Akumin Inc (AKU) 2018 Q4 法說會逐字稿

Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to Akumin Inc.'s 2018 Fourth Quarter and Year-end Financial Results Research Analyst Conference Call. (Operator Instructions)

Mr. Zine, you may begin your conference.

Good morning, ladies and gentlemen, and thank you for joining us for Akumin's earnings call for the year and quarter ended December 31, 2018.

Before we begin, let me remind you that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements that are subject to risks or uncertainties relating to Akumin's future financial and business performance. Actual results could differ materially from those anticipated in these forward-looking statements.

The risk factors that may affect results are detailed in Akumin's periodic results and public disclosure. These documents can be accessed under Akumin's profile on SEDAR at www.sedar.com.

Akumin is under no obligation to update any forward-looking statements discussed today, and investors are cautioned not to place undue reliance on these statements.

We may also make reference to certain non-IFRS measures during this conference call such as EBITDA, adjusted EBITDA, adjusted EBITDA margin and adjusted net income/loss attributable to shareholders of Akumin. Our definitions for these terms are included in our public disclosure. Our use of these non-IFRS measures is intended to complement IFRS measures provided -- by providing additional information and further understanding of our results of operations.

On today's call, Mohammad Saleem, our Chief Financial Officer, and I plan to provide you with highlights from our operations and financial results for 2018 and the quarter ended December 31, 2018. After our prepared remarks, we will open the call to questions from industry analysts.

Overall, our results for the year and the quarter were in line with management's expectations. 2018 was a year of significant growth for Akumin. Organic growth continued in line with management expectations. In fact, in Q4 2018, relative to Q4 2017, we estimate revenue for the quarter would have increased by approximately 10% when you exclude our 2018 acquisitions, our purchase of noncontrolling interest in Texas in Q2 2018 and the onetime revenue impact in Q4 2017 following Hurricane Irma which hit Florida in September 2017.

Acquisition growth was also significant.

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we added 21 centers to our network, representing more than $50 million in pro forma annual revenues. As at year-end, we had 45 centers in Florida

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in 2018, we completed the acquisition of noncontrolling interests in 7 of our centers in Texas that were previously not wholly owned, bringing all of those operations under the Akumin network to streamline our corporate structure, to provide balance sheet flexibility and to simplify the administration of our regulatory compliance regime. While the decrease of revenue resulted, this decrease was related to ownership changes and not to operating issues. The decline is consistent with declines experienced with prior purchases of noncontrolling interest experienced by Preferred Medical Imaging in Texas before we bought it and was anticipated by our management team.

We recorded revenue of $154.8 million for the year and $45.5 million for the quarter. Adjusted EBITDA for the year was $31.8 million, and adjusted earnings per share or EPS was $0.20.

Adjusted EBITDA for the quarter was $9.2 million, and adjusted EPS was $0.05. If the acquisitions completed during Q4 2018 had occurred at the beginning of that quarter, the adjusted EBITDA would have been approximately $10 million.

We measure our ability to scale our business by revenue and adjusted EBITDA. We measure the profitability and health of our business by looking at adjusted EBITDA margin and adjusted EPS on a diluted basis. Our financial discipline in terms of capital deployment is measured by return on capital to all stakeholders and return on equity. As you can see in our MD&A, these measures have been generally improving over time. The management team will continue to focus on improving these metrics as we execute our acquisition growth strategy and our organic growth initiatives. We believe this focus will result in long-term shareholder value creation.

Akumin's acquisition growth strategy remains to build density in core geographic markets. In the current stage of our growth, we continue to be focused on developing the size and scope of our network, which we believe will provide an attractive alternative to hospitals for insurance and other third-party payers. We believe we will continue to have significant access to debt markets in order to execute on our acquisition growth strategy. And we may also use our currency from time to time as an attractive form of consideration to potential operators to join the Akumin platform.

We closed the year with approximately $19 million cash on the balance sheet.

We also remain focused on existing business operations. We spent a considerable effort over 2018 streamlining our billing and revenue cycle management practice, which included the addition of a Chief Revenue Officer to run the department in late Q1. Through our legacy businesses, we had inherited a number of different billing systems and workforces. We are happy to report that all of our businesses, including those acquired in late 2018, are now fully integrated across the company on the same billing platform.

We are also continuing our efforts to integrate operations from recent acquisitions. The operations of the 4 centers in the Tampa Bay, Florida area that we acquired on May 11, 2018, are now fully integrated, and we have made significant progress towards the full integration of the operations of Rose Radiology, which was acquired on August 15, 2018.

We have also started the execution of the operational integration for the 5 centers we acquired in Q4. We expect these building and operational integrations to have a direct impact on the bottom line of the company in the second half of this fiscal year.

