Good day, and welcome to the RadNet, Inc. Third Quarter 2022 Financial Results Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Mr. Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet, Inc. Please go ahead.

Thank you. Good morning, ladies and gentlemen, and thank you for joining Dr. Howard Berger and me today to discuss RadNet's third quarter 2022 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, 2021. 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 third quarter 2022 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 all of you for your interest in our company and for dedicating a portion of your day to participate in our conference call. 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. During the third quarter revenue from Imaging Centers reporting unit increased 5.2%, aggregate procedural volume increased 5.7% and same-store same-center procedure volumes increased 3.9%. This performance would have been substantially better but for staffing shortages that prevented us from both utilizing the capacity we have in our facilities and expanding hours to service the growing demand we are experiencing. We believe the strong demand for imaging services is being driven by increasing efforts from payors to direct procedural volumes outside hospitals into ambulatory freestanding imaging centers. During the quarter we were forced to utilize expensive temporary labor and absorb extraordinary amounts of overtime charges, which impacted our EBITDA, profitability and operating margins. Although we anticipated increased salaries, benefits and wages in our initial guidance, the labor market has been more challenging than we originally projected. More recently, we are seeing signs of improvement in the labor market. In the last couple of months, we have been more effective in filling open positions. In September, our number of open positions peaked at 850, representing almost 10% of the entire workforce. The latest report I have received in…

Thank you, Howard. I'm now going to briefly review our third quarter 2022 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 third quarter performance. I will also provide an update to 2022 financial guidance levels, which were released in conjunction with our 2021 year-end results in March and which we amended in May and August upon releasing our first and second quarter financial results. 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 earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling interest in subsidiaries, and is adjusted for noncash or extraordinary and onetime 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 third quarter of 2022 results. For the third quarter of 2022 RadNet reported revenue from its Imaging Centers reporting segment of $349.1 million and adjusted EBITDA of $50.2 million. As compared with last year's third quarter, revenue increased $17 million or 5.1% and adjusted EBITDA decreased $4.7 million or 8.5%. This comparison excludes a onetime benefit for the forgiveness of deferred federal payroll taxes in the third quarter of 2021. Including our AI reporting segment, revenue was $350 million in the third quarter of 2022, an…

Thank you, Mark. Despite some of the challenges in the overall operating and economic environment that we discussed earlier on today's call, I am very enthusiastic about the coming quarters and next year for RadNet. As the largest, most sophisticated and best capitalized operator in our industry, we are well positioned regardless of what the greater economic or industry-specific conditions are like. RadNet is indispensable to the healthcare delivery system in our regional markets. Our scale and breadth of capabilities as well as our relationships with referring physicians, patients, health systems and capitated partners create a significant advantage over our other competitors. These advantages position us to capitalize on opportunities that could arise. Specifically in difficult times, weaker imaging operators become eager and attractive acquisition candidates and long-term value creating consolidation can be aggressively pursued. In the coming quarters, we will continue to execute on a multitude of initiatives that I discussed in my earlier remarks. These include opening the de novo centers we have in development -- sorry, I lost the connection there for a moment -- expanding our hospital and health system joint venture businesses, rolling out our Enhanced Breast Cancer Detection offering to all RadNet markets, accelerating the commercialization of our AI portfolio, and opportunistically pursuing accretive acquisitions in our core Imaging Center business. These initiatives should drive our growth and efficiency and position us for a very strong 2023. In conclusion, we are excited and enthusiastic about the opportunities that lie ahead for RadNet and we look forward to updating you further in the coming quarters regarding our progress. Operator, we are now ready for the question and answer portion of the call.

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

I guess Mark, I'll start with you. So as I think about the Q3 results, I mean the revenue line was actually pretty decent and despite some of the challenges in the quarter. But as I think about the cost lines, I mean how lasting or how sticky are these challenges on the cost side? I know inflation is obviously an issue. And it sounds like you're gaining some traction on the recruitment front? But just curious as to your thoughts and the lasting effects of these headwinds?

Sure. Yes, I mean, clearly, we were impacted by labor challenges, which is similar to what we're seeing in almost every industry, particularly in healthcare and it impacted both -- impacted Brian there both on our revenue side as well as the cost side because we had staffing issues where we had to pay substantially. Our overtime was substantially higher than normal, we use temporary service. And in other cases, we couldn't staff rooms, and so we had to cancel appointments, reschedule appointments if we could. And so we lost both revenue and our costs were higher during the quarter. We have seen some recent improvement that gives us significant amount of confidence moving into the fourth quarter and into the next year on the staffing side. As we said in our prepared remarks, our open positions peaked in September at about 850 open positions. And as of yesterday, the report that came out of HR is that our open positions are down to about 262 employees. So we're doing a lot better on the talent acquisition front. I think, one, we've refined some of the systems, we've added more recruiters. I think, in general, the market has gotten a little bit more favorable for companies looking to hire. We have noted that there were some hospitals and health systems in our markets that started doing layoffs. Kaiser made some layoffs here in California, Adventist Health also announced some layoffs. So I think we are capitalizing on a labor market that is certainly stabilized. And what we're seeing is improving going into the fourth quarter. We also have seen that impact not only our costs as we move into the fourth quarter, but our revenue. We had the strongest revenue in October, the strongest month all year in October, and we're seeing very similar per day revenue as we've moved early on here in November, which gives us tremendous confidence that November is also going to be a strong month. So we have a lot of reason to be optimistic, and not to mention all of the initiatives that Dr. Berger went through on in his prepared remarks about what should drive incremental revenue and profitability as we move into 2023.

