Good day, and welcome to the RadNet, Inc. Q4 and Full Year 2020 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.

Thank you. Good morning, ladies and gentlemen, and thank you for joining Dr. Howard Berger and me today to discuss RadNet's fourth quarter and full year 2020 financial results. Before we begin today, we'd like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. This presentation contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Specifically, statements concerning anticipated future financial and operating performance, 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 include those risks set forth in RadNet's reports filed with the SEC from time to time, including RadNet's annual report on Form 10-K for the year ended December 31, 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 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 fourth quarter and full year 2020 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'm very pleased with our performance in the fourth quarter. Continuing with the recovery of our procedural volumes that began in 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 3D 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 tomosynthesis 3D technology. Second, the increased revenue was the result of reimbursement increases from private and capitated payers as well as improved…

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 and 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 December 31, 2020, RadNet reported revenue of $308.5 million and adjusted EBITDA of $50.7 million. Both were the highest quarterly levels in our company's history. Revenue increased $7.7 million or 2.5% over the prior year same quarter and adjusted EBITDA increased $3.8 million 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 3D mammography offerings, improved reimbursement for private and capitated payers, enhanced cash collections and significant cost…

Thank you, Mark. In conclusion, the challenges encountered during the COVID-19 pandemic created a seminal event for RadNet. COVID-19 required us to reevaluate every aspect of our business, a business that has grown primarily in the past through acquisitions. COVID-19 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're 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 preauthorization 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 core functions. As we now approach the end of the first quarter of 2020, 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 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 end of 2020 leading into this year along with the availability of $195 million of revolving credit facility will provide us the financial capabilities to pursue creative 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.

Thank you. [Operator Instructions]. We'll take our first question from Brian Tanquilut with Jefferies.

Hi. 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 and I appreciate you mentioning the conservative of 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 you're embedding in your guidance? Let me start with that.

Good 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 2% 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 were put upon everybody in 2020. Notably during the last nine months of 2020, many health systems went 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. Along side of that, we believe that the additional volume that will come to us will 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 with healthcare 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 guidance for 2021?

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 investment and expansion that we should be watching out for going forward?

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 mammogram. So we've begun both through our Whiterabbit 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 40% to maybe even 50% or 60% of all women who should be getting their mammography are not. Therefore, since there's about 40 million mammograms done annually, there's a good argument to believe that perhaps 20 million to 30 million 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 the 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 3D tomosynthesis throughout our entire fleet, but to elevate to their newest technology with high resolution detectors and faster and better management 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 mammographers are capable of doing. So I think all of those gives us a good reason to think that our mammography which was up as we reported even in the fourth quarter, up almost 12%, has that opportunity to continue in 2021. I also want to mention that in most households, the mother or the women are very much the determinant of where healthcare is accessed by the rest of their family. So encouraging more and more of that in the mammography business we believe will also help us with other downstream imaging and procedures that we can’t do in our centers.

Okay, that makes a lot of sense. 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? You expanded the credit facility. So should we be thinking that you'd be acquiring more in that market specifically, or are you open to further expansions from a geographic footprint perspective?

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 had become the largest operator of independent freestanding imaging facilities and a lot of our growth opportunities and improved performance are based on those kind of metrics. So Phoenix, which has I think a population of well over 5 million people, has some very attractive and unique situations for us. And as 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, and I think the investment and involvement in Phoenix very much fits that profile.

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.

Sure. With the initiatives that we completed in 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 costs out of our cost structure that will certainly impact margins positively here in 2021. We having over 16% margin in the fourth quarter was a significant improvement, not only over the prior year but over prior quarters. We expect to get, if you look at our guidance and look at the implied margin there, that we expect to have somewhere around 15% blended margins for 2021. And why that's a little bit lower than the fourth quarter here is there is some seasonality 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 the issue with deductibles. Having said that, we've had a robust start other than some of these weather conditions here in the first quarter of 2021, so we do expect some margin enhancement here in 2021 versus I would even say -- versus 2019 because 2020 is not a good year to compare for – compare it 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 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 into the future with respect to our margins.

Awesome. Thanks, guys.

Thanks, Brian.

We’ll go to our next question from Mitra Ramgopal with Sidoti.

Yes. Good morning and thanks for taking the questions. Just wanted to follow up on AI comments earlier. Obviously, it seems like you're getting some nice traction on the mammography side and the FDA approval likely and the upgrade to 3D. I'm just wondering if the AI platform could be expanded to areas beyond mammography for you.

Good morning, Mitra. Yes, there's four core areas that we think as an outpatient provider that primarily as we've seen a shift, the population health will be beneficial not just for the company but hopefully for 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 80% of all the cancers. And each of those have screening tools that exist right now that I believe can be demonstrably improved through the 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 cost 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 the insurers, health insurers as well as employers to give some real definition to population health.

Okay, thanks. That's very helpful. And, Howard, I know you've talked early about increasing preference of payers to shift 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.

I think it is. And 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 local and geographic issues take a lot of work. But we think that the marketplace is ready for this. And I think in a very specific way, COVID has helped focus people's attention on that given that the general consumer, healthcare consumer is more reluctant to go into a hospital or health system today if they have the availability of comparable or even better access to outpatient imaging. So I think more and more of the hospitals and systems are recognizing the need to make this shift and in addition to issues related to reimbursement, we can focus on a more strategic relationship in an approach to population health. I think we're getting a lot of good conversation surrounding these opportunities. So, again, I think RadNet is unique in terms of the number of centers 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 joint venture arrangement affords a lot of opportunity for both long-term stability and growth initiatives with our healthcare systems. I believe I’m loathe [ph] 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 RadNet employees the opportunities to get their vaccinations for COVID as part of the frontline essential healthcare workers. And so while that is not necessarily a easily monetize benefit, it was a significant benefit to the RadNet employees that gave them the comfort and the confidence to continue to provide these services, which clearly has now been identified as an essential service. So 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.

