ranges, which could result from accretive tuck in acquisitions we expect to complete during the year, further benefit from the cost reduction measures implemented in 2020, increases in reimbursement from private and capitated payers and expansion of our joint venture initiatives. Additionally, achieving growth in the Arizona marketplace through our Dignity Health joint venture will be a major focus throughout 2021, which could include both De Novo centers as well as

Speaker 3

acquisitions. In 2021,

Speaker 1

we will also complete our upgrade to three d mammography and continued development of our AI solutions. Sometime around the middle of twenty twenty one, we hope to receive FDA approval for our initial mammography AI product submitted in the fourth quarter of twenty twenty one, and we anticipate filing with the FDA for its review a second mammography AI offering by year end. I'd now like to turn the call back over to Doctor. Berger who will make some closing remarks.

Speaker 2

Thank you, Mark. In conclusion, the challenges encountered during the COVID nineteen pandemic created a seminal event for RadNet. COVID nineteen required us to reevaluate every aspect of our business, a business that has grown primarily in the past through acquisitions. COVID nineteen allowed us to pause and analyze all of our procedures and processes in order to achieve more optimal performance. The pandemic also gave us the opportunity to make decisions that would otherwise have proven more difficult in more normal times.

We were able to consolidate some of our centers that were in close proximity to other centers in ways that preserve patient access, convenience, and our procedural volume. The regional centralization of our scheduling departments and pre authorization teams afforded us the ability to more effectively manage our capacity without losing business or negatively impacting our customer service. In addition, we were able to exit non core businesses and activities that were distracting our management teams for more for more core functions. As we now approach the end of the first quarter of twenty twenty, we are optimistic for the remainder of the year. In particular, we look to make substantial progress in deploying artificial intelligence in our business, especially with regards to screening mammography.

These AI tools should improve our diagnostic accuracy and result in earlier disease detection and better compliance amongst patients. We are also working diligently to expand a number of our health system joint ventures and seek to establish new ones. Our strong cash position at the 2020 leading into this year, along with the availability of a $195,000,000 revolving credit facility, will provide us the financial capabilities to pursue accretive strategic acquisitions and execute on all other facets of our operating plan. Operator, we are now ready for the question and answer portion of the call. You.

Speaker 0

We'll take our first question from Brian Tanquilut with Jefferies.

Speaker 4

Hey, good morning, guys. Congratulations on a good quarter and obviously a tough year, so congrats on navigating all that. I guess my first question for both of you guys, Howard and Mark, as I look at the numbers that you posted in the quarter, obviously, it looks like you've seen a good bit of recovery already. And Mark, I appreciate you mentioning the conservatism guidance. But how are you thinking about the recovery that's remaining or the opportunity remaining to see volumes pick up from pent up demand?

And what kind of cadence over the course of the year are you embedding in your guidance? I'd like to thank you for

Speaker 2

morning, Brian, and thank you. I think there were a number of issues that occurred in 2020 that will continue to help drive volumes into our centers along with the normal efforts that we make from a marketing and contracting standpoint and just what has traditionally been a two to 3% annual organic growth in volumes. Notably, the pandemic has created an additional effort on the part of payers to further encourage and help direct business away from hospitals. A number of the major payers have either reiterated or announced their reimbursement preferences for outpatient imaging centers to the point where they may not pay for some of the routine imaging that are done in hospital systems both at not only, higher cost, but now with the pandemic, still upon us, a less comfortable place for patients to go. So we believe both of those issues will create additional volume directed to outpatient facilities in general and ours in particular.

In addition to that, it's clear that some of our recovery to more normal volumes and in fact having exceeded that so far in the early part of this year is delayed treatment, and doctor visits, that, would put upon everybody, in 2020. Notably, during the last nine months of 2020, many, health systems went to, to the extent of not performing elective procedures, which is one of the reasons why, our MRI volume and others were affected so much. We expect, those to be lifted. Most of, the health systems have already done that, but we expect that that additional need for these essential services will be resurrected in 2020. Alongside of that, we believe that the additional volume that will come to us would be a result of people preferring to go to the outpatient and ambulatory centers, along with the fact that there are more articles appearing in the literature that delayed health care leads to greater costs and more morbidity in the system.

So I think all of those factors will help drive our revenues and are somewhat factored into our our guidance for 2021.

Speaker 4

Yes, I appreciate that. And then I guess, Howard, while I have you, obviously, mammography is an area that you've been focused on and you've talked about AI a little bit in that space. Can you just walk us through what the strategy is there and what sort of investments and expansions that we should be watching out for going forward?

