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Edited Transcript of AKUu.TO earnings conference call or presentation 14-Nov-19 1:30pm GMT

Q3 2019 Akumin Inc Earnings Call

Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Akumin Inc earnings conference call or presentation Thursday, November 14, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mohammad Saleem

Akumin Inc. - CFO & Corporate Secretary

* Riadh Zine-El-Abidine

Akumin Inc. - President, CEO & Director

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Conference Call Participants

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* Endri Leno

National Bank Financial, Inc., Research Division - Associate

* George Ulybyshev

Clarus Securities Inc., Research Division - Research Associate of Growth & Innovation

* Tania Rae Gonsalves

Canaccord Genuity Corp., Research Division - Analyst of Healthcare

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Presentation

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Operator [1]

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Good morning. My name is James, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Akumin Inc. 2019 Third Quarter Results Research Analyst Call. (Operator Instructions) Thank you.

Mr. Zine, you may begin your conference.

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Riadh Zine-El-Abidine, Akumin Inc. - President, CEO & Director [2]

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Thank you. Good morning, ladies and gentlemen, and thank you for joining us for Akumin's earning call for the quarter ended September 30, 2019. Please note the visual presentation is meant to guide our earnings call today, and a copy is available through the URL link in our Q3 2019 earnings press release.

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 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, adjusted net income 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 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 the quarter ended September 30, 2019. After our prepared remarks, we will open the call to questions from industry analysts.

Overall, our results for the quarter were in line with management's expectations. As you can see in the executive summary on Page 3 of our presentation, we continue to see growth across all of our key financial metrics. I will discuss these further in the following slides. 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 earnings per share. Our financial discipline in terms of capital deployment is measured by return on capital to all stakeholders and return on equity to shareholders.

Turning to Slide 4. Our RVU volume for the quarter increased by approximately 69% relative to Q3 2018. The volume for the third quarter of 2019 is $1.4 million RVUs. Similarly, RVUs have increased approximately 61% on a year-to-date basis compared to the same period of 2018. On a same-center basis, when excluding acquisitions completed during the period, this increase in Q3 represents growth of approximately 10%. We use our views rather than individual procedures to measure our volume on a relative basis. RVUs is a standardized system used by CMS for Medicare that applies a weighting to different procedures to distinguish the complexity from one procedure to another so that the brain MRI is distinguished from the standard x-ray.

On Slide 5, you can see that we recorded revenue of approximately $69 million for the quarter, an increase of 76% compared to Q3 2018. This revenue growth was driven by previously announced acquisitions and strong organic growth of 10% in a relatively stable pricing environment. As you could also see, our revenue per RVU is up slightly in the quarter to $48 per RVU. Akumin generated a higher proportion of revenue from attorney and auto payers driven in large part by the ADG acquisition, which closed in late May 2019.

On Slide 6, adjusted EBITDA for the quarter was just over $18 million, an increase of 117% from the same quarter last year, with adjusted EBITDA margin increasing to 26%. We believe part of the margin expense -- expansion is a result of higher proportion from attorney and auto payer, but it's also a result of organic growth and operational synergies implemented earlier in 2019. Management remains focused on realizing synergies from previously completed acquisitions.

At this time, I would like to hand the call over to our Chief Financial Officer to discuss the balance sheet.

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Mohammad Saleem, Akumin Inc. - CFO & Corporate Secretary [3]

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Thank you, Riadh. Good morning, everyone. I will focus on Slide 7 and provide summary information about Akumin's balance sheet as at September 30, 2019. Akumin's cash balance was about $17.5 million at September 30. The accounts receivable were about $77 million versus about $66.5 million at June 30. This increase of about $11 million was mainly due to approximately $15 million increase in net revenue in Q3 2019 versus Q2 2019, mainly due to the acquisitions made in Q2 and Q3 2019 and organic growth. Also, during August 2019, we made the El Paso acquisition, which added approximately $1.3 million in opening balance sheet accounts receivable in the Q3 2019 number. As at September 30, 2019, based on pro forma annual revenue at the end of Q3 2019, the company's days of sales outstanding were approximately 98 days versus 92 days at the end of Q2 2019. Excluding the auto/attorney payers, the days of sales outstanding were approximately 77 days at the end of Q3 2019 versus 69 days at the end of Q2 2019. This increase is mainly due to revenue growth from acquisitions and organic growth, increase in auto attorney accounts receivable. During the quarter, the service fee revenue from auto and attorney business represented approximately 31% of Akumin's revenue in Q3 2019 versus about 11% in Q3 2018.

