Good day and welcome to the RadNet Second Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Mark Stolper, Chief Financial Officer. 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 2023 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 US 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, 2022. 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 2023 results. Give you more insight on 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. I’m very pleased with our performance in the second quarter. It was the strongest quarter in our company's history with record revenue and adjusted EBITDA. Relative to last year's second quarter, our core imaging center segment revenue increased 13.8% and imaging center adjusted EBITDA increased 14.7%. This performance was driven in-part by heavy demand in virtually all of our markets. Aggregate procedural volumes increased 11.4% and same-center procedural volumes increased 7.1% compared with the second quarter of 2022. This heavy demand is being driven by a number of factors that we have highlighted in recent quarters, which we believe will continue to create strong growth for years to come. First, within the healthcare delivery system there is a growing focus on preventative noninvasive medicine with keen interest in the earlier and more accurate detection of diseases. As managed-care grows risk-based provider models become more common and population health screening becomes more prevalent, diagnostic imaging will grow in its importance. Second, as the population expands and ages, diagnostic imaging is used with greater frequency. In fact, Medicare wise utilizing imaging two to three times more often than younger commercial lives. Third, technology in our industry continues to evolve and improve, creating additional medical indications for ordering diagnostic imaging tests. Advances in MRI technology and…

Thank you, Howard. I'm now going to briefly review our second quarter 2023 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. I will also provide an update to 2023 financial guidance levels, which were released in conjunction with our 2022 year-end results in March, in which we amended in May upon releasing our first 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 extinguishments and noncash equity compensation. Adjusted EBITDA includes equity and earnings of 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 second quarter 2023 results. For the second quarter of 2023 RadNet reported revenue from its imaging centers reporting segment of $401.3 million and adjusted EBITDA of $63.7 million, which excludes revenue and losses from the AI reporting segment. As compared with last year's second quarter, RadNet revenue increased $48.5 million or 13.8% and adjusted EBITDA increased $8.2 million or 14.7%. Including our AI reporting segment, revenue was $403.7 million in the second quarter of 2023, an increase of 13.9% from $354.4 million in last year's second quarter. Including the…

Thank you, Mark. Technology has always been a driver for the change in our industry. This appears to be truer today than ever before. Artificial intelligence, both clinical and generative is in its nascent stage within the field of radiology, everything that we do today will be impacted by technology innovation and artificial intelligence in the coming years. Our business is an information technology business, almost every process we perform, including collection of patient information, scheduling, pre-authorization, insurance verification, creation of radiology reports, billing and collecting, medical coding and processing of patient payments can be enhanced by data algorithms and management tools. Artificial intelligence and informatics either already play or will play important roles in all of these business processes. RadNet has always been on the leading-edge of technology, which has been a key to our success. In the past, we have both adapted solutions from others that benefited our business and created our own solutions in areas where we sell were imperative for us to control. This philosophy has not changed. In 2010, we began a journey to design our own radiology information system and image management system, which has become core to our data work flow. Much of what we do at the operating level and the efficiencies we have created and operating our 363 centers have been the result of our ability to control our IT infrastructure. As we move into the next-generation of innovation, driven primarily by AI, we see even more opportunity to bring efficiencies, cost-savings and improve margins to RadNet through investments in our digital health initiatives. As demonstrated by our second quarter results, our operating core operating business is healthy and growing, supported by heavy and expanding procedural volumes. The next stage of RadNet's growth [indiscernible] will be to bring these technological solutions to our business and to the broader radiology marketplace that make servicing this accelerating demand possible. I believe we have assembled many of the components, including the management talent to take our business and industry to the next level of innovation, elevating radiology and our diagnostic capabilities to an even more important and critical role in health-care delivery. We're excited to keep our stakeholders informed of our progress in these areas, while continuing to execute on driving growth in our core business through a focus on same-center performance, hospital and health system partnerships, tuck-in acquisitions and de novo expansion. Operator, we are now ready for the question-and-answer portion of the call.

Thank you. [Operator Instructions] And today's first question comes from Brian Tanquilut with Jefferies. Please go ahead.

Hi. Good morning, guys. I guess my first question is for Howard and maybe Mark, too. Obviously, the core business is strong and volume performance was really compelling. Just curious how you're thinking about the sustainability of strong demand trends and your ability to maintain healthy organic growth rates going forward?