Speaker 2

Well, I think the primary reason why we're focused on mammography is that depending upon whose articles you read or which statistics, the marketplace does not do a particularly good job at this time in the compliance for our patients to get their annual or biannual mammograms. So we've begun both through our White Rabbit relationship as well as some of our own internal measurements and analytics to reach out to patients and improve their compliance. In addition, there's an estimate that anywhere from perhaps as much as thirty percent to maybe even fifty or sixty percent of all the women who should be getting mammography are not. Therefore, since there's about 40,000,000 mammograms done annually, there's a good argument to believe that perhaps 20 to 30,000,000 more mammograms should be done on an annual basis. So we believe that given the scale that we have and the analytics that we're capable of using to drive better compliance and reach out to first time women getting their mammograms after the age of 40 will help drive that business.

To that end, as I mentioned in my remarks, we have gone through a significant upgrading of our mammography systems through a relationship with Hologic to not only get to the three d tomosynthesis throughout our entire fleet, but to elevate to their newest technology with high resolution detectors and faster and better management for for reading the scans. We hope to couple that with the continued effort in our artificial intelligence through the DeepHealth division, which in an article that we published back in November demonstrated that artificial intelligence is able to detect breast cancer one to two years earlier than even some of the most qualified mammography are capable of doing. So I think all of those give us good reason to think that our mammography, which was up as we reported even in the fourth quarter, up almost twelve percent, has that opportunity to continue in 2021. I also wanna mention that in most households, you know, the mother or the or women are very much the determinant of where health care is accessed by the rest of their family. So encouraging more and more of that mammography business, we believe, will also help us with other downstream imaging and procedures that we can do in our centers.

Speaker 1

Okay. That makes that makes a lot of sense.

Speaker 4

And then, I guess, shifting gears, Howard, you obviously entered the Arizona market through the JV with Dignity. How are we thinking about or how should we be thinking about your expansion plans there? Know, you've expanded the credit facility. So should we be thinking that you'd be acquiring more in that in that market specifically? Or are you open to further expansions from a geographic footprint perspective?

Speaker 2

I I think we'll be doing both, Brian. We already have designs on at least two, new, imaging facilities that will be on campuses of, two of the largest Dignity health systems. We are in conversation with other medical groups that are closely aligned with Dignity about helping to manage their imaging in a more effective way and driving business into the joint venture. And we believe that there are acquisition opportunities that are available to us to expand our footprint and have similar kind of opportunities and results like we've experienced in other markets that we've entered. The best example of that being when we entered the New York Metropolitan Marketplace.

Believe it or not, it's eight years ago at this point. We have become the largest operator of independent freestanding imaging facilities, and a lot of our growth opportunities and improved performance are are are based on those kind of metrics. So Phoenix, which has, I think, a population of well over 5,000,000 people, has some very attractive and and unique situations for us. And I've said I've mentioned in prior earnings calls and conferences, the opportunity for us to enter new markets will follow the pattern that we've demonstrated over the last couple of years of expanding it with joint venture partners with large health systems. I think the investment and involvement in Phoenix very much fits that profile.

Speaker 4

Got it. Mark, quick last question for me. How are you thinking about the sustainability of margins? Because they're obviously very strong in the quarter. I know you've laid out your cost initiatives, but just your quick thoughts on that.

Thank you.

Speaker 1

Sure. You know, with with the initiatives that we completed in 02/2020, in evaluating really every aspect of how we do business both at the regional levels, the center levels, as well as in, all the corporate support functions. We did pull significant amounts of cost out of our, out of our cost structure that will, certainly impact margins positively here in 02/2021. We, you know, having over 16% margin in in the fourth quarter, you know, was was a significant improvement not only over the prior year but over prior quarters. We we expect, you know, you know, get get if you look at our guidance and and look at the implied margin there, you know, we expect to have somewhere around 1515%, blended margins, for 02/2021.

And why that's a little bit lower than two than the fourth quarter here is, you know, there is some seasonality as as you're well aware, Brian, in our business with respect to, the first quarter, there's always some seasonality related to weather conditions in the Northeast as well as as well as the issue with deductibles. Having said that, we're you know, we we've had a a robust start other than some of these weather conditions here in in in the first quarter of of two thousand twenty one. So we do expect the margin enhancement here in 2021 versus, I would even say, versus 2019 because 2020 is not a a good year to compare for compared to because of COVID where our margin was incredibly depressed. So I think there's some real good opportunity for margin enhancement. Also, as we adopt AI technology, particularly around mammography and then and develop or license other AI technologies for other modalities into the future, we have the ability to make our radiologists more productive, potentially use fewer radiologists, and lower the cost significantly of delivering the professional interpretation of our scans.