Lastly, we also continued to streamline our corporate structure. We acquired the outstanding noncontrolling interest of 7 of our Texas centers, and we also eliminated 18 entities from our corporate structure as a whole. We also converted our Texas limited partnerships to limited liability companies, establishing a consistent corporate organizational structure in the company.

In addition to our internal focus, a lot of changes are going on in the diagnostic imaging industry and the U.S. health care industry, generally speaking, which, of course, will influence our strategy. The increase in high deductible plans have made patients more aware of out-of-pocket expenses and has made patients expect more price transparency and a more meaningful service experience. Insurance payers are still active in driving patient behavior and pushing patients to outpatient centers from hospital care. We are also still seeing some strategic alliances in development between retail and insurance companies, and we expect all of these trends to lead to the best practices of customer-centric companies becoming more dominant in health care practices. We believe Akumin, with its clearly defined strategy, operating philosophy and record of execution and integration, is well positioned to take advantage of this disruption and changes resulting from these trends.

At this time, I would like to hand the call over to Mohammad Saleem, Chief Financial Officer of Akumin, to discuss the financial results.

Thank you, Riadh. I will provide a summary of Akumin results for the quarter ended December 31, 2018. I will not focus on the year-over-year results in my remarks for 2 reasons. First, the period ended December 31, 2017, was a 15-month period, and as a result, it is not directly comparable to the 12-month period ended December 31, 2018. Second, because of the scale of the acquisition growth, the comparison of the 2017 and 2018 periods is not meaningful. However, I would encourage you to review our 2018 MD&A where you will find some discussions regarding year-over-year comparisons.

As I discuss our results, I will use certain non-IFRS measures, which are defined and reconciled in Akumin's MD&A. I will define these terms now. Adjusted EBITDA means EBITDA plus noncash items such as stock-based compensation, impairment of assets, gains or losses in the period, nonoperating cash items such as settlement costs and public offering and acquisition-related costs and onetime adjustments.

Adjusted net income to shareholders of Akumin means adjusted EBITDA less depreciation and interest expense taxed at Akumin's estimated effective tax rate, which is a blend of U.S. federal and state -- statutory tax rates for Akumin for the period.

In terms of volume performance, Akumin measures volume of procedures performed in its diagnostic imaging centers based on relative-value units, or RVUs, instead of the number of procedures. RVUs are a standardized measure of value used in the U.S. Medicare reimbursement formula for physician services.

Akumin's volume in Q4 2018 was approximately 1 million RVUs compared to approximately 850,000 RVUs in Q3 2018. I'm providing sequential quarterly information as meaningful comparative information for 2017 is unavailable. The increase is primarily resulting from acquisitions during the quarter.

With respect to the income statement, the company reported the following results as compared to the same quarter for last year. Revenue was $45.5 million, up from $35.2 million in 2017. Adjusted EBITDA was $9.2 million versus $8.3 million in 2017. Adjusted EBITDA margin was 20% versus 23% for the same quarter last year. The improvement in revenue was mainly due to the acquisitions in 2018.

Excluding the 2018 acquisitions, Akumin's revenue was about $1.2 million lower than in Q4 2017. This decrease is due to lower contribution in Q4 2018 from Texas operations related to the noncontrolling interest acquired earlier in the year and higher contribution from Florida operations in Q4 2017 following Hurricane Irma, which we estimate to be an additional revenue of approximately $2 million. Excluding our 2018 acquisitions, the noncontrolling interest purchase and the estimated revenue impact following Hurricane Irma, we estimate revenue for Q4 2018 would have increased by about approximately 10% relative to Q4 2017.

The improvement in adjusted EBITDA was mainly due to the acquisitions in 2018. The adjusted EBITDA in Q4 2018 included a onetime positive adjustment of approximately $0.8 million, which comprised of 2 items: first, an add-back related to incentive-based compensation for management for the 9 months ended September 30, 2018, which had previously not been accrued and was paid during Q4 2018; and second, a deduction related to reclassification of certain third-party costs as nonoperating expenses that related to the 9 months ended September 30, 2018, but were reclassified in Q4 2018.

The adjusted EBITDA margin was higher during Q4 2017 relative to Q4 2018, mainly due to strong performance in Texas prior to Akumin's purchase of the noncontrolling interest of the previously mentioned 7 Texas centers and in Florida following Hurricane Irma in September 2017. Also, Akumin has increased its presence in Florida during 2018 through acquisition that had lower margins than our existing business.

The adjusted diluted EPS was $0.05 versus $0.07 for the same quarter last year. This decrease is mainly due to higher depreciation and interest expense and increase in weighted average diluted share count, which was 63.1 million versus 43.9 million in Q4 2017.