Good morning, Brian. Thank you. I think the key to sustaining our growth is really the investment that I've talked about in our digital health platform. The advent of generative AI as well as the faster and easier development of new algorithms will allow us to transform all of the processes that we use to operate our imaging centers considerably more efficiently and with less dependence on the labor issues that we currently face much as everybody in health care and, for that matter, the general economy. So we expect the growth in the imaging sector of our business to continue to grow, but that the ability for us to scale up and perform the necessary cash and demands that we have will be imperative for us to use these tools that can create these efficiency and lessen our dependence on already overstretched or stretched labor market. So as we move into the latter part of this year and certainly by the first quarter, we'll be able to perhaps talk a little bit more specifically about these initiatives. But as we demonstrated in the press release that we made about a week or so ago with the new executives added to this team, we feel that we are in an excellent position to drive this transformational change and control the processes that have allowed us to operate all 363 of our centers on a single platform, regardless of what market that we're in. So while I'd like to think that we can be proud of what we've achieved to this point, I think the best is yet to come in terms of the technological innovation and transformation, which radiology and imaging are probably better suited for than virtually any other specialty in the health care industry.

And Brian, I'll just add one other thing here. Another key to our continued growth and success is the ability to increase our capacity. And the 12 de novo centers that we have currently under construction, I think five of which will open by year-end or should open by year-end, the other seven sometime in 2024, will also be instrumental in our ability to create the capacity that we need to better service the heavy demand that we have right now in virtually all of our markets where we're experiencing significant backlogs, which is obviously a high-class problem, but one that is still indeed a problem as we try to get patients into our centers expeditiously and try to provide great service to our referring physician community. So I think the de novo strategy and driving that level of capacity in addition to the technology advances that Dr. Berger talked about as well as some additional technology that we've licensed that allow for shorter scan times for MRI scanning with post-processing software that allows for greater throughput and obviously, greater capacity at our center. So all these things are important to continue to be able to grow like we have been because the demand for imaging services is there, and that's clear in all of our markets.

Understand. I appreciate that. And then I guess my second question, as we think about AI, and I understand the reasons for the delay or the pushing some of the targets out, I guess, two questions. As I think about -- Mark, you said you think you'll still hit breakeven by the end of 2024. I mean maybe if you can remind us how does that compare to your original outlook for the business? And then second, maybe taking a step back, how are you thinking about or where does your confidence come from in your ability to get the AI side of the business where you want it to be in the time frame that you've outlined?

Brian, I'll take that one and Mark can fill in if he thinks I missed anything like you did so nicely just in the question before this. But I think we're as confident and perhaps even more confident in our AI division for two reasons. Number one, we have been successful in about 30% of our screening mammography cases, having our patients enroll in what is increasingly being recognized as a very valuable addition to the breast screening process. And this is -- since we're going direct to consumers since there is no reimbursement for AI at this point in time, this is a different strategy than almost anything that we've attempted in the past, although our prior effort in this was also successful from 8 years ago, I think it was when 2D mammography got converted to 3D mammography. And we had a similar process that we implemented to have patients pay for this before it was reimbursed. We expect a similar process to unfold here so that the direct-to-consumer we hope is just a stopgap here until it's adopted by not only more and more of the payors, but more and more employees -- employers, I should say, that recognize this kind of wellness screening can certainly benefit them as well as their employees. But I'd like to pivot on that that while that's been a slow learning process for us, what I don't think will be slow will be the generative AI side of the initiatives that we have already begun embarking on that we think can be transformative in the way that radiology is practiced and managed. And I think that, in some respects, may even become more important in the short term here given a number of the issues, as I mentioned in my opening…

Got it. And then maybe, Mark, last question for me. I mean, thank you for giving color on your view on reimbursement. Remind me, if I'm saying this correctly, this is about the same level that you see in terms of proposed cuts every year. And am I right in thinking that Congress has stepped in to kind of like block or mitigate this over the last three years or four years?