And that could be a real game changer, you know, into the future with respect to our margins. Awesome. Thanks, guys. Thanks, Brian.

Speaker 0

Go to our next question from Mitra Rangopal with Sidoti.

Speaker 3

Yes, good morning. Thanks for taking the questions. Just wanted to follow-up on the AI comments earlier. Obviously, it seems like you're getting some nice traction on the mammography side and with the FDA approval likely and the upgrade to three d. Was just wondering if the AI platform could be expanded to areas beyond mammography for you.

Speaker 2

Good morning, Mitra. Yes. There's four core areas that we think as an outpatient provider that primarily as we see a shift of population health would be beneficial not just for the company but hopefully for the pop the populace. If you look at the various cancers that are most significant in volume, you deal with breast cancer, prostate cancer, lung cancer, and colon cancer. Those account for about eighty percent of all the cancers.

And each of those have screening tools that exist right now that I believe can be demonstrably improved, through application of artificial intelligence. We've already demonstrated some of that and have indeed, put our capital to work as regards to mammography. So once we get some good traction on that, we plan and are already looking at some initiatives for at least prostate along with colon and lung cancers down the road. We think if anything that can serve as a great tool for putting some definition behind what population health means. We believe that diagnostic imaging will be at the forefront of that and that tools in these areas can have a very prominent effect on both diagnosing earlier as well as then obviously leading to lower lower costs and reduced mortality.

So we think it's incumbent upon us as the leader in this industry as well as just generally what's good for the population to focus our attention on these tools and provide programs for insurers, health insurers, as well as employers to give some real meaning and definition to population health.

Speaker 3

Thanks. That's very helpful. And Howard, know you talked earlier about increasing preference of payers to ship some of these procedures to the outpatient setting. I'm just wondering if that's also leading now to increased conversations or opportunities as it relates to more JVs.

Speaker 2

I think it is. And, you know, we these are slow to develop and take a long time. The health systems are large and to get their attention as well as deal with other, you know, local and geographic issues take a lot of work. But we think that the market place is ready for this. And I think in a very, specific way, COVID, has helped focus people's attention on that given that, the the general consumer, health care consumer, is more reluctant to go into a hospital or health system today, if they have the availability of of of comparable or even better, access to, outpatient imaging.

So I think more and more of the hospital systems are recognizing the need to make this shift. And if in addition to issues related to reimbursement, we can focus on a more strategic relationship and an approach to population health. I think we're getting a lot of good conversation surrounding, you know, these opportunities. So, again, I think RadNet is unique in terms of the number of centers it has that are in joint ventures. As we've mentioned before, over 25% of our centers now are in joint ventures and we, look eagerly to expand that number, as we go forward given that I think the the joint venture arrangement affords a lot of opportunity for both long term stability and growth initiatives with our health care systems.

I'd be I'd I'd be low if I didn't mention here that during the COVID period, one of the additional benefits from our joint ventures was that all of our health systems reached out to us and afforded, you know, LabNet employees the opportunities to get their, vaccinations for, COVID, as as part of, the frontline, essential health care workers. And so while that is not necessarily a easily monetized benefit, it was a significant benefit to the Admed employees that gave them the the the comfort and the confidence to continue to provide these services, which clearly has not been identified as an essential service. So I I I think these initiatives and the benefits that we provide were more demonstrated during the COVID period than perhaps at any other time in our history.

Speaker 3

Okay. Thanks for the additional color. And then quickly on the capitation business, if you can help us in terms of how you're thinking about that. Obviously, despite the pandemic, you saw a really nice growth there. And just wondering if we should continue to expect double digit top line in that piece of business going forward near term.

Speaker 2

Yes. I I believe that will be the case, Mitra. The particularly out here in California where we have the greatest penetration of capitation, I think more and more of our medical groups and related insurers are looking at not just capitation, but potentially new risk sharing models that given our geographic access and the breadth of services we offer, are exciting proposition. So, hopefully, you'll be hearing more about that, later this year, with initiatives that, may not be conventional in terms of what we have traditionally been doing in the way of capitation, but expanding, you know, the potential reimbursement models that may move a little bit further away from the traditional fee for service. So, again, I think, they're in a unique position, to do those, for a lot of, the reasons that we've already talked about.

