Good day and welcome to the RadNet, Inc. Second Quarter 2019 Financial Results Conference Call. Today's call is being recorded. At this time, I'd like to turn the call over to Mr. Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet, Inc. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and thank you for joining Dr. Howard Berger and me today to discuss RadNet's second quarter 2019 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, including those risks set forth in RadNet's reports filed with the SEC from time to time, including RadNet's Annual Report on Form 10-K for the year ended December 31, 2018 and RadNet's quarterly report on Form 10-Q to be filed shortly. Undue reliance should not be placed on forward-looking statements especially guidance on future financial performance, which speaks only as of the date it is made. RadNet undertakes no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the date they were made or to reflect the occurrence of unanticipated events. And with that, I'd like to turn the call over to Dr. Berger.

Thank you, Mark. Good morning, everyone, and thank you for joining us today. On today's call, Mark and I, plan to provide you with highlights from our second quarter 2019 results, give you more insight into 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 you all for your interest in our company and for dedicating a portion of your day to participate in our conference call this morning. Overall, I am very pleased with our performance in the second quarter, which was a continuation of the strength our business demonstrated in the fourth quarter of last year and in the first quarter of this year. During the second quarter, we drove 18.3% revenue growth and 13.0% EBITDA growth as compared with the second quarter of last year. Both metrics were the highest of any second quarter in our company's history. Our performance was driven by significant aggregate and same-center procedural volume growth. In this quarter, we achieved 3.5% same-center growth. This is primarily attributable to a number of efforts of our regional teams. First, our marketing teams are having success differentiating our centers and service offerings relative to our competitors. We continue to believe our equipment multi-specialty radiology practices, IT systems and conveniently located centers are the best in the business. Further the investments we have made in recent years in leading edge equipment are recognized by referring patients and the physicians. Not only is our equipment and images of the highest quality, but investments we've made in newer equipment has allowed us to alter protocols to scan patients more quickly thus increasing the number of scanning slots at our centers. This provides us additional capacity at our already busy facilities. Our…

Thank you, Howard. I'm now going to briefly review our second quarter 2019 performance and attempt to highlight what I believe to be some material items. I will also give some further explanation of certain items in our financial statements as well as provide some insights into some of the metrics that drove our second quarter performance. Lastly, I will update 2019 financial guidance levels and discuss Medicare reimbursement for 2020. In my discussion, I will use the term Adjusted EBITDA, which is a non-GAAP financial measure. The company defines adjusted EBITDA as earnings before interest taxes, depreciation and amortization and excludes losses or gains on the disposal of equipment other income or loss, loss on debt extinguishments, bargain purchase gains and non-cash equity compensation. Adjusted EBITDA includes earnings, equity earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling interests in subsidiaries and is adjusted for non-cash, or extraordinary and one-time events taken place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or loss attributable to RadNet Inc. common shareholders is included in our earnings release. With that said, I'd now like to review our second quarter 2019 results. For the three months ended June 30, 2019, RadNet reported revenue of $289.1 million and adjusted EBITDA of $43.1 million. Revenue increased $44.7 million, or 18.3% over the prior year same quarter, and adjusted EBITDA increased $5 million, or 13% over the prior year same quarter. For the second quarter of 2019, as compared to the prior year's second quarter MRI volume increased 9.7%, CT volume increased 14.1%, and PET/CT volume increased 9%. Overall, volume taking into account routine imaging exams inclusive of X-ray, ultrasound, mammography, and all other exams increased 11.4% over the prior year's second quarter. In the second quarter of 2019,…

