Good day, and welcome to the RadNet, Inc. Fourth Quarter 2019 Financial Results Call. Today's conference is being recorded. At this time, I'd 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 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, 2019, 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 2019 results, give you more insight to the factors which affected the 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. 2019 was certainly a very productive year and one which sets the stage for what we are anticipating to be a strong and active 2020, as indicated by our guidance levels we announced this morning and which Mark will review in his prepared remarks. During 2019, we made progress on all strategic fronts, and I believe our performance, particularly in the fourth quarter, demonstrated the strength of the RadNet model and the multifaceted aspects to our business that make it unique within the health care. I would like to begin by highlighting some of the accomplishments of 2019. First, and most importantly, our operations teams were successful in driving same center growth. On a same-center basis, our procedure volumes grew 2.3%, 3.5%, 4.7% and 3.3% in each of the 4 quarters of 2019, respectively. For all of 2019 on an aggregate basis, our revenues increased 18.4% and our EBITDA increased 15.8%. Although we had an excellent fourth quarter last year, setting new records for revenue and EBITDA at the time, we were able to exceed last year's fourth quarter revenue by 17% and last year's fourth quarter EBITDA by 5.5%. Our center level performance has been driven by our focus on patient experience, providing high quality service to the…

Thank you, Howard. I'm now going to briefly review our fourth quarter and full year 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 fourth quarter and full year 2019 performance. I will also provide 2020 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 extinguishments and nonequity compensation -- noncash equity compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to noncontrolling interest in subsidiaries and is adjusted for noncash or extraordinary and onetime 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 2019 results. For the 3 months ended December 31, 2019, RadNet reported revenue of $300.8 million and adjusted EBITDA of $46.9 million. Both were the highest quarterly levels we've ever produced in our history. Revenue increased $43.6 million or 17% over the prior year same quarter and adjusted EBITDA increased $2.4 million or 5.5% over the prior year same quarter. The increase in revenue and adjusted EBITDA was the result of a combination of same-center growth performance as well as the contributions of the Kern Radiology and Zilkha Radiology acquisitions acquired earlier in…

Thank you, Mark. I continue to believe that RadNet's core operating tenets ideally position us for the changing landscape of health care. We have designed our company to scale through geographic concentration, multi-modality approach, health system partnerships, population health management and capitation. In the coming quarters, we will continue to grow our business but following these key tenets and through leveraging our core competencies to improve our regional operations. One of our core competencies is information technology. As many of you are aware, almost 10 years ago, we concluded that we must own our own information technology backbone in order to successfully scale our platform cost efficiently and to provide the level of service and care to our patients and referring physician communities above that of our competition. This decision led us to purchase eRAD and to customize its software over the last decade to support our growing complexity and demanding workflow. We recently made a similar decision with regards to radiology artificial intelligence solutions. We believe that these technologies will be transformative to our business and our industry. As such, we believe that we must control these -- how these solutions are developed and how they are deployed. I very much look forward to giving you more details about this during tomorrow's special conference call. In that call, we plan to discuss DeepHealth acquisition and outline our artificial intelligence strategy. Operator, we are now ready for the question-and-answer portion of the call.

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

I guess, Howard, my first question for you. COVID is, obviously, a very relevant topic right now. How are you thinking about that in terms of your potential exposure as people alter their daily routines and what are you seeing so far? I know your friends that are there in California. So have you seen any impact in terms of cancellations on procedures? And how do you think that will play out in terms of being able to recapture? Any delays if they occur in future quarters?

Brian, it's Mark. I think I'll take that question. As you can imagine, our HR department has been focused on this for a number of weeks. We've got people that are -- a team that's dedicated 100% of their time to creating a robust communication program, both externally for patients and referring physicians as well as internally to the 8,000 RadNet team members. With respect to our external communications, we have imposed patient screening scripts that we have trained our schedulers and our front-office personnel that is backed by the CDC best practices. And we have recorded messages that are going out to all patients and referring physicians that deal with the fact that if patients are sick and they potentially have symptoms with respect to COVID-19 that they should go and visit their doctors and the referring physician again and not come in for their exams. We have also trained our front-office personnel with regards to emergency protocols. If a patient shows up to us -- each of one of our centers and is suspected as being infected. So we are fielding lots of calls from patients and from -- excuse me, from our employees as well. And we have some policies that we've put into place with regards to sick day policies. We are encouraging our employees if they're feeling ill to not come to the office. We've put a travel ban for corporate travel on our employees. Only very mission-critical travel is being accepted. We are encouraging employees who are not at the centers, if possible, to work remotely depending upon what their job functions are. And we are putting in place right now, both on the East Coast and West Coast with our 2 respective chief operating officers, contingency plans if we ultimately have a labor shortage at any of our facilities. So that's the communication plan. With respect to the performance so far in the first three months of the year, I'll let Dr. Berger comment on that.