Speaker 1

Yeah. I'll I'll add that, you know, during 02/2020, our capitation business was really a shining star. And unlike the other books of business that we had that were significantly impacted from, you know, from COVID nineteen, I. E. The fee for service business, you know, our capitated contract our capitated revenue was up over $14,000,000 from 02/2019.

And that was really because the enrollment in these HMO patient in these HMO program was stable and even had slightly increased in 02/2020, even despite, you know, COVID nineteen. Many of the many of the workforce that lost their jobs during 02/2020, many of them were put on furloughs and still had their health benefits. And so that the enrollment in within HMOs, and as as you're aware, in California, most of these HMO h HMO patients are then managed by medical groups through these capitated contracts, and we sub capitate from these medical groups. And our and our, revenue dollars are associated with the number of enrollees in these programs. And because the number of enrollees were stable to slightly grow growing in 02/2020, our revenue was, was up, not only because of the enrollees, but also because some price increases that we have built into many of these contracts on an annual basis.

So and then furthermore, the incidence of imaging, meaning the the use of imaging under these contracts, the utilization was significantly lower in 2020 so that the profitability of our capitated contracts in 02/2020, you know, was drastically up relative to prior year. So it's it's really a great book of business, one that we're looking to expand. We continually have conversations with new medical groups here in California, as well as taking on and assuming the responsibility, financial responsibility for more lives that might be part of other medical groups that we do contract with here in California that have other geographies that we could potentially capitate for. So it's a it's a business we like. We have no cost of billing and collecting.

We have very little patient bad debt, and we get paid in the month that we render the services so that we have no cost of carrying receivables. So it's it's it's really a a unique part of our business.

Speaker 3

Okay. No. That's great. And then quickly, Mark, I don't know if you can help with what's a good tax rate to use for 02/2021.

Speaker 1

Yeah. 02/2020 was jumping all over. There were lots of ins and outs related to transactions, so it's it's really hard to tell from 2020 what our effective tax rate is. If you assume for your modeling purposes that a, federal tax rate of about 21% and a blended, state tax rate of about 5%, so you get into the, you 26 to 27%. That's a good, a good proxy for our tax provision.

As you're probably aware, we're still burning off a pretty substantial, net operating loss carry forward. So, at least the federal part of that, tax provision, either isn't paid in in cash, but it still hits our income statement, with respect to our earnings per share.

Speaker 3

Thanks again for taking the questions.

Speaker 1

You're welcome. Thanks, Mitch. Go

Speaker 0

to our next question from John Ransom with Raymond James.

Speaker 1

I wanna congratulate you guys on having the shortest prepared remarks that they got me covered, so you get to think the word. Say that again, John. We're we're having a little trouble hearing you. Oh, sorry. I'll take off.

Is that better? Yes. That's better. Better? Yeah.

Sorry. Yes. Take off. Okay. So I just wanted to give you guys the award for being the most distinct management team I cover in terms of your prepared remarks, so congratulations.

Speaker 4

Is that sufficient or do

Speaker 1

put you to sleep? No. No. It's actually a compliment. You guys are succinct.

It's it's it's a compliment. So just a few things. If if we remember right, so DaVita Medical Group sold to United, and that's a big, as you know, IPO group in California. Has having those practices in the hands of United, which is probably more aggressive with RAF scores and the like, has that has that been part of the better pricing that you've seen in California on the IPA contracts, or is that just a coincidence?

Speaker 2

I don't think at at this point, John, that it has translated into any additional benefit or opportunities for us. You know, the the marketplace here in California is not so much controlled by United corporate, but really here the local management and officers here in California that we've known for quite some some time. So even without United entering the picture, I think we've had ongoing discussions with the various groups that have now been aggregated under United into opportunities to further expand capitation. Maybe at some point, there might be more of a national opportunity that we would look at with United that could be not only for capitation but other fee for service businesses, particularly in terms of mammography, that that could be exciting for us.

Speaker 1

Okay. You you guys obviously came through the awfulness with flying colors. And this this is kind of I'm I'm trying to find the glass half full question or glass half empty ass question, but don't take it in the wrong way. But, you know, being so exposed to California, New York that were kind of extreme examples of lockdown states, did did that that cause you to maybe rethink some of your geographic concentration? Or or does it are you thinking, like, gosh, it couldn't get worse than this

Speaker 2

and look how well we did? You know, I I get often asked the question, John, about why we're only in five or six states. Now we're actually a seventh with with Arizona. Right. And, you know, there's I make the analogy for those of you who are old enough or who have read widely about history that when they caught the famous bank robber, Willie Sutton, they asked him why he robbed banks, and he said because that's where the money is.