Thank you, Mark. Before we move on to the question-and-answer portion of our call, I would like to emphasize why we believe it is such an exciting time to be in our industry and why the future looks very bright for diagnostic imaging. First, we remain a technology-driven industry. Each year, there are new advances in equipment and related technologies, which open new applications for what we do and drive incremental patient volumes over time. Radiology remains the key diagnostic tool for identifying most injuries and diseases. Advances such as 3D breast imaging, multi-slice CT scanning, PET/CT and now PET/MR devices, to name a few, are unheard of 20 years ago and continue to push the envelope of diagnostic medicine. We continue to believe that the requirement to invest and reinvest substantial capital expenditures into our centers represents a significant barrier to entry for others, particularly smaller less capitalized operators. Second, artificial intelligence, which I discussed earlier, will have transformational impact on how we and other industry players do business in the near future. AI promises to make our radiologists more productive and accurate. AI should also shorten scan times and report turnaround times. AI will refine business processes and impact areas such as marketing and revenue cycle. Ultimately, AI may allow operators like ourselves to reduce overall cost, thereby materially impacting our margins. Third, our industry will continue to benefit from the migration of patients away from acute care settings in favor of ambulatory outpatient centers. This will continue to benefit patients and referring physicians and significantly address the rising cost of healthcare. Patients prefer freestanding centers, because of their convenience and higher level of service. Lastly, the diagnostic imaging industry remains fragmented and will benefit from the efficiencies that can be gained from sensible and methodical regional consolidation. We intend for RadNet to continue to lead this charge in targeted geographies. We see an accelerating opportunity set for us to further penetrate and expand our regional networks and more aligned with health systems and insurance companies. Operator, we are now ready for the question-and-answer portion of the call.

Thank you. [Operator Instructions] And we'll go first to Brian Tanquilut of Jefferies.

Hey, good morning, guys. Congratulations on a great quarter. I guess my first question for Howard or Mark. Same-store volume came in at 3.5%; I think it's probably the highest I've seen in years. So is there anything you would call out in terms of what the drivers were for that robust same-store growth during the quarter? And how do you think about the sustainability of that level of growth?

Good morning, Brian. I think it comes predominantly from two places. Number one, as I mentioned in our opening remarks, the movement of patients from hospitals into outpatient centers, while it is slow, I believe, it is starting to pick up some pace. We know that because our conversations with almost all of the commercial insurance payers are beginning to discuss more opportunities and methods by which we can help accelerate that growth. In addition to that, the joint venture partners who we've more recently here particularly in California become -- partnered with are also helpful in moving patients from hospital to the freestanding centers along with the groups that are part of those health systems more -- referring more of their patients into the joint venture centers. The other part of it which I think is important is to understand that the investment that we make in our equipment particularly the newer equipment is allowing us to shorten scan times and increase the volume in our centers which are challenged with backlogs. In particular, when we look at the primary advanced imaging modalities MR, CT and PET/CT all have been significantly affected by new technological advances occurring with software and artificial intelligence that allows us to shorten scan times. We are also standardizing our protocols across all of our markets and using best practices to help shorten those scan times. So we have been able to achieve in many of our centers that are challenged with these higher volumes reducing our scan times often by as much as 25% to 33%, which results in more revenue per unit time or per hour in our centers and is helping to drive that volume along with the new technologies that give us a wider range of applications. So I think those are the kind of tools that we're seeing out there that are primarily the driver in and I do think this is sustainable because we have yet to see the full impact of hospital migration and the implementation of new tools and techniques to reduce our scanning times.

That is awesome. And then Mark I guess a question for you, I mean, the strong same-store translated to good EBITDA growth, but as I look at the margin still down year-over-year. Is there anything to call out in terms of the Q2 margin performance?

Yes, sure. So you're right. Aggregate revenue way up, EBITDA aggregate up, margins compressed about 50 basis points here in the second quarter relative to last year and that's primarily the result of two acquisitions that we made on April 1. The acquisition of Kern Radiology and then a another acquisition in Long Island called Zilkha, where we acquired about $30 million of revenue to which in the quarter we received -- from which in the quarter we received very little EBITDA. Because those were two -- almost asset deals that came -- were very strategic to our the particular regions of Bakersfield where we are now in the midst of consolidating the Kern Radiology group with our existing operation there called Truxtun Radiology. That's going to take a quarter or two before we start seeing the enhancement that we are expecting to get on the EBITDA side. And then in terms of the Zilkha operation that was very strategic for another location where we can send our ACP and Long Island lives and that we expect to turnaround as well. So we think there's actually a significant improvement that we -- that we will get on our margin side by getting the contribution for those that $30 million of revenue to look more like the rest of our business.