Brian, given the somewhat precipitous developments here in the last week to 10 days, we have not as yet been able to estimate what the impact of the coronavirus circumstances will be on our centers. Fortunately, we had a very robust January and February, and it was only at the very beginning of March that we began to see some softening of our volumes relative to our budgets in the early part of March. However, it is very much different on a market-by-market basis. At the present time, for example, we've seen very little impact on our markets in Maryland and New Jersey. And generally speaking, they have held up well here throughout California. The place where we seem to be having some more substantive impact in the last several days is in the New York market predominantly. It's hard to anticipate what this is going to affect us and how long it will be, given the uncertainty surrounding the whole coronavirus situation, but we do feel that the situation will be relatively short-lived. And the main impact that we feel is to the extent that if patients don't go into their doctors' offices it will affect our volumes. I've been pleased with the first half of this month, where the volumes have held up reasonably well, mostly in the markets that I indicated to you before. So I think we're just going to have to wait this out and see not so much what's happening now, but how long the effect of the coronavirus policies impact us and for that matter everybody else. But at this point in time, we haven't factored anything into our forecast. And then we haven't, for that matter, changed any of our staffing volumes as our centers are still very busy in all the markets, including New York.

Howard, just to follow up on that. I mean, as I think about kind of the fundamental drivers of your volume. If -- or as we see procedures getting delayed, for example, in New York, as you mentioned, how do you think about the ability to recapture that in subsequent quarters when the coronavirus kind of dies down? I mean, do you think the volume or the demand is something that stays there? Or do you -- is there a leakage that we should be thinking about as we think about the future quarters?

Well, the impact of the coronavirus is similar, in my opinion, to what weather conditions are like, particularly on the East Coast and in the Northeast when we are affected by severe storms, primarily snow storms. That was volume. While it may delay treatment is something that we don't necessarily recover from given 2 factors. Number one, it delays patient visits and then those studies are unordered and filling our centers, while they may get done later, they spread out through our backlog and in our centers unless they're really urgent or emergent studies. The place where I think we will rebound from and where I see more of an impact from the modality standpoint is in mammography, which is an elective procedure, totally at the discretion of the patient, particularly for the follow-up screening mammography. Given the fact that those patients will eventually come back in, I believe we can recover those because we've built additional capacity into our centers as a result of the initiatives with Whiterabbit to, in fact, improve compliance by those patients. So I think it's kind of a mixed bag. I mean, neither of these sides I expect it to be something that will recover as soon as the major impact from the quarantines and the reduction in travel is over. The other volumes, I think, will recover, but it may not be noticeable in the overall volumes that we see and expect to see throughout the coming months.

I appreciate that. I guess, shifting gears, Howard. You talked in your prepared remarks about the payers' efforts to shift volume out of pricier inpatient or hospital-owned facility. As I look at your volume performance for Q4, obviously, very good. Is that an early sign of the benefits from these payer-driven efforts? I mean, Cigna obviously kicks in, in April. So how are you -- I guess, the follow-up to that would be, how are you thinking about your ability to grow at this sort of 2% to 4%, 2% to 5% level?

Well, I think it's hard to pinpoint any particular issue that is helping to drive our business. I think if you look at what we do and the industry that we're in, meaning health care in general and imaging, in particular, we expect to see growth simply as the population increases and ages, both of which will generally generate more imaging. Additionally, as Mark and I talked about in our prepared remarks, we have invested significantly in our centers to handle additional capacity and that capacity is not just more referrals, but also the ability for us to do exams that older pieces of equipment either were less capable of doing or the new equipment allows us greater throughput because of improved computer processing and faster scanning times. So when you mix all that together, along with the fact that in our markets we're very competitive with our offering, both against hospitals as well as the other smaller operators, I think they all add to the dynamic of an expectation for increasing volume at the rate that we're talking about. I think that the inevitable move from hospitals into outpatient centers, as I've said on prior calls, is an inexorable one, but which will be slow because it's not just a matter of the health plans and the patients adopting this, but it's also changing the behavior of the referring physicians, which, with the payers that we deal with, virtually at all levels, is becoming considerably more aggressive than it has been in the past. So I'd like to believe that, that movement will help us with our volumes, but I think it will take us a while to go ahead and quantitate what the impact of that is, given the fact that we also continue to consolidate in our markets and take out competitors that helps us drive our volumes.