Yes. So this, we believe, is the result -- the proposed cut as the result of a phase-in of the budget neutrality aspect of increasing the E&M codes that primary care docs and family practice medicine docs bill under, which occurred several years ago, and they've been phasing in this cut in not just radiology but every specialty in order to pay for those E&M increases. And so we face this cut for the last few years. It was a little bit higher the last couple of years, but then was ultimately mitigated by this Appropriations Act that was passed in December of both December of last year, and the December of the prior year was a bipartisan bill that was sponsored by two Congressman, one Republican, one Democrat from both California and Indiana. This is Bera and Bucshon. And so, a lot of our experts and lobbyists not only within radiology, but within health care in general -- because remember, this cut is being faced not just by radiologists being faced by everybody -- that there's a lot of support to try to get these cuts either reversed or mitigated. So we have some level of confidence that, again, this year, some of the proposed cuts here in the Medicare communication that we got several weeks ago will likely be mitigated. But regardless of whether it's mitigated or not -- and we're estimating the total impact to be the $7 million to $9 million range in our revenue -- we've got more than that in terms of reimbursement increases that have either already gone into place in 2023 that will increase our reimbursement in 2024 or that will be scheduled to go into place both within our capitation contracts as well as our commercial contracts. So regardless, we're not overly concerned about this level of reimbursement cut, but we do have some level of optimism that part of the Medicare cut will be mitigated.

Brian, let me add one other thing, which I'm sure you're aware of, which may make the drive away from hospitals even stronger than it is right now. As I'm sure you're -- as you've seen that the new hospital outpatient prospective payment system has increased the reimbursement to hospitals for their Medicare patients, further widening the reimbursement that's paid to hospitals for the same services that we provide on a freestanding outpatient basis. And I think it's interesting to see that the very thing that has been a big driver in moving the patients away from hospitals into outpatient centers, which was primarily from the commercial payers in the extraordinary difference in reimbursement is now being seen also on the Medicare side of it. And in the times that we exist with inflation and expenses going up, it will be even more imperative for our patients to be very mindful of where they get their place of service.

To that point, Brian, the [HOP] (ph) schedule now has over a 30% premium relative to the outpatient Medicare fee schedule, which makes no sense whatsoever, particularly because Medicare supposedly, is interested in site neutrality with respect to its reimbursement. So as this spread widens, I think you're going to have more and more Medicare patients, particularly ones that have a 20% co-pay, which is very typical in the Medicare fee-for-service landscape start directing their business out of hospitals just like the private payers and commercial insurance plans are doing.

Got it. Thanks, guys.

Thank you. And our next question today comes from Nathan Malewicki with Raymond James. Please go ahead.

Hi. I'm Nate here, stepped in for John. So just first on the labor and environment. Last we heard, contract labor costs were running at about 50% of last year's level. So any update on contract labor? And anything you can quantify there? And then just more broadly on the labor environment. Has that and will that continue to improve in the second half and then in the foreseeable future?

Sure. Hi, Nate, I'll take this one. So what we've said in the first quarter, what we did say in the first quarter is that our reliance on contract labor as well as our reliance on paying our own employee base over time is about 50% of what it was last year. It's not that the cost of outside labor of these staffing companies has gone down by 50%. It's just that we're relying less on them as we've become more successful in filling open positions. If you remember, our number of open positions hit its height in September of last year. And throughout last year, we were mightily struggling with filling staff at our facility, at the facility level, and keeping our centers open long enough to service the heavy demand. We've been much more successful this year, and there has been some stabilization in general in the labor market in being able to staff our centers appropriately to keep the centers open to fill more of this backlog. So it's not that the pricing has gone down. It's just our reliance on outside services has gone down.

Got you. Thanks a lot. And then just on seasonality here. Is it safe to assume that this year future is kind of similar trends as kind of pre-pandemic periods? So maybe, I don't know, 24%, 25% of total EBITDA in 3Q and then a bit of a step-up there in 4Q?

Well, we typically do see seasonality in our business. The first quarter tends to be our most challenged quarter primarily for two reasons. First, being winter weather conditions in the Northeast or in the United States, where roughly 35% of our business is, and we're impacted by storms that close facilities or power lines going down, power outages, things of that nature. The second reason the first quarter is a little slower is that the reset of patient deductibles tends to create a phenomenon where patients utilize health care services less at the beginning of the year and then are more liberal with their spending as they move through their deductibles towards latter part of the year. So we tend to see the first quarter and the first half of the year a little lighter than what we see in the third and fourth quarters. Also, summer vacations tend to impact the second quarter. And then the fourth quarter, as patients have moved through deductibles tends to be high utilization, high utilization quarter and then you also have higher utilization of mammography in the fourth quarter, which coincides with the October month, which is breast cancer awareness. So I would expect all things being equal, although we can never really tell that the second half of the year tends to be stronger than the first half and 2023 should be no different.

Awesome. Thanks. And then just squeezing one more here. On the equity earnings of joint ventures line, it looks like that came in lighter than our model, and it was about $1.5 million this quarter, kind of a bit of a deviation from historical trends. So anything to read through there in terms of JV consolidation or just the overall JV strategy? And then just how to think about that line item moving forward? And that's all I got. Thank you.