Got it. And then one last question for me. As I think about capitation there was a sequential increase and obviously year-over-year as well. Is this is a good run rate to be thinking about for the rest of the year on year on capitation?

Yes, it is. Brian. The primary increase in that is coming from our new capitation contract with the subsidiary of Emblem called the ACP -- AdvantageCare Physicians and in addition to that we are in the midst of discussing with all of our capitation contracts pricing for the 2020 calendar year. So we're comfortable with that run rate is sustainable and probably should be growing also.

Got it. Actually Howard, if I -- since I have you if I may ask one more question since you mentioned AI towards the end of your comment and I appreciate all the comments on how it helps you operationally, but in terms of monetization of your asset the data that you're sitting on and AI capabilities that you guys have how are you thinking about the ability for RadNet to monetize that going forward?

We are talking to a couple of companies that either will do data warehousing and use some of the medical records or information that we have as part of an overall availability and business to monetize that into the community. I don't know if that will be a substantial part of revenue that will create much of a change in the overall company's performance, but more importantly, it will give us access to other people whom we single out that can help us -- be more operationally effective in adopting artificial intelligence inside the company. My concern all along is and has been -- how commercial artificial intelligence and data storage can be from an enterprise standpoint. I think that to the extent that it helps us with our margins by producing efficiencies, more accuracy and potentially creating a competitive advantage to hospitals and other freestanding centers may be the biggest benefit of it from a long-term standpoint. So I think positioning the company in the artificial intelligence and data storage area will be critical, but not so much from commercializing it, as it will be for the internal consumption.

All right. Appreciate that. Thank you.

Thank you, Brian.

[Operator Instructions] And our next question comes from Mitra Ramgopal of Sidoti.

Yes, hi. Good morning. First I was just wondering on the -- I saw same-store numbers -- we saw -- if you're starting to see any benefit at all from insurers like UnitedHealthcare etcetera and a shifting of more of these procedures away from the hospital to a patient?

Hi, Mitra. I think we are. I think, it's a little too early to try to quantify that in greater detail. Part of what we believe that we're seeing is just a shift simply based on the competitive benefit that I believe, we provide as opposed to our other competitors in the freestanding market. I think that as I mentioned in some of my remarks here the ability to change referral patterns in healthcare is generally a very slow one. Even those hospital systems that are acquiring medical groups, find it a slow process of trying to get those referring physicians to alter their referral patterns and I'm not just talking about imaging, I'm talking about all the ambulatory services. But it is something that over a period of time, I believe will continue to benefit from the RadNet and it centers will benefit from. So if you look at those forces, if you will, inside healthcare in general and imaging in particular they drive volume. The ones that have always been there, meaning increasing the population which drives more imaging, an ageing population which drives more imaging and greater applications with new technology. The dimension that we're adding now is a more directed effort on the part of health plans and our and health systems into the lower cost that have more cost effective imaging centers and it's hard to kind of peel back as to which of those is contributing to the same-store center organic growth. But in aggregate, I expect all of those to continue to be a factor here with an additional acceleration coming from the last part that I just mentioned.

The other thing we're seeing and this is not unique to UnitedHealth members, but because there has been such a migration and accelerated migration to higher deductible health plans, you're seeing patients themselves being more aggressive in directing themselves to lower cost settings. And as time goes by patients get more and more educated as of the disparity between the pricing that they're seeing in the hospital versus the ambulatory centers. And so we're seeing some of that acceleration out of the hospitals in favor of our centers just because patients are getting more educated.

Okay, no. That’s great. Thanks. The other thing, I wanted to follow up on a little is, obviously as you continue you built a nice scale now on the JV side, and as you look at quarter expansion, are you seeing heightened interest in terms of maybe hospital is now starting to approach you more just because of they are seeing the benefits the other are getting working with you?

