Good day and welcome to the RadNet Inc. Third Quarter 2019 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 third 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 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, 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 third 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 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. Our principal operating and financial metrics improved during this quarter, relative to last year's third quarter. Our revenues increased 20.9%, our adjusted EBITDA increased 7.7%, aggregate procedural volumes increased 13% and same-store volumes increased 4.7%. This is indicative of the steady quarter-to-quarter improvement we've demonstrated throughout 2019. During the quarter, we continued our operational focus on further implementing the EmblemHealth ACP capitation contract that we commenced in the fourth quarter of last year and the integration of two of our most recent significant acquisitions. We now have completed the replacement or upgrade of much of the equipment in the 26 ACP locations and continue to make progress in referring more of the ACP membership into RadNet's freestanding facilities. We continue to aggressively meet with ACP physicians and educate them on the benefits of utilizing the RadNet facilities. As a result, we believe that the economics of this contract will improve throughout the coming quarters. Concurrent with commencing operations of the ACP contract, we acquired Medical Arts Imaging in Long Island, New York effective October 1 of last year. The 10 Medical Arts centers were our first centers in Nassau and Suffolk counties and have provided us with important locations to service both the EmblemHealth ACP lives, as well as other patients, in Long…

Thank you, Howard. I'm now going to briefly review our third 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 third quarter performance. Lastly, I will reaffirm 2019 guidance levels. 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, transaction costs and non-equity – 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 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 third quarter 2019 results. For the three months ended September 30, 2019 RadNet reported revenue of $292.7 million and adjusted EBITDA of $41 million. Revenue increased $50.5 million or 20.9% over the prior year same quarter and adjusted EBITDA increased $2.9 million or 7.7% over the prior year same quarter. For the third quarter of 2019 as compared with the prior year's third quarter, MRI volume increased 11.8%, CT volume increased 14.9% and PET/CT volume increased 8.5%. Overall, volume taking into account routine imaging exams, inclusive of X-ray, ultrasound, mammography and all other exams increased 13% over the prior year's third quarter. In the third quarter of 2019, we performed 2,055,390 total…

Thank you, Mark. Healthcare is rapidly changing in the United States. Services in virtually every discipline of healthcare are migrating away from expensive hospitals in favor of lower-cost ambulatory settings. While we are experiencing this slow trend in diagnostic imaging, we are also seeing this movement with the growth of surgery centers, urgent care facilities, outpatient emergency rooms, freestanding laboratories, home health, and the list goes on. The healthcare landscape is changing. Private payers are more focused on value-based care. For example private payers such as Anthem and UnitedHealthcare are beginning to be more aggressive in directing their members to outpatient facilities. Forward-thinking health systems and community hospitals are more interested today in partnering with us to own imaging facilities in joint ventures. Patients with high deductible plans are beginning to understand the pricing differences between freestanding diagnostic imaging settings and hospitals. Health plans and third-party companies are creating transparency tools to inform patients of pricing differentiation amongst facilities. We continue to believe that RadNet is well-positioned to benefit from all these trends. More recently we are making aggressive moves into artificial intelligence and machine learning. The announcement with Whiterabbit which we discussed earlier on this call is an example of such a move focused on mammography. We believe we perform approximately 4% of all the mammograms that take place in the United States and we believe we can grow this to 5% within existing facilities with the Whiterabbit solutions platform. Our Phase 1 rollout which we are now underway with is targeting women who have had mammograms in the past that are currently non-compliant. Phase 2 will target the 25% to 35% of eligible women who simply do not have annual or bi-annual mammograms as allowed in their health plans. Beyond mammograms we will be pursuing new technologies aimed at screening tools for prostate colon and lung cancer as well as risk assessment solutions and other areas of preventative medicine. We look forward to discussing some of these initiatives in more detail as they unfold in the coming quarters. Operator, we are now ready for the question-and-answer portion of the call.

Thank you. [Operator Instructions] We'll now take our first question from Brian Tanquilut of Jefferies. Please go ahead.

Hey good morning guys. Congrats on a strong quarter. I guess to that point my first question for Mark or Howard how do you guys feel about the quarter in terms of the KPIs that you guys track? Obviously, same-store was strong, but just wanted to get a feel of where the quarter shook out versus your internal expectation.