Yes. Nothing I can think of that would be a trend. Obviously, one quarter a trend doesn't make. So I would expect that line to even out. I'm not -- I have to go back to see what impacted the quarter in that respect at our unconsolidated JV levels, which is what you're talking about in terms of equity and earnings. But yes, I wouldn't -- there's nothing that's gone on there that would make that sustainable, that change.

Thank you. And our next question today comes from Yuan Zhi with B. Riley Securities. Please go ahead.

Good morning. Congrats on another strong quarter. And thank you for taking our question. First, a follow-up on Brian's question, maybe more for Mark. I noticed the same-center volume year-over-year growth rate was 7.1% versus 9.3% last quarter. The overall volume growth was 11.4% versus 14% last quarter. This might be a repeat from the last question, but specifically for your 2023 guidance in your modeling assumptions, do you anticipate the volume growth in the second half to be similar to what you have observed in 2Q? And it will be great if you can comment on what you have observed so far regarding the patient flow in July. Thank you.

So we have had very strong same-center performance for the first half of the year. We've always said historically that we felt over the long run, given the growth in the industry and our growth in our markets and taking share away from competitors that we felt that we could sustainably grow in the 3% to 5% same-store sales growth over the long period of time. As there has been significant growth, not only in the industry from some of the newer technologies such as PSMA that Dr. Berger spoke about on the prostate side and other things that are driving new applications, new indications for ordering these tests, the industry has been growing nicely. And we've been growing faster because we're also benefiting from the shift in hospital based -- from hospital-based outpatient imaging to freestanding center imaging. So our growth over the last year or two has been exceeding that kind of 3% to 5% range that we've talked about. Now in the first quarter, we had extraordinary growth, as you mentioned at 9.3%. And we talked about it then, and I'll emphasize this now. We don't believe 9.3% is necessarily a sustainable number. We were impacted positively by two things in the first quarter that was extraordinary, the first being that we had a much more mild winter this year relative to the winter in the first quarter of 2022, and that benefited us in the first quarter. And the second extraordinary impact was that the first quarter of 2022 was impacted by the Omicron variant of COVID, where not only patients were impacted extensively, but our employee base was also impacted to the tune of having over 8% of our employee base on COVID leave for the first couple of weeks of January of last year. So the 9.3% this year in the first quarter was better than it normally would have been, but for those two situations, which I just described. The second quarter here was a much cleaner, what I'd call, same-store sales comparison with last year where we weren't being impacted by weather, we weren't being impacted by Omicron in 2022. And it was, I think, a more fair comparison. So to your question directly about the second half of the year, I would hope that we could exceed or be towards the high end of that 3% to 5% same-store sales growth that we've talked about in the past and I would hope that it would look more like the second quarter going forward because of all the reasons that I've talked about, which is driving our growth.

Got it. Maybe a quick follow-up there. If it would be great if you can comment on what you have observed so far of the patient flow in July.

July was a good month for us. July is always a bit of a challenge given the July 4th holiday and what day of the week it falls on, which this year, it fell on a Tuesday, which is not necessarily most advantageous for us given that the Monday is almost like an extension of the holiday weekend and also the vacation schedule. But relative to last year's July volumes, we're pleased with what the early results in July look like and where August appears -- at least for the first week appears to be also holding well within our expectations.

Got it. Thanks for the additional color there. And maybe Howard or Mark, can you provide more color on your capacity right now for MRI and PET scans? Are the current procedure close to your 90% of your capacity? I'm asking because the comments from Biogen, Eisai they are targeting to treat 10,000 Alzheimer's disease patients by the end of March 2024. Assuming there is this increasing demand, I'm curious what do you view as the rate limiting factors for you to meet this demand, such as the numbers of imaging instruments you have the staffing to support the procedure or even the supply of imaging agent? Thank you.