I think we're seeing that in California where we've moved up our efforts for joint ventures more so than taking it on the East Coast. On the East Coast, we're already joint ventured with several major hospital systems particularly in Maryland and in New Jersey where we have the RWJBarnabas joint venture. So the likelihood of us seeing a lot of additional joint ventures in those markets is probably going to be disappointing and maybe very, very slow. On the other hand here in California where managed care and the huge geographic expanse that patients can come from are getting more and more traction from our existing joint venture partners who are looking to expand all of those joint ventures and at least two or three other large health systems here in California that we're in active discussions with about expanding new joint venture relationships with. So I do expect that to continue and I think as that model itself proves successful like it already has, it wouldn't surprise me if we start to care interest may be in other geographies that we're not currently in the market in those particular markets. So I think it's a very good model for us in terms of long-term security and stability and one that should provide us opportunities to enhance the growth of the company both organically and by acquiring more centers.

Okay. Thanks again for that. And then I know you had mentioned in terms of the JVs having conversations with them as it relates to then sort of price increases and I'm just wondering what the reimbursement environment looks like and how comfortable you feel that you should be able to get some light gains there?

In Barnabas that you are saying?

On the JV side, I think you had mentioned you're going to be having a number of conversations in terms of contract renewals and looking to implement some price increases.

That wasn't so much with the -- in the joint ventures as it was reviewing our capitation contracts and looking at re-basing some of those contracts for 2020. So that's primarily a function of what goes on here in California routinely on an annual basis which we are accelerating and focusing more on for our 2020 year end.

Okay. Thanks for fitting that up. And then finally obviously with the AI division now I was just wondering if you think there any another areas where you think you need to get into to fill any or ready to make run like you're offering sort to speak. I know you already have to teleradiology Breastlink now AI et cetera not sure, if there's anything else really for you to add near term?

Near-term probably nothing else I think. With the enormous opportunity that AI represents for us I think that that will be a major focus for us for the remainder of this year and moving into 2020. We've identified about half a dozen companies who we'd like to partner with or maybe even ultimately invest in that I think can take some of the technologies that they are developing and continue to work on that I think will add substantial value to the company. So I believe that will be the focus for us for the remainder of this year and going into 2020 from an investing opportunity and using the tools that I think are uniquely capable with artificial intelligence to improve all of the processes by which we run this company.

Okay. Thanks for taking the question.

Thanks, Mitra.

Thanks, Mitra.

[Operator Instructions] We'll go next to John Ransom of Raymond James.

Hey. One thing that you may have said this, but I'm just struggling to remember is when you do your hospital JVs, I know one of the big points for RadNet is that you are much cheaper, but if we're thinking apples to apples, so let's say you have a center in LA suburb and then you do have another center with the hospital JV partner. Is it right to assume that maybe that rates a little bit difference since the hospital is negotiating this rate for you or is it essentially kind of the same commercial rate whether or not it's hospital partner or not or just is that too simplistic question?

I think that's a great question, John and good morning.

Yes, sir.

Actually, I think we have information from a historical standpoint that relationships with hospitals do help us with reimbursement. In particular, I'm referring to our partnership with the RWJBarnabas Health system where with their help, we've actually been able to negotiate -- fee schedule which is different from the published PPO fee schedule for the physicians that is substantially better and where we get increases every year. So that's something that I think we've already demonstrated part of the benefit with and to that end, our partnership with and joint venture with RWJBarnabas continues to be budgeting and exceed expectations. So we're very focused on New Jersey in particular in expansion of that and what happens with that when we do new acquisitions, we're able to get a rate lift from acquiring those centers and putting them under the joint venture fee schedule, which helps us significantly de-leverage those transactions. We think ultimately that same opportunity exists here in California and just because of the number of health systems that we're dealing with the opportunity to expand that and the population in California that we have that could wind-up being a very significant opportunity for us similarly here in California, which accounts for about 40% of the company's overall revenues.

So just to be clear, John though these are still outpatient rates that are substantially lower than what the hospitals are charging in those markets. So they're outpatient rates that are higher than what perhaps RadNet would have been able to negotiate on its own using the leverage and strength of the health system that we're partnered with but there is still much closer to RadNet rates than they are to the hospital.

All right. So secondly this is completely unfair question, but if you had to guess let's say, you have 100 people and a group medical plan. Today, do you have any idea what percentage of those even know that, gosh, if I go to the freestanding centers I'm going to save 3x over going to the hospital. I mean, it seems to me like those engagement efforts and that education effort is still for a second inning. But do you have any perspective on that and even with your own employees in your own health plan, do you proactively reach out to them and say for certain scheduled procedures like outpatient surgery or imaging it's -- or even in primary care it’s heck of a lot cheaper to go here than it’s to go to the hospital?