Good morning Brian. We're pleased with the results. The third quarter is traditionally one where we get impacted by some events which are not always easily anticipated, for example where the two major holidays fall out July four and Labor Day as well as just seasonal issues related to vacations and other personal behavior issues that might influence those decisions particularly in the New York area. So while these are somewhat built into our modeling, we're pretty close to where we anticipated to be at this point not only in the third quarter, but year-to-date. So using the metrics of the first three quarters of this year, which of course include the third quarter, we're highly confident that we will as Mark reaffirmed our guidance levels for the whole year and by implication what the fourth quarter presents itself with. Again, there was a lot of activity in the third quarter related to investment opportunities both externally with issues like Whiterabbit and our continuing rollout of our EmblemHealth/ACP relationship as well as initiatives as we went into some detail discussing Whiterabbit and that new rollout if you will of opportunities in mammography and breast screening. I'd like to amplify on that for a moment in that, while we focus on our metrics related to screening mammography, it should be noted that about 20% of the women who have screening mammography need to go on to diagnostic mammography, which then leads to other procedures that we do in relationship to breast ultrasound, MRI of the breast, biopsies and other procedures. So we expect as the volume continues to increase as a result of these Whiterabbit initiatives, we will see that additional procedural volume filtered through the organization. And most importantly at the magnitude of what we are capable of doing in mammography in our business that could have additional significant impacts, which we expect to see more in the fourth quarter here as we expand that rollout. So I'd have to summarize by being pleased with the third quarter results, but more as a launching and platform for the rollout of our fourth quarter, and then our 2020 expectations that we'll be announcing at the close call in March.

Howard, just to follow-up on that. So as we think about the volume opportunity, it sounds like you think that you could gain at least 100 basis points of market share in mammography. So how are you thinking about the flow-through of that in terms of same-store? I mean are you expecting -- I know it's a little early to think about guidance, but are you thinking that same-store should accelerate next year as all these initiatives with technology and Whiterabbit are yielding results?

Yes, Brian. Again, we do about 4% of all the mammography in the United States, which is really a reflection of the overall RadNet strategy of being focused in the five major markets that we primarily operate in. And so if as we anticipate and with what we've seen in our pilot testing of the Whiterabbit program, the possibility of a 20% increase in our overall volume that translates into a substantial amount of additional mammography as well as the other procedures that roll from that. But I think I'd be remiss in just focusing on mammography and breast cancer screening, we are actively pursuing other business models that we believe much like breast mammography and breast screening, our attention is going to be heavily focused on prostate over the coming quarters, which we believe much like breast screening should become routine for men almost beginning in their very early ages. So we expect to see those kind of drivers in the business that I think will be reflected in our 2020 results, but which are very much a reflection of the overall RadNet business strategy being multi-modality and concentrated densely in highly populated markets. So what we're seeing now which may have hurt our margins slightly are a lot of investments in personnel as well as equipment and facilities to begin to capture these kind of opportunities along with the more corporate functions of managing the overall non-imaging non-site facility responsibilities that we have whether it be accounting, HR and most importantly revenue cycle management to better prepare ourselves for not only increased volume, but better results. I was particularly pleased as Mark pointed out, a significant reduction in our DSOs by six days, which we are fortunately seeing reflected in improved cash flow and build of cash as we demonstrated in this quarter's results. So if we look at the big picture and use the third quarter as a barometer for both what we're doing with our investing and with our strong performance, particularly at the center level with the slightly less than 5%, same-store center growth, I'd have to say, I'm very pleased with the results overall.

Got it. And then I guess Mark to follow-up on that, so it seems like you're expecting same-store to be -- to remain strong going forward. How should we be thinking about the flow-through of margins into next year as you push -- if you factor in all the puts and takes on the investments you're making, should we expect the margins to flow through next year I guess?