We have been transitioning ADG's revenue cycle management over to Akumin's platform, which management expected would lead to some disruption to our DSO during the quarter. In addition, the integration efforts from previous acquisitions are also continuing.

With respect to net debt, we calculate it as debt excluding operating lease liabilities in our balance sheet and net of cash. It was approximately $311 million at September 30, 2019. This gives us an implied net debt to adjusted EBITDA ratio of about 4.3x based on annualized EBITDA for Q3 2019.

Lastly, our capital expenditure for the year-to-date September were approximately $9.3 million, representing approximately 5.5% of year-to-date revenue, which is broadly in line with our expectations.

I will hand it back to Riadh now to discuss some of Akumin's operational highlights and to provide a strategic update.

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Riadh Zine-El-Abidine, Akumin Inc. - President, CEO & Director [4]

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Thanks, Mohammad. Turning to Slide 8. While we remain focused on streamlining our operational efficiencies and the integration of previously announced acquisitions, we also continue to identify opportunistic tuck-in acquisitions and have completed some of those recently. On August 16, 2019, we completed an acquisition of 5 centers in El Paso, Texas. The purchase price was approximately $11 million and was fully funded using our revolving credit facility. Based on the revenue of those 5 centers for the 12 months ended December 2018, we expect this acquisition to add approximately $13 million of revenue to our business. These 5 centers expand our geographic footprint in Texas, which was primarily in the Dallas-Fort Worth area. Given the timing of the acquisition, note that Q3 2019 does not include the full contribution from this acquisition.

Shortly after the end of the quarter, we also completed an acquisition of 3 centers in West Palm Beach, Florida. This transaction, which had a purchase price of approximately $18 million, was also funded using our credit facilities. Based on the revenue of those 3 centers for the 12 months ended December 2018, we expect this acquisition to add approximately $21 million of revenue to our business. This acquisition expands our density in the South Florida market and complements both our existing South Florida business as well as our ADG's attorney and auto business.

Slide 9 outlines several strategic priorities that management is currently focused on. First is our growth strategy. 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 provides an alternative to hospitals for insurance and other third-party banks. You've seen this strategy implemented with the acquisitions this year in both Florida and Texas, which we expect will leverage our existing payer network. Another strategic focus is our continuing efforts to strengthen our Akumin brands. On that front, we have commenced certain initiatives to migrate sites that still operate and the predecessor banners over to the Akumin name and with the uniform design. ADG will continue to operate its centers as well as any other locations we convert to ADG brand with a focus on the auto and attorney and its own brand.

Third, and as discussed previously in this call, we are continuing to streamline our revenue cycle in order to reduce our DSOs through our integration efforts and also through technological enhancements.

Fourth, we have ongoing efforts to integrate prior acquisitions with a particular focus on billing and operating platforms. As we've discussed in the past calls, we have completed the billing transition of all for our 2018 acquisitions and have completed most of the operational transition as well for those acquisitions. Our focus now is largely on the integration of 2019 acquisitions and the cost-reduction synergies that will continue to benefit the entire company.

Lastly, as our U.S. shareholder base continues to grow, we will be exploring ways in the first half of 2020 to more closely engage with those U.S. investors as well as all other investors. As you will note from the press release, we recently enlisted the services of Hinge Markets led by Jeffrey White to dedicate additional resources to our investor relations.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of George Ulybyshev from Clarus.

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George Ulybyshev, Clarus Securities Inc., Research Division - Research Associate of Growth & Innovation [2]

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This is George just dialing in for Noel. Couple of questions here. Just to start off, can you talk a little about the progress on the integration of the ADG acquisition and your outlook for future acquisitions going into next year?