Hey, Brian. Yes, let me just amplify on that a little bit. I think that the increased labor costs, once we fully staff up, are here to stay. And we're building that in anticipation of our 2023 performance. But there are other things that we can do, and have been doing here throughout 2022 to help reduce the dependency that we have on our technological capabilities. There are investments that we're making in equipment that will improve throughput into our centers, that will help drive revenue without any further increasing our costs, as well as other initiatives we're taking in contracting with some payors, as well as expansion that we think will add substantially to our performance not only in 2023, but also here in 2022's fourth quarter. So we're anticipating I think is where you were going, Brian, that higher labor costs are going to be here to stay not just for RadNet and healthcare, but throughout other industries. And the company is making the appropriate adjustments to ultimately maintain and hopefully grow our margins.

I guess, Howard or Mark, I'll follow up on that, right, I mean since we -- you alluded to kind of like heading into 2023. Maybe qualitatively any moving pieces that we should be thinking about as we think about '23. And then just maybe some views on your ability to drive positive EBITDA growth next year?

Yes, Brian, I think there are initiatives I think I outlined many of them, but we are working on expanding almost every one of the hospital partner relationships that we have to either add more facilities or improve the actual performance. I think that we will drive revenue substantially with the 15 new centers that we're developing, the majority of which will be operational by the first -- at the end of the first half of this year. Our average center generates about $4 million or so of revenue. So 15 new centers ultimately will drive the -- we hope about $60 million of new revenue, some of which we've already started experiencing, but only recently in the latter part of the second quarter and into the third quarter so far this year. I think we should pay particular attention to the new initiatives that I outlined also, that come in the form of artificial intelligence. We're very excited about our Enhanced Breast Cancer Detection program, which we think will have an enormous impact on improving the detection of cancer earlier and better outcomes for our patients. And we'll be the standard by which screening mammography in breast cancer will be performed. So I think that, that will contribute significantly the next year. As I mentioned, we do 1.4 million screening mammograms a year. And that number will be growing. In addition, some of the benefits that we'll get by the increasing labor positions that we're filling in are -- well, not labor positions but the staffing positions that we're filling, should decrease our cost of overtime, as well as reducing and hopefully substantially eliminate the temporary staffing agency. So I think we're looking at a significant opportunity to improve our margins next year, that will come both from revenue as well as better control of costs, but higher wages are here to stay. That's for sure.

I guess Mark shifting gears, or I guess for Howard. EBCD, it sounds like a really interesting program. Anything you can share with us in terms of greater detail on how it works and what you see the opportunity there being?

Sure, Brian, the pilot program that we rolled out last week in Delaware is meeting with very enthusiastic reception by our patients. We are using a lot of collateral both in terms of our website and handouts that we give patients to educate them as to what the value of the service will be. We're charging $59 for this, which we believe is a very attractive price point. And so far, in our centers, we're having between 30% and 40% of the patients enrolled for this new service. So we expect those numbers to increase significantly. And we're further buoyed by a report that came out of the United Kingdom, the British Journal of Radiology, which indicated in the survey they did of women, 88% of them were attracted and encouraged by the use of artificial intelligence for breast imaging. So we believe this is a substantial opportunity, not only for RadNet, but really the industry as a whole, to get a better handle on managing breast cancer, which one out of every eight women will suffer from at some time in their life, and there are -- these technological tools to be more accurate and earlier in cancer detection, could have far reaching implications for RadNet, its partners in the radiology imaging industry as a whole.

And Howard last question for me, if I may. There's a lot of discussion about Alzheimer's drugs coming up for approval here. And obviously, imaging will be a key part of that discussion. Just curious how you're thinking about that opportunity and how you're preparing for that potential tailwind if it gets approved?

Well, we've already been doing a fair number of these studies, as part of our research relationships. So we think these are good tools. I think as they get adopted through reimbursement, I think, it can have a substantial impact on our revenue. But it's one of many initiatives that we have for evaluating new procedures that will help better define treatment pathways. Another one we're working on is PMSA for prostate cancer metastasis, which we do more than any other imaging operator in the country, and which has gained an enormous amount of acceptance. So if this is adopted, which we all believe it will, all of these patients will need regular MRs to determine both the extent of the potential Alzheimer disease initially, as well as the effectiveness of treatment given that there are some side effects of these drugs that need to be carefully monitored. So I do believe the -- particularly with the strategy that RadNet offers of being in densely populated markets, that could be a future large driver of business for us and we stand ready to do that, as I said, we've been doing many already as a part of these drug research programs.