Yes. As Dr. Berger said, we did spend more aggressively in this quarter on infrastructure, which I think positions us better next year for flow-through. And there's a good opportunity for our margins to improve assuming we have continued strong same-center performance. I've always said in this business that we could assume in a normalized environment, a normalized economy kind of a 1% to 3% same-center growth. We've achieved that and then some this year and we've used that as an opportunity to make these investments in our people, in our processes, in our technology to position ourselves for that type of flow-through going forward. So I think we're all feeling very optimistic about next year and the opportunity for margin expansion. We're also -- one other point I'll make also -- we also have -- are in the process of digesting a couple of substantial acquisitions, at least the size that we do. And I'm talking mostly about current Medical Arts also the ACP integration. And we spent a fair bit of money in investing in those integrations and those assets and are not yet optimized. So I think that there's some possible benefit that we'll see to our margins next year as we optimize those operations. The one thing I will also say on margin expansion, we are suffering something -- from something that we're seeing throughout health care and really through the economy, which is some wage inflation at this point. The economy has been incredibly robust. Unemployment has been at record lows, historic lows and we are seeing some wage inflation that we have to keep up with to retain our employees and to attract new employees. And I'm hearing that from other health care CFOs with whom I'm friends with and we think that it's temporary. And hopefully that trend ultimately reverses when the economy slows down. And at some point it will slow down.

Last question for me Mark. How are you thinking about M&A just in terms of what's your pipeline like? Or are you kind of like in the process of digesting first then slowing down a little bit?

Sure. We are focused on integrating the acquisitions that we've done in the last 12 to 18 months. We always have an active pipeline, mostly filled with small tuck-in deals in our five major markets. We have looked recently at some more sizable acquisitions, potentially planting new flags in other areas of the country for a variety of reasons, mostly price and return on invested capital. We've chosen not to pursue those transactions because they were at multiples that far exceeded the multiples that we have to pay on assets in our existing markets. And when you go into a new area of the U.S. other than some corporate G&A synergies that we might have really there are no center level or regional operational synergies. So we've always found that we could get a better return on invested capital by continuing to invest in our five core markets. And then growing from those markets contiguously like we've demonstrated, particularly in the New York Tri-State area. So I think in the next 12 months you'll see us be active on the small tuck-in transactions and you'll also see us expanding existing joint ventures and entering into new joint ventures with health systems. Howard said in his remarks, currently 25% of our centers are held within joint ventures with large health systems and community hospitals and we see an opportunity to grow that business substantially over the next few years, potentially to up to 50% of our centers.

Awesome. Thanks, guys. Congrats again.

Thanks, Brian.

Thank you. [Operator Instructions] We'll now take our next question from John Ransom of Raymond James. Please go ahead.

Hey, good morning. I know your brand is something the market likes is that your rates are a lot lower than hospital centers. But when you do one of these joint ventures or say you put a freestanding center that's not in the hospital, but as part of a hospital affiliation, do you notice a change in the rate from managed care that you otherwise would have gotten just because the hospital has better contracts?

Good morning, John. We do not use hospital rates for the outpatient billing centers that are in joint ventures with hospitals. What we have been able to do successfully and which we are continuing to pursue is that in all of our markets, whether we have our centers with joint venture partners or whether we own those centers wholly ourselves is negotiate separate fee schedules with those payers that are reflective of what we believe are the fair and sustainable reimbursement rates. So even though 25% of our joint ventures are currently -- excuse me of our centers are currently in joint ventures, none of those centers are using hospital rate billings. But generally almost all of those joint ventures have rates better than what we can negotiate by ourselves.

Okay. Can you give some idea of the order of magnitude of that?

Perhaps the best example of that is in New Jersey with our hospital partner the Barnabas Health system. I would say that our fee schedule, which is a separate RadNet or by definition the joint venture's name there New Jersey Imaging Network is probably somewhere in the 10% to 15% depending upon the payer better than what the freestanding imaging centers in that state would get. And that is something similar to what we're looking to achieve in other markets, if not already at those levels now.

So just doing the simple math, I mean, if you were to go from 25% to 50% and if we were to take your commercial bit and say maybe there's a 10% lift in that mix that's a useful long-term way to think about the opportunity?

I think so. I think so. I think

Okay.