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Riadh Zine-El-Abidine, Akumin Inc. - President, CEO & Director [3]

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Sure. Thanks, George. We -- as we indicated earlier on the call, we -- the third quarter had a significant, obviously, transition that happened of ADG, which obviously is a sizable business in terms of its revenues, to Akumin's revenue cycle platform. So that transition has happened. Obviously, there is always a disruption when you have a transition like that, but it happened with minimum disruption, and that's obviously a big step in integrating ADG into Akumin. I think from -- I guess -- I also indicated from a branding perspective, that was always the strategy from day 1 that we'll continue to operate as 2 separate brands, where the ADG brand is primarily focused on auto and attorney business.

As it relates to the operating side, we have integrated some of the, obviously, corporate functions. We haven't seen the benefit of those synergies yet in Q3, but there are also other initiatives that will be -- from an operational perspective that will not impact just the integration of ADG. It will also benefit the entire company, but that's more of a 2020 event.

So I think we executed -- we're executing based on plan, the integration of ADG, and so far we're very pleased with what we've accomplished but also very pleased with the organic growth despite the change of ownership that the entire company continue to enjoy, not just Akumin but both Akumin and its wholly owned subsidiary, ADG.

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George Ulybyshev, Clarus Securities Inc., Research Division - Research Associate of Growth & Innovation [4]

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Okay. Great. And I guess going into 2020, do you just plan doing such smaller acquisition tuck-ins primarily or do you have plans for anything bigger than that?

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Riadh Zine-El-Abidine, Akumin Inc. - President, CEO & Director [5]

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So going into 2020, George, the significant focus on streamlining operations because it's really a -- we see a big milestone in the transformation of Akumin to be the leading provider in the industry. That's going to lead to not just more efficiencies, but it's going to lead to acceleration of integration for any future acquisitions.

As you've seen in prior -- in this quarter, whether it was in Q3 or really Q4, because we made one in October, we will continue to be opportunistic with tuck-in acquisitions. Those are very accretive on our platform, and we have the support of our lender group, so we will continue to do those.

As -- in terms of larger acquisitions, I think if we -- if there are some good opportunities at good valuations and we could be accretive from a capital perspective like we were on ADG, we will definitely consider those.

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George Ulybyshev, Clarus Securities Inc., Research Division - Research Associate of Growth & Innovation [6]

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Okay. Great. And just moving on to the next question. In terms of refocusing some of your conventional imaging centers into personal injury business, how many centers have you converted to date? I believe you had about 4 converted as of the last quarter out of the 9 planned. So just trying to get a sense of where you guys are with respect to that.

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Riadh Zine-El-Abidine, Akumin Inc. - President, CEO & Director [7]

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Yes. Actually, as of -- you're correct, they are about 9. I think actually, as of last quarter, we converted 2, and we had 2 more to convert. And as of today, 4 have been already converted and have actually seen some uptick in their volume as a result of that conversion. So that is going according to plans, and we expect to complete the other 5 in 2020. And that would be the -- with the completion of those 5, we would've executed the, as you indicated, the full conversion of those 9 sites.

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Operator [8]

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(Operator Instructions) Your next question comes from the line of Endri Leno with National Bank.

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Endri Leno, National Bank Financial, Inc., Research Division - Associate [9]

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Congrats on a good quarter, and a few questions from me. So first, I was hoping if you can talk a little bit about the El Paso acquisition in terms of what kind of market share do you estimate you have there and how many, if any, further acquisitions you might need to do there to get a leading market share in El Paso.

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Riadh Zine-El-Abidine, Akumin Inc. - President, CEO & Director [10]

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Sure. Thanks, Endri. That's a new market for us. There are really 2 established outpatient players. The rest is obviously hospital-driven. We have a decent market share, obviously, if we have -- if we own 1 of the 2 established ones, which are about the same size, the 2 established players. So we are a significant now player just because of the way the market -- the landscape of that market is being mainly hospital-driven market. So we expect, obviously, an opportunity for more organic growth in that market. If the opportunity makes itself available where we could consolidate further players in that market, we will. But I think now with this platform and once we put our formula in place, we expect to drive significant organic growth in that market. So we're very excited with actually starting to -- and we have other opportunities, but we are going to start to look at other pockets in Texas, where we could do hopefully what we've done in Florida and continue to build different markets just like the Dallas-Fort Worth market that we acquired back in 2017.