[Operator Instructions] We'll take our next question from Mitra Ramgopal with Sidoti & Company.

Howard just curious, your thoughts as we head into a likely recession next year, how resilient is the business especially on the volume side as its structured today in the markets you're in?

Well, generally speaking, healthcare has been relatively insulated from recessionary factors. And, in fact, some people say during a recession people need more health care, because they don't take care of themselves as well, as they might in better times. But besides that, there is a -- as I’ve talked about in my prepared remarks, there is already what we are seeing is a substantial effort on the part of payors to drive more of the outpatient businesses away from hospitals. And we expect that to continue. So I think both because of aging population, increasing population, and screening tools that are uniquely done in outpatient facilities, more so than in hospitals, and better pricing, all point to a rather optimistic approach for our volumes in 2023. I think that a lot of these efforts to move the business away from hospitals have finally taken root here, as payors become more aggressive about doing this. And as you've seen, almost all the payors as well as other new entrants into healthcare, delivery of primary health care, like Walgreens and CVS, even Walmart will be involved in bringing healthcare more to where people live and where they may shop and spend more time. And we expect to be a part of that program. And we'll probably have more information on that in our next close call for the fourth quarter. So I don't think volume for us Mitra is a concern. I think handling that volume and improving our margins and keeping our costs controlled after the experience that we had in 2022 and for which we have learned an awful lot about how to even better manage the operations will be of substantial benefit for us in 2023.

And on the expansion in Arizona, if I remember, it was off to a slower start than you might have anticipated, but it would appear based on the expansion that you're pretty comfortable with that market and the growth opportunities there now?

Definitely, we hope to have some more announcements about further efforts to expand our reach in not only the Phoenix area, but in other relationships that we have with the Dignity Health System, inside of Arizona and in other markets also. So, we certainly have benefited already from establishing a strong relationship with the Dignity Health System, which while it took longer than we wanted, will be one of our major joint venture partners here for the future.

And if you can help us in terms of as you look at the growth opportunities, how you sort of prioritize them, whether it's a JV, M&A, de novo, investments in AI? Any sense in terms of the importance of those opportunities for you?

Well, I think they're all very good opportunities for us, perhaps where I might want you to focus on or at least keep your eye on is that the recent announcement that we made into acquiring a majority position for the UK-based Heart&Lung Health program could be a template for future expansion on the teleradiology side. One of the ways that radiology in particular is going to need to change is further recognition of the fact that the labor shortage that we talked about is not only with the non-professional side of our industry, but also on the professional side of it. And there are too few radiologist in fellowship programs that are coming out into the marketplace and jobs currently being offered. And the increasing demand for these services are going to necessitate changes in the way that the delivery of the professional component is delivered. I think for RadNet in particular, this represents a great opportunity for us to not only -- with the current state that we've made in teleradiology, but get deeper into specialty teleradiology networks, which will enhance our opportunity to combine this with artificial intelligence and create superior outcomes. But also, in general address some of the shortages that we and everybody else is experiencing by taking our large base of radiologists and creating our own teleradiology initiatives here. So I don't know if I could put any of the things that I've mentioned in my prepared remarks as a greater priority. They're all priorities, and they're all incredibly exciting opportunities for us to pursue. So RadNet is in the process of not being just the outpatient imaging center, but really leading radiology even further into the future by using technology to drive opportunities, both on the revenue side and on the controlling on the expense side. And I'm sure we're going to have more to talk about this as we get deeper into 2023.

And then finally, just following up on that a little, looking -- I think, looking ahead, I think you mentioned, the higher costs are here to stay on the labor front. So we're just wondering if that might give you some pause as you look to expand your de novo strategy and even adding more imaging centers at this point?

I don't think it'll slow us down from doing that, because the demand is there. And as I mentioned in our de novo remarks, in my remarks about the de novo centers, a lot of these are to really increase capacity for demand that we already have. I think part of the experience and challenges that we have with our labor costs are things that we're talking to the payors and others about the need for better reimbursement. So while that's always been an effort on the part of the company to improve reimbursement, I think that, that is even a greater opportunity for us to have these conversations. As I mentioned, we're just an incredibly essential part of healthcare delivery in all of our markets, and it's incumbent upon everybody that needs our services to understand that these kinds of increased costs are -- has to be borne by the payors as well as others and to keep RadNet be the contributor it is and the importance that it is. Everybody has to take that into consideration. So we have very receptive groups out there, although these don't culminate in overnight, we're having very good success along those lines in terms of trying to offset and keep our margins higher by improve reimbursement from all of our payor contracts.

With no additional questions in queue, I'd like to turn the call back over to our speakers for any additional or closing remarks.

Thank you, operator. I would like again to take this opportunity thank all of our shareholders for their continued support, and the employers of RadNet -- and employees, I'm sorry, of RadNet and the employers for that matter, 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 speaking with you on our next call.

That will conclude today's call. We appreciate your participation.