I think you're right. And on almost all accounts there John. Patient…

That’ll be the first time that's happened this year by the way that I've been right about anything. So I'm already feeling better about things.

Really. I thought you were going to say it was the first time today but it is okay. Patient engagement or what I think is more broadly referred to as consumerism is a complicated subject because there still is the preponderance of patients who go where their doctor tells them to go. I mean at the end of the day the ability for the average patient to make a decision that might be contrary to what he thinks their doctor recommends is something that we and the health plans have to fight against. I think that that process can be facilitated with plan design and education but we worked very hard with our referring physicians to try to educate them. What we're finding is that both the health plans and our health system partners are getting more and more engaged in that process, which in and of itself will I think create a much bigger impact ultimately than the patient education side of it. We use other radiology business, managers on the East Coast for example that have programs that they call smarter choice where they indeed on behalf of the health plan field calls from the patients because they do the pre-authorization and in that process they will attempt to try to switch a patient who they know has been referred to a hospital to a lower cost freestanding facility and while they have had some success in doing that, it's a very slow process and one that has been in some respects disappointing. So with -- armed with that information we go back to the health plans and say we have to start that process not so much at the patient level but at the referring physician level and with some health plan design changes, and the conversations that we're having today are unlike those that we've ever had in the past and while it's still slow, I do believe that that will be the primary methodology, by which their transformation or transition will occur.

So what do you guys do with your employees in that respect?

Yes, I was going to comment on that. So we're a big enough company where we're self-insured for our health plan. And we have created narrower networks to try to drive our employees into specific locations depending upon what specialty. For instance, for imaging, as you might guess RadNet is the exclusive provider of imaging services to the RadNet health plan and so we've carved essentially out of the Blue Shield network, we've narrowed the network to include only RadNet centers, we've done -- we've chosen an outpatient laboratory to do the same thing where we're getting very low pricing and we’re using services like Teladoc and others that are -- that are in network that where we've negotiated a carve out in our benefit plan with our Blue Shield network to try to narrow the network. Yes, we're limiting choice, but we're providing value for employees and lowering the cost. So I think more and more large self-insured employers are willing to narrow choice in favor of being able to provide lower premiums and lower cost that's borne by the actual employer for providing health care and I think that's the future.

Sure. Okay. And just lastly from me, I always ask this question and I don't expect the answer changes every 90 days, but is the M&A I'm sorry wrong question. Mark, I think you've mentioned to me before capacity utilization is starting to become a little bit of a constraint on your same-store growth. So just practically speaking, how much more volume can you squeeze out of your same-store imaging centers as you sit today.

I'm going to take that one instead of Mark, John. And that was partly the focus I had on artificial intelligence and other processes. One that I called protocol optimization that we're working on very diligently about three years ago, four years ago we hired a radiologist who probably is from a technological standpoint maybe the most sophisticated in the entire industry and his sole focus is to work with our centers, our radiology groups and with management in purchasing of new equipment and then implementing protocols and we're finding substantial benefit from those efforts here that will allow us to add additional revenue and slots for imaging in those centers that are challenged with volumes and this is something that we expect to do in every modality that we are currently performing in our centers. So that's why I put as much emphasis I did on artificial intelligence and other technological advances not being so much for us a commercial opportunity, but an internal opportunity to drive revenue and when do you think that in the past the average scan time for an MRI has been about 0.5 hours, so that we're able to do maybe about two patients an hour. We've now reduced that in the majority of our centers down to about 20 minutes. So picking up one extra scan per hour can be a substantial influence in our business performance here if we have that demand to fill those slots which in many of our centers we do so. That's a key takeaway I think from the earnings call here that I want to reemphasize. And thank you for asking that question.

Okay. That’s it from me. Thank you.

And with no further questions in the queue, I'd like to turn it back for any additional or closing remarks.

Thank you, operator. 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. 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.

And again this does conclude today's conference. Ladies and gentlemen we appreciate everyone's participation today. And you may now disconnect.