We expect improved financial results in the second half of 2019 as a result of the integration and streamlining efforts in billing and other operations of our recent acquisitions.

With respect to our balance sheet, cash balance was $19.3 million at December 31, 2018, versus $20.4 million at September 30, 2018. Accounts receivable were $29.8 million versus $26.1 million at September 30, 2018. The increase was due to higher revenue during the quarter, partly due to the 2018 acquisitions in Florida.

Fixed assets at December 31, 2018, were $55.6 million versus $51.2 million at September 30, 2018. The increase was mainly due to the 2 acquisitions in Florida during Q4 2018.

Total debt of the company was $117.5 million at December 31, 2018, versus $103.6 million at September 30, 2018. The key liability of the company is our 5-year syndicated term loans of $100 million at fair value. In addition, this credit facility includes a $30 million revolving credit facility, of which $11.9 million was drawn as of December 31, 2018, to partly finance the 2 acquisitions in Florida during Q4 2018. As of December 31, 2018, we are in compliance with financial covenants under our credit facility.

We expect to implement IFRS 16 related to leases from January 1, 2019. This will bring our operating leases on Akumin's balance sheet. We are still reviewing this information, but we expect that it will result in right-of-use assets and corresponding lease liabilities in the range of approximately $106 million to $116 million.

With respect to key events occurring during the quarter. On November 12, 2018, Akumin announced completion of 2 acquisitions in Florida for a total of 5 clinic locations, 4 in South Florida and 1 in mid-Florida. The purchase cost for these acquisitions was approximately $13.3 million and was partly financed through our syndicated revolving credit facility. On a combined basis, these acquisitions had annual revenue of approximately $19.2 million on an LTM basis as of June 30, 2018.

I will stop here and hand it back to Riadh for closing remarks.

Thank you, Mohammad. This concludes our prepared remarks, and we would ask the operator to start the question-and-answer period.

(Operator Instructions) Your first question comes from Noel Atkinson with Clarus Securities.

First, I was wondering if we could talk a bit about the average rates per RVU. So you mentioned that Texas was a bit softer as expected in Q4 and that has been sort of an issue with the going-in network and things like that in Texas. So where do you see the average rate per RVU for the current overall portfolio now? Is it pretty stable going forward?

Yes. It's really -- Noel, it's really where we are in Q4. So there -- I mean also Q4 doesn't have the full contribution of the Florida businesses.

So there are 2 things that could impact the price. One, like you mentioned, the -- seeing the full effect of -- from out-of-network to in-network. That is already fully factored in Q4 for Texas. There's no more any impact from that transition. That's behind us. But what's not behind us is when you add businesses in a market that has a lower price than -- per RVU, which is a market like Florida, so we don't have the full contribution in Q4 from what we've added in Florida. But that means it's -- it wouldn't be that far from where we are in Q4. So I think your comment is correct, which means we should expect now stability at these levels.

Okay. Great. You mentioned in your remarks about a 10%, I guess it would be a same-store sales or procedure growth net of sort of onetime items and acquisitions and that sort of thing. What's driving that because that seems to be significantly higher than what your largest competitor is talking about, which is sort of 1% to 3%, 1% to 2% growth.

Yes. The biggest thing -- obviously, it's not the same. As you know, it's not the same scale. So I'll start there. I mean when -- if we have a significant larger scale, you will not see -- you will not see 10%-plus. So for example, it is low single-digit organic growth in Texas. It is actually also maybe mid-single digit what we start to see finally in the northeast market. This is the first time where we start to see organic growth in that market.

Florida is higher and what's driving that, Noel, is some of the broken assets we've acquired. So if you look also what we've done in '18 with the acquisition in the Tampa Bay area, that was a broken asset. So obviously, with something like that, you don't enjoy single-digit growth. It's -- you're doubling your volume and more than doubling your volume. And that, obviously, in the overall portfolio, delivers that 10%-plus. But as we get bigger, you're not going to -- obviously, you would not expect 10%-plus on the whole portfolio. So that's what's driving that.

Okay. Great. And then the last question before I go back in the queue. So if I look at employee compensation, it's continued to rise as a percentage of revenues in Q4 versus Q3 versus Q2. Is that related to just integration of acquisitions? Or are you -- and the decline in rates in Texas as you went in-network?

And then what -- can we see some economies of scale in that in the first half? Or do we really have to wait till the second half to see that kick in?