Okay. Thanks for the additional color. And then quickly on the capitation business, it's going to 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?

Yes, I believe that will be the case, Mitra. Particularly out here in California where we have the greatest penetration in 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 a way of capitation, but expanding the potential reimbursement models that may move a little bit further away from the traditional fee for service. So, again, I think – then that’s a unique position to do those for a lot of reasons that we've already talked about.

Yes, I'll add that during 2020, our capitation business was really a shining star. And unlike the other books of business that we have that were significantly impacted from COVID-19, i.e. the fee for service business, our capitated revenue was up over $14 million from 2019. And that was really because the enrollments in these HMO patients -- in these HMO program was stable and even slightly increased in 2020 even despite COVID-19. Many of the workforce that lost their jobs during 2020, many of them were put on furloughs and still had their health benefits. And so the enrollment within HMO, and as you're aware in California, most of these HMO patients are then managed by medical groups through these capitated contracts and we'd subcapitate from these medical groups. And our revenue dollars are associated with the number of enrollees in these programs. And because the number of enrollees are stable to slightly growing in 2020, our revenue 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. And then furthermore, the incidence of imaging, meaning the use of imaging under these contracts, the utilization was significantly lower in 2020. So that the profitability of our capitated contracts in 2020 was drastically up relative to prior years. So 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 business we like. We have no costs 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 really a unique part of our business.

Okay, 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 2021?

Yes, 2020 was jumping all over. There were lots of ins and outs related to transactions. So it's really hard to tell from 2020 what our effective tax rate is. If you assume for your modeling purposes a federal tax rate of about 21% and a blended state tax rate of about 5%, so you get into the 26% to 27%. That's 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 it leaves the federal part of that tax provision even paid in cash, but it still hits our income statement with respect to our earnings per share.

Okay. Thanks again for taking the questions.

You’re welcome.

Thanks, Mitra.

We’ll go to our next question from John Ransom with Raymond James.

I want to congratulate you guys for having the shortest prepared remarks of any company I've covered, so you get the succinct award.

Say that again, John. We're having a little trouble hearing you.

Sorry. Is that better?

Yes, that's better.

So I just wanted to give you guys the award for being the most succinct management team I cover in terms of your prepared remarks, so congratulations.

Is that [indiscernible] puts you to sleep?

No, it's actually a compliment. You guys are succinct. It’s a compliment. So just a few things. If we remember right, so DaVita Medical Group sold the United and that's a big, as you know, IPA group in California has. Having those practices in the hands of United, which is probably more aggressive with your lab [ph] scores and the like. Has that been part of the better pricing that you've seen in California on the IPA contracts, or is that just a coincidence?

I don't think at this point, John, that it has translated into any additional benefit or opportunities for us. 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 time. So even without United entering the picture, I think we've had ongoing discussions with 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 could be exciting for us.

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

I get often asked a question, John, about why we're only in five or six states, now actually a seventh with Arizona. But 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 we can suffer through situations like we did here through the pandemic and the lockdowns, the fact of the matter is to combine the population of the United States that is in New York and New Jersey and in California, we're probably talking, I'm going to say, about a third of the population or somewhere in that area. So, 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 inclement weather, but it's where the people live, it's where their lives are. We're very much 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, which gives us some very unique contracting capabilities.

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/competitive strategic bidders for, let's say, a substantial plateful of assets versus where RadNet would be? Is the market going to pay 2x to 3x or 4x higher than you're willing to pay for, say, [indiscernible] with a nice market and something like 20 million of EBITDA, or are you going to be consistently out bet in those situations just given your history?

I think we're aware of all the transactions that go on 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 those even if they tended to be at higher multiples than we may have paid in the past for. So I think while that -- the aggressive PE [ph] 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 and new to us in terms of our attractiveness to the stock market and shareholders. But I would say that we're more optimistic about how we can continue to leverage our facilities and that the – consolidation, I know I'm rambling here a little bit so I apologize, John. But consolidation is a major force inside of healthcare. And I think there's no better poster child for that. Then the imaging, particularly the outpatient imaging space, I like the leverage that we have with our platform gives us enormous opportunity, many of which 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.

Okay. And sorry, one more I just forgot to ask you. In your hospital JVs, your legacy was, gosh, I don’t know, affiliated freestanding centers are one third -- one half the price of what it would cost to get it done at a hospital. And, of course, you pointed rightly that all the payers that 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 lift. So let's say the rate is just make up a number 1,500 bucks for an MRI at the hospital and it's 400 bucks at RadNet. Is the hospital affiliation price 600, or is it a little better, a lot better or how does that work considering obviously they have more leverage with the payers than sort of RadNet will be in a given market?

It varies from market to market. In some markets, the relationship with the health system has in fact allowed us to get better rates than we would have on our own – on a standalone basis. But I think the primary benefit of the relationship with the health systems is not so much for rate lift. It's more having a seat at the table with the relationship with 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, health insurers see that we're joint ventured with a health system, they know that there is less of a necessity for them to help insurers on the pricing side of this, and that the health systems are shoulder to shoulder with us and helping drive the business away from the hospitals into the outpatient centers. The other thing is, is that all of our health systems bar none are in the business of acquisition of practices, physician practices. And once they are under the health system, it's easier for them, particularly with the access that they get afforded, 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 the health system joint ventures that are -- and have created benefits that we would not have enjoyed without them.

That's it for me. Thanks so much.

All right. Thanks, John. Stay safe.

There are no further questions at this time.

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 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.

That does conclude today's conference. Thank you for your participation. You may now disconnect.