Great question. I'll be happy to answer that one. The demand that we have is not exceeding the capacity of our equipment. It's exceeding the ability of us to staff up to levels that allow us to use our equipment on the extended hours and times where we can see these patients. That's our biggest challenge, and it's particularly apparent in the MRI modalities. And what we're doing to address that, which again is somewhat novel to the RadNet core strategy and platform is that there is new technology called the remote operation command centers that allow a technologist to operate more than one MRI equipment, piece of equipment, remotely. And what we have found is that in certain markets, for example, in Florida or in Arizona where the shortage is not as serious as it is, let's say, in New York, we are gaining better acceptance in hiring of technologists that can run those systems remotely from other of our markets. That is probably the near-term ability for us to address some of these additional capacity issues. As Mark mentioned, we're also building more centers to add capacity. And in some cases, we have begun to buy our own mobile scanners that allow us, particularly more so on the West Coast to move those around the areas that are being particularly challenged. So we do have a lot of tools in the tool kit, not the least of which also is that the newer MRI scanners or upgrades that we can make to existing standards have had a remarkable impact on reducing the scan time, which for many of our MRIs has been reduced from 20 minutes to 30 minutes down to 10 minutes or in some cases, even less, has allowed us to increase our throughput and capacity in that manner. So there's a number of ways to address these problems. And all of it, by and large, is really driven by the use of technology, both from artificial intelligence standpoint and some of these other remote tools and other algorithms that just help us increase our capacity without necessarily having to increase our staffing.

And Yuan, I'll address the second part of your question, which was specifically about Alzheimer's imaging and what you're hearing out of Biogen and Lilly and others. So the initial PET CT, which is one of the key ways of detecting the presence of these amyloid plaques which is necessary to get these patients on to the newer therapies that have come out by some of these pharmaceutical companies, that could be a huge opportunity for diagnostic imaging and obviously, for us. And with respect to capacity, which I think was the question that you had asked as it relates to Alzheimer's imaging, we currently have 67 PET scanners that are doing on average -- while doing in total 60,000 scans per year, give or take. When you do the math over 255 workdays, each PET CT scanner that we have is doing less than four pet CTs per day. The rest of the day, those scanners are very busy doing routine CT work. If we had -- if there were a flood of PET CT demand in relation to these Alzheimer's drugs, what we would do is to utilize our existing PET CT capacity. And each PCT, a busy PET-CT can be doing 13, 14, 15 scans a day. So we have a lot of PET-CT capacity in our existing installed base. The challenge we would have at that point is then moving routine CT work to either other scanners, expanding hours or having to buy additional CT to take over that level of volume. But we do have a fair bit of PET-CT capacity even within our own installed base at this point.

Got it. Appreciate all the helpful color there. Thank you.

Thank you. And our next question today comes from Mitra Ramgopal with Sidoti. Please go ahead.

Yes. Hi. Good morning. Thanks for taking the question. Most of mine have already been answered. But I just had a quick one in terms of the cash on the balance sheet in light of the equity raise. How should we think of the capital allocation priorities in terms of growing the company, be it M&A, de novos, investments in technology and personnel versus maybe looking to reduce debt given the high interest rate environment?

I would say all of the above might be the best way for me to answer that, Mitra. I think one of the benefits of the equity raise that we accomplished was giving us the opportunity to look at ways that we can deploy that capital in the best interest of the company's growth. As we said, one of our shorter-term possibilities is the pay down of some of our debt. But given the company's projected cash flow for the rest of this year and next year, I think you'll find that we'll be investing into de novos, upgrading technology of existing equipment, replacing older equipment with newer equipment. We used to use in the past operating leases as way of minimizing the amount of cash outlay. We have essentially eliminated that, and now are paying cash for virtually all of our capital equipment investment. So I think that will also help our margins and help the growth of the company. And lastly, we look -- we are looking to use the capital we raised to invest in our new digital health initiatives, which we think may have the best returns on investment given the long-term prospects that we're tending towards a capital-light business that can have substantially better margins than the imaging center sector. So we'll look to continue to utilize our capital in any way that can help the business grow, and we'll look forward to discussing some of those with more detail as the rest of this year unfolds.

When we completed the equity offering -- because you can imagine, prospective investors were very interested in this very question. What we said was part of the reason why we're raising the money was that in October of this year, one of our interest rate swaps roll off and gives us more exposure to floating rate debt. And we intend -- and that's $100 million of notional exposure that rolls off in October of this year. And so, our intention is to take $100 million from our cash balance at that time and repay debt so that we don't have more floating rate exposure. That's still our intention to do that. And the only reason why we wouldn't do that is if there were some extraordinary use of proceeds before that time, like an M&A opportunity that would take its place. But that's not the intention in terms of utilizing it for M&A at this point. There's nothing that's a foregone conclusion.

Okay. Thanks and congrats on the great quarter again.

Thanks, Mitra.

Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Again, I would like to take this offer 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. Good day.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.