So I mean, obviously, we're being conservative. We said we expect to see the full impact in the second half. But obviously, some of that impact we expect to see in the first half given the actions we already have taken and others that will follow shortly in the next few weeks and months. So that's why we said we should see the full impact in the second half. But obviously, we're going to see some of it in the first half as well. What's driving that is, as you know, it's a 2 step process. So whether it's what we're doing on streamlining with billing or whether -- or what you do with operations. Before you get to the employee compensation line, you have to get through the systems and integration because without that, you cannot do anything with streamlining your workforce. So that's what's driving that. It's a typical lag.

We -- what we really focus on is really a flawless execution on changing systems because that's not an easy thing to do in this industry, as you know. The easy part is streamlining the workforce. So that's why we said we were very pleased to report that we have completed the full integration of our billing across the whole company, including what we bought in November 2018. So that's a big achievement for our company. And now we're turning our attention -- well, we've been working on it, but we're going to complete it to turn our attention to the operational side to -- and then like -- then you will see again some of that.

Actually, if you recall, Noel, we saw some of that impact in Q3. But then you make acquisitions again, and you kind of lose what you actually built, the synergies.

(Operator Instructions) And we have a question from Endri Leno with National Bank.

Yes. I'll start, I just wanted to make sure. So the Texas -- the decrease in Texas, is that fully because of the in-network from out-of-network transition? Or was there something else there?

No. The decrease, as we mentioned, there is no more decrease between out-of-network and in-network. That's not the case in Q4. The -- all the decrease is actually related to only one thing, it's the purchase of the NCI, which, as we mentioned last quarter, we do expect some disruptions from that and that's the result of that. But obviously, the strategic benefit in the long term -- that was more of a long-term decision, is much larger than this short-term impact. We expect it to be now at a stable level. We don't expect any further decline from the levels we are at right now. So it's -- now it's a matter of the recapture some of that and obviously recapture other opportunities that were not available because of the structure that was in place before. So it's -- it was totally related to the strategic buyout of the NCI.

Okay. Great. Next question I have. So on the onetime adjustments, that $0.8 million, so the cash compensation that had not been accrued, I mean, is that something that we can also expect for Q4 next year? I mean is that more of a -- could that be a recurring sort of a Q4 kind of an expense? Or will there be...

No, no, no, Endri. So obviously, because it was not -- it was not Board-approved, so we actually had everything in Q4. Going forward, it's being accrued on a regular basis.

Okay. Great. And one more kind of accounting and then I have a couple of general strategy and industry questions. But on the accounting, so operating leases for 2019 were about -- are about $13.9 million. Is that the expected lift we can see in EBITDA from those operating leases in 2019?

Yes. I would say that you would expect to see the operating lease expenses that have been booked will be offset through that. And again, like we're still looking at all the impact because some of the operating lease costs that we see, they include -- like there is some fluctuation from month-to-month. For example, on rent leases, you would have some CAM charges or taxes, which are hard to forecast like when you're looking at the lease contracts. So it would not be maybe one-to-one, but it would be pretty close.

Okay. Great. And next couple of questions and then I'll get back in the queue. But first of all, I was wondering if you can talk a little bit about the UnitedHealthcare decision to require preapproval for medical imaging that they started in February. Have you seen any lift in Q1, I mean especially as Akumin centers are in their preferred network. Have you seen anything? And how do you expect that evolves over the course of 2019?

Yes. So we see that as a great opportunity. And actually, some of the operational changes we're working on from a technology perspective is to further streamline our pre-authorization process, so to make it actually more seamless to the referring physician community and to the patients. So that will increase volume. I think its near-term impact is obviously it's more resources that you need to have against that, but we have the back office to deal with that. It's going to actually really have more of an impact on the smaller players, so we do expect to leverage this kind of changes and start to see higher volume in our platform, which we start to experience in some markets.

Okay. Great. And the second question, there was a notice by the FDA, I think, a few days ago for some increased reporting standards on mammograms. Do you expect or -- I mean are you, number one, ready to do that? And do you expect any incremental cost based on that?

No, we don't expect any incremental cost. We're ready for that. And that's actually -- and you're bringing a good point here. So that's a really significant area for growth for us. And as you know, in Florida, we do a lot of those procedures. We don't do those in other markets. And it's usually a procedure that most independent providers stay away from given the administration burden that comes with that procedure. We have the, obviously, processes in place to deal with something like that and we are continuing -- making the effort to continue to improve those processes in place. As letters go out and as more administration will be required, actually we see that as a good trend to -- for us to continue to grow that market or that procedure for us.

And at this time, I will turn the call over to the presenters.

Great. Thank you, everyone, for your participation on today's call. I would like to take the opportunity to thank all of our investors and partners and also to thank all of our employees and radiologists for their continued support.

This concludes today's conference call. You may now disconnect.