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Endri Leno, National Bank Financial, Inc., Research Division - Associate [11]

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Okay. Great. Next question is, you mentioned in your prepared remarks that you are converting some centers into the Akumin brand. How many of your centers do you need to be converted? How long do you expect it takes? And then how do you tie it in with the launch of a digital advertising campaign that you mentioned in prior calls? And how's the digital advertising going you've launched already?

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Riadh Zine-El-Abidine, Akumin Inc. - President, CEO & Director [12]

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Sure. So I think -- thanks, Endri. So those are -- so I'll answer them as 2 separate questions. So the first one is, as it relates to the conversion of ADG, so as we indicated earlier, they are 9. We've converted 4. There is another 5 to convert. We expect to convert the next 5. And I mean we could convert them much earlier, but I think there is -- there are other operational changes that are happening to facilitate the branding initiatives that we are working on. So we will probably do that over the first 3 -- complete those 5 over the first 3 quarters of 2020, where we will complete all 5. So that's really the conversion of certain Akumin sites to ADG. And just, again, to remind everyone on the call, that conversion works when you have a small footprint of a clinic, and you basically target the auto and attorney volume with a footprint that is mostly driven by a smaller clinic with MRI and x-ray most of the times.

The second part of your question. On the branding side, a lot of that will be really on the -- once it's going to be tested, it's going to be tested on the Akumin side, and where we are right now is we're hoping to make the changes in the operations in the first half of 2020, and the first market that will see the change will be the first market that will actually have a testing from additional branding perspective. And hopefully, we could start to see the results of -- it's not a costly initiative, but we could see much more organic growth from those type of initiatives going forward.

So the short answer to your second question is we are still on track to have that as a big test market in the first half of 2020. Once we do that, it's really very quickly -- you could very quickly roll it throughout the whole company. But first, you need to make sure you test the one specific market that has a nice density and has already converted to our new service delivery before we actually jump into digital advertising. So we will do that in the first half -- towards probably the end of the first half of 2020, and that is learn from that market and then roll it into many other markets across the whole country.

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Endri Leno, National Bank Financial, Inc., Research Division - Associate [13]

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Okay. Great. Just turning on the financial side of metric. So you mentioned there was a little bit of disruption transitioning ADG in Q3, and that impacted the DSO. What is your target DSO with the ADG in? And when do you expect it to get there?

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Riadh Zine-El-Abidine, Akumin Inc. - President, CEO & Director [14]

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So we -- when we look at DSOs going into Q4, we expect DSOs to stabilize in Q4. And then going into 2020, we have given now that -- I have explained this on many of the previous calls, but I think we -- obviously, you see historical results. We see more than historical results internally. So we start to see the trend going in the right direction as we always expected because we knew that some of the increase in DSO was actually a result of our actions. It was not a structural issue. So now we believe that the Q4 would be the first quarter where you will actually start to see it stable, not increase. But then the goal is by the end of -- as you move the year out, is to continue to bring the DSOs excluding personal injury in the 60 range, and then obviously it would be higher including the personal injury business, and that could be in the high 80s, including personal injury business. So that's -- we -- I think if we had a lower organic growth, you could get below 60, but I think we're targeting DSO excluding personal injury in the 60 range, and that's totally achievable as we move into 2020.

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Endri Leno, National Bank Financial, Inc., Research Division - Associate [15]

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Okay. Great. And just on Q4, if you look at it more on the RVU per case and it was a little bit up in this quarter, is there any seasonality associated with the auto and attorney payers for Q4? Should we expect to see a little bump there? Or is it more flat for the year?

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Riadh Zine-El-Abidine, Akumin Inc. - President, CEO & Director [16]

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Well, it's more consistent. There's no really any seasonality that is worth mentioning.