To some extent, I think our strategy follows along with that. And while, you know, we can suffer through situations like we did here, you know, through the pandemic and the lockdowns, the fact of the matter is that if you combine the population of The United States, you know, that is in New York and New Jersey and in California, we're probably talking, I'm gonna say, about a third of the population or somewhere in that area. So, you know, I think we have to take the good with the bad. There's seasonal issues that we get confronted with like we were in February with some, you know, inclement weather. But it's where it's where the people live.

It's where the lives are. We're very much a a volume driven business. And my preference would be to stay in those markets where, we can become the major outpatient player and benefit from large volumes and access to our centers, gives us some very unique contracting capabilities. Right.

Speaker 1

Okay. Fair enough. And then lastly, can you give an update if any we don't see a lot of portfolios trade in this business, but where do you think the private equity slash competitive strategic, you know, bid is for, let's say, a substantial play for playful of assets versus where a RadNet would be? I mean, is the market gonna pay two to three or four times higher than you're willing to pay per se, but somebody can't be with a nice market and something like $20,000,000 of EBITDA? Are you going to be consistently outbid in those situations just given your history?

Speaker 2

You know, I think we're we're aware of all the transactions that go on, you know, in the imaging space, and we see the size of, these transactions, not so much in terms of the dollar amount, but in terms of the multiples that people are paying. And I think we look at each one of these in a very specific way. I think if a set of assets were to come up that are very strategic for us, it would be worth taking a close look at at those even if they, tended to be at higher multiples than we may, have paid in the past for. So I think while that, you know, the aggressive, you know, PE approach for acquiring some of these imaging assets has been a bit of a head scratcher for us. Nonetheless, I think it helps define how valuable the RadNet strategy is, that should have some of that benefit in there to us in terms of our, attractiveness to, you know, to the stock market, and shareholders.

But I I would say that we're more optimistic about how we can continue to, you know, leverage our facilities, and that the consolidation. Know I'm rambling here a little bit, so I apologize, Dan. But consolidation is a a major force inside of health care. And I think there's no better poster child for that than the imaging, particularly the outpatient imaging space. I like the the leverage that we have with our with our platform gives us enormous opportunities, many of which that, you know, we're working on this year to further create efficiencies and streamline our business.

So, scaling up, under the right circumstances is certainly something that we would be very serious about.

Speaker 1

Oh, and and sorry. One more. I just forgot to ask you. In your hospital JVs, I mean, your your legacy was, gosh, our unaffiliated freestanding centers are one third to one half the price of what it would cost to get you get it done at a hospital. And and, of course, you know, you pointed rightly that all the payers are now steering people away from hospital settings for routine scans.

But when you do a joint venture with a hospital, I'm assuming there is some contracting left. So is the so let's say the rate is, just make up a number, $1,500 for an MRI at the hospital, and it's $400 at RadNet. Is is the hospital affiliation price 600, or is is it a little better, a lot better? Or how does that work out? Considering obviously they have more leverage with the payers than say RadNet would in a given market.

Speaker 2

It varies from market to market. In some markets, the relationship with health system has in fact allowed us to get better rates than than we would have on our own on a stand alone basis. But I think the primary benefit of the relationship with the health systems, is not so much for rate lift. It's it's more having a a seat at the table, with the relationship of the health system on a shoulder to shoulder basis and where the health system can actually drive volume into the outpatient centers. And that happens in two ways.

Number one, when the health systems see that we are joint ventured with excuse me. When the health insurers see that we're joint ventured with the health system, they know that there is less of a necessity for them, the health insurers, on the pricing side of this. And that the health systems are shoulder to shoulder with us in helping drive the business away from the hospitals into the outpatient centers. The other thing is that all of our health systems, bar none, are in the business of acquisition of practices, physician practices. And once they're under the health system, it's easier for them, particularly with the access that they get afforded, you know, with the RadNet locations to direct that business into the outpatient marketplace.

So both of those benefits have been, I think, a very important part of our strategy with health system joint ventures that are and have created benefits that we would not have enjoyed without them.

Speaker 1

That's it for me. Thanks so much.

Speaker 2

All right. Thanks, John. Stay safe. Yes, sir.

Speaker 0

There are no further questions at this time.

Speaker 2

Again, 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. Our 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 today, and I look forward to our next call. Stay safe and healthy.

Speaker 0

Today's call. Thank you for your participation. You may now disconnect.