Whether we're looking at our joint venture relationships or whether we're looking at our 100% owned centers, we're constantly in discussions with all of the payers regarding reimbursement rates. And so while I think the joint ventures give us additional leverage with hospital partners, I think bulking up and becoming even more important to the delivery systems in the markets that we're in by controlling more and more access. And in fact producing the kind of quality from a technology standpoint and patient experience as much of a driver in those discussions as it would be as if those centers were in joint ventures with hospitals.

Okay. And just a question for Mark. Why such a wide range for 4Q?

Why such a wide range for what?

Yes. If you look at your guidance, I mean it's a pretty wide range for implied 4Q. Why not tighten it up a little bit?

I didn't hear the word. Did you say 4Q? I'm sorry.

Yes, yes. The fourth quarter implied ranges are pretty wide. So why not tighten those up a little bit?

Typically, we haven't tightened up ranges. In the past, we've set a range and left it. But we don't think that there's going to be tremendous variability, but -- so we just as a practice haven't tightened up ranges as the year has gone by. We usually have a $5 million to $10 million EBITDA range anywhere close to about a $50 million revenue range and we tend to leave them. There's no magic to it.

Okay. And then going to the more interesting topic of some of your strategic initiatives in prostate and breast. How do you solve the last-mile problem of getting consumers to act in a more -- I mean we saw for example a big uptick years ago in Katie Couric and colonoscopies and then that sort of died down. And certainly, there's a lot of -- in advertising investment for Cologuard and that sort of thing. But how do you get the -- how do you get higher level of consumer engagement in some of the screening tests that frankly aren't very pleasant for people and the utilization rates haven't really changed a whole lot over the years?

Hi, John, I'll take that question. And I think it's a great question and I think it goes very much to some of my closing remarks. What we have found in a somewhat limited trial here is that the only way to really change behavior is to be more aggressive about trying to educate and contact patients that either have not been accessing the system or don't access it with the level of frequency that's necessary. And I think the driver in that will be much like we talked about with Whiterabbit and using those kind of deep learning and ultimately social media or social applications. But also what we're looking at is getting into more risk assessment questionnaires with some of our existing patients that help focus their attention on not only what they may know about the need to do things, but give them some guidance with regards to their own history as well as perhaps genetic testing that would indicate why they are at higher risk and should seek out these kind of screening tools. And I need to also frame that against perhaps the most important part and that is trying to get the cost benefit of doing these screening tools down to something that is either very affordable by the average consumer or something that becomes recognized by the payer much like they have with mammography of the need to do it on a mass screening basis. That's one of the reasons why I mentioned our focus on prostate cancer. What we have seen now with the newer tools both from an equipment standpoint meaning MRI scanners as well as artificial intelligence are substantially enhanced ability to rapidly scan and identify prostate cancer. And if we can get the cost of that down to something…

Great answer. Mark maybe I missed this because I jumped in a little late. Did you quantify in 3Q the additional spending?

We didn't. We didn't. If I had to just estimate it off the top of our – at top of my head, the additional investments we made in personnel in scheduling, in pre-authorization revenue cycle probably $1 million to $2 million.

Okay. I mean, yeah, because versus our model you certainly beat our revenue forecast but a little bit of a margin give-back to us. In fact, that's probably what it was it was the spending. And just Howard one last thing, I mean, this is more of an editorial than anything else but the other thing we are seeing is you've got a-third of the Americans in high-deductible plans. But in some cases they're finally starting to reduce the out-of-pocket for certain screening procedures. So even though you might have a $2000 co-pay so for example for a colonoscopy that co-pay might be zero. So this simple plan is unchanged. I think there's something that we're also seeing. But I'm just – I don't have a real systematic way of knowing how widespread that is but I know that's something that's starting to be looked at?

I think you're spot on again John. As you may know or not know at this point, there is no out-of-pocket expense for screening mammography. In most states, it is a requirement by the Department of Health in those states that screening mammography be offered and that the patient not pay anything out-of-pocket for that. You can call that plan design, but you can also call it good business. I think that the future will have similar kinds of models for other things like I mentioned with prostate, screening, colon screening and lung screening for cancer. And if you aggregate those four cancers together, you're talking about over 80% of the cancers that cause death in the United States. So, if we get to that place which I think now because of technology, not because of anything special with plan design, but as technology allows these tools to be further and further rolled out on a mass population health screening basis, I believe we could see rapid adoption of this. And the overall impact to the health care system long-term could be so substantial that it will change the entire thought process much like some of the conversation you're seeing on value-based medicine. I think this is a cornerstone for how we turn that corner to get to that place.