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Endri Leno, National Bank Financial, Inc., Research Division - Associate [17]

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Okay. Great. And the last one for me, I'll open the line is, we had the nice organic growth in RVUs in Q3. Can you comment a little bit on organic revenue growth in Q3?

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Riadh Zine-El-Abidine, Akumin Inc. - President, CEO & Director [18]

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Yes. I think -- I mean I think you could -- we could see it from the total revenue increase this time because more and more is under our watch. So we -- and you could see it in the dollar, which is why this time we've also shown the history of the dollar per RVU. Because as you have that stable pricing, you would expect the revenue increase to be aligned with what you're seeing as volume increase. The only difference would be businesses that are at a higher -- that drives higher revenue points will obviously have more growth in dollars than they would in volume. But overall, they're both going in the same direction. We're very pleased with the organic results in our existing clinics. So I think, think of it as everything else being equal, the price is stable right now, and what you see is volume growth translates into dollars growth.

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Operator [19]

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Your next question comes from the line of Tania Gonsalves with Canaccord Genuity.

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Tania Rae Gonsalves, Canaccord Genuity Corp., Research Division - Analyst of Healthcare [20]

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Gentlemen, that was a great quarter. Congratulations. Most of my questions have been asked. So just a couple of things from me, more I guess forward-looking, but if you do see personal injury rolled out across all 9 of the prospect centers, where do you think adjusted EBITDA margins could go? We saw a little bit of the benefit of higher EBITDA margins from personal injury comes through this quarter. Where could they go once fully rolled out?

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Riadh Zine-El-Abidine, Akumin Inc. - President, CEO & Director [21]

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So thanks, Tania. So I'm going to answer the question in 2 ways. Really, the -- because the third quarter has all of ADG, you have really seen the impact on margin. So any more improvement in margins, it's not going to really be driven by the conversion, it's going to be driven by the synergies from the opportunities that existed in the entire company. And this is something that maybe we haven't actually addressed in prior calls, but the opportunities for cost reduction across the whole company as we go into 2020, obviously, you're not going to see them in the first half of 2020, but they are significant. And we're -- we -- the whole team is spending a lot of time implementing all of our operational changes because they are going to lead to not just a different level of service, which also translates to higher organic growth and also translates into better integration formula for everything we're going to buy going forward, but also the other benefit is significant cost-cutting.

So if we're going to improve margins again by a couple of other points as we move into the second half of 2020, all of that will actually really be a result of significant synergies that we are working on. It's not going to be much of personal injury. And as you probably noticed, so for example, the recent acquisition we acquired in West Palm, which will be in the fourth quarter, it's not a personal injury business. So we -- as we continue to do tuck-in acquisitions, a proportion of our personal injury business in Akumin will continue to come down. And any really margin improvement that you will see from here would be the result of our operational initiatives. Like I said, that's a significant initiative for us. It's not really small savings.

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Tania Rae Gonsalves, Canaccord Genuity Corp., Research Division - Analyst of Healthcare [22]

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Excellent. And then just lastly, on the CapEx side, it looks like the addition to PP&E went up a little bit, spending slightly more than you have historically. Can you comment on that?

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Riadh Zine-El-Abidine, Akumin Inc. - President, CEO & Director [23]

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Yes. I mean absolutely. I think we always kind of range it in the 5% to 6% range. The -- what you've seen -- we're right in the middle at 5.5%. We're doing more upgrades than we've done in the past on the software side, which drives more revenues. So for us, as long as we're in that 5% to 6% range, we're very comfortable. So we don't -- obviously, it's a little bit lumpy, but over a year, that's what you would expect it to be. But we are -- we don't have any major capital expenditures that will really change the whole picture of the business. Even if it goes up again, it will be -- it will probably get to the 6% range or low 6s.

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Operator [24]

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And with that, that concludes today's Q&A portion of the call. I would like to turn the call back over to Mr. Zine for some closing remarks.

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Riadh Zine-El-Abidine, Akumin Inc. - President, CEO & Director [25]

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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 all of our employees as well as all the clinical staff and radiologists for all of their support in making another great profitable quarter and looking forward to more growth going forward.

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Operator [26]

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This concludes today's conference call. We thank you for participation. You may now disconnect.