Thank you. Great. That's it for me. Thank you.

Thanks, John.

Thanks, John.

Thank you. [Operator Instructions] We'll now take our next question from Mitra Ramgopal of Sidoti. Please go ahead.

Yes. Good morning. Again, really solid numbers on same store for MRI/CT. I'm just wondering, if anything particular is driving that light from the internal investments you have been making.

Well, good morning, Mitra. Yeah, I think it's just really a combination of both the investments that we're making continuing to become even more important in the various markets that we are as we expand our footprint. And I think that slow turning of a big ship of patients moving from hospital-based pricing to outpatient pricing. I think the recognition of how important it is particularly with high-deductible plans both by the payers as well as hospital systems is really creating opportunity in the outpatient market, and particularly for RadNet that is just creeping up every quarter for us. So, if you take all that along with I think the inevitable increase that imaging itself will experience as a result of an aging population and a growing population, I saw a statistic today that 10,000 Americans every day reach eligibility for Medicare benefits. And in our experience, the incidence of imaging utilization for the senior population versus what we call the commercial population in other words everybody under 65 is anywhere from 2.5 to 3 times as much. So putting all those factors together, I think it's prudent for us to expect the 1% to 3% same-store sales growth that Mark has built into our models. And perhaps with some of the new initiatives that we're undertaking you might see that growth even greater, which would reflect the almost 5% same-store sales growth that we had in the third quarter.

Okay. No. Thanks. That's very helpful. Just on the capitation business that's also growing really nicely obviously helped by the Emblem contract. I was just wondering, how we should think about that more longer term in terms of the kind of growth we should expect from that piece of the business.

Very good question, Mitra. I think there's two aspects of that for us to talk about. Firstly, our capitation business is a hidden gem inside RadNet. Virtually nobody else does capitation at the scale that we do. And within there, there are benefits in other forms of business that we get by these close relationships, and it's what we call sticky business. We generally have had these contracts for years, if not decades. So we have that reliability of the volume and cash flow that comes from them. The other side of that is much like we look at on the commercial side of it or our private payers we are reviewing constantly all of our capitation contracts and looking at opportunities for resetting these rates that are reflective of growing utilization and growing need. So, I think there are revenue enhancement opportunities for us that we hopefully, we'll be able to more accurately or -- an expanded conversations start talking about next year. But, all of these represent the business opportunities that benefit all parties and where the need for reimbursement to not always be thought of as something that people are looking to force down, but rather paying sustainable affordable rates that allow us to continue to invest in our equipment, our personnel, and as we've talked about today, artificial intelligence and other tools to manage the patient population better. So, we're very happy with our capitation business, and look at it with opportunity for the future not just as a static part of our business.

Okay. Thanks, Howard. And then final question Mark on the guidance, obviously it's unchanged. I'm assuming the fires in California have not really had a material impact on operations for you.

Yeah. I don't -- it depends upon of course how you define the word material. We did lose some business, fortunately not extended, but both in Northern California, which was not interestingly not hit as badly this year as it was last year. But in Southern California, particularly here in the Greater Los Angeles area and in our San Fernando Valley and Los Angeles markets where the fires became pretty intense and extensive, we did have perhaps 1.5 to two days on average of overall downtime in portions of our markets. But, I mentioned that, because the San Fernando Valley is one of our busiest markets in the Los Angeles area. So, on the one hand, it was not material relative to the size of the company, but a day or two loss of business does hurt. But knock on wood it could have been much worse. And we're all thankful here to the firefighters and other support teams here in California that prevented this from being far worse.

Yeah. Hopefully it gone soon, and thanks again for taking the question.

Thank you, Mitra.

Thank you. Ladies and gentlemen, this was it for the question-and-answer session. I would now like to turn the conference over to the speakers for any additional or closing remarks. Thank you.

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.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.