I appreciate that. Mark, just shifting gears really quickly. Capitation revenue was pretty strong during the quarter. Is there anything to call out there? And is that the right number to be thinking about going forward for capitation contribution per quarter?

Sure. Yes, one of the things that we focused on throughout 2019 was going after potential price increases on a number of our contracts. As, I think, you're probably aware, we benchmark the reimbursements that we get from each one of our contracts against the other books of business that we have. And based upon utilization of the services and whether there's been pricing increases in recent years, there are a number of contracts that could fall behind where we want to be, where our targeted reimbursement is relative to other books of business that we have. And in 2019, we made a concerted effort to go to a number of our large capitated contracts where it was the case where we were lower than where we wanted to be with reimbursement, and we were able to get pretty significant pricing increases. And so that's why you see some real nice growth in our capitated business throughout the year. A number of those capitated contract increases came through towards the second half of the year. Also, I would say that enrollment in these capitated contracts, which these are HMO patients, as a reminder, has been strong. As premiums have increased, many people have migrated towards HMO products in California, and in particular, most of the dollars for HMO care are being sent from the insurance companies to these large capitated medical groups, and then we subcapitate for the imaging piece from those medical groups. So enrollment has been strong, particularly in the area of Medicare Advantage where we've seen the senior lives increasing substantially and the way we price our capitated contracts as we bifurcate the pricing between commercial lives and senior lives. So to the extent that there's some growth in the senior life side of these enrollment statistics, we get better reimbursement.

I appreciate that. Last question for me really quickly. As I look at your guidance, you're showing flat margins. Shouldn't we be thinking about some margin opportunity as you drive above-average same-store growth?

Well, I think that there is that possibility in 2020 as we move forward. Like most of the other health care companies, we are subject to increasing the salaries, which is our biggest single line item expense, due to a very competitive marketplace for the shortage of technologies and other health care professionals that we seek to employ. So our margin expansion is something that we hope initiatives in our infrastructure and IT improve reimbursement operations and ultimately, our artificial intelligence initiatives will help us on. But I believe we projected what we think is a very achievable and conservative guidance levels that we will be able to comment more on as the year unfolds.

We'll now take your next question from John Ransom at Raymond James.

Well, Brian asked all the good questions. So feel kind of bad. Just one thing, I think the market is trying to wrap its head around, and probably not very successfully, is what is the defense, if any, against an asymptomatic COVID patient wandering in and infecting a whole bunch of people in the center? And then you obviously are not -- you don't have a way to test them and then you have to shut a center down because everybody came in contact with this person. Is there anything in the works to try to mitigate that risk? I know if people have symptoms, you can send them, but how do we keep asymptomatic people from infecting like mass workplaces?

No, I think that's -- go back in time, the $64,000 question, John. Yes, the best that we can do is to try to screen our patients and the referring physicians for those patients that are coming in with the presumptive diagnosis or rule out diagnosis of coronavirus. I think asymptomatic patients, which, by and large, is the preponderance of the people who will be incentivized is an impossible situation for everybody unless there -- unless the testing was expanded in such a dramatic and almost incomprehensible way to identify these patients. And then, of course, the consequences of that, in and of themselves, they have substantial potential impact that none of us want to really think about. So at the end of the day, if you listen to the experts on is there's a lot of factors that even if somebody isn't symptomatic and has the virus, number one, doesn't automatically make them even contagious. It has to do with the volume of the virus that's in their body beyond just the fact that they may even test positive for it. So I don't know how we're going to be able to manage that any different than a typical physician office or any other health care provider other than take precautions. And if somebody is ultimately identified, we take the necessary steps at that center that may have been impacted, number one. Number two, on a daily basis, we use all the appropriate purification and cleansing techniques that are advocated by most of the -- by the CDC and others that oversee this responsibility.

Then another question. Obviously, your -- what -- maybe an impossible question to ask, but what would you estimate your imaging, if you could separate out what I'd call kind of elective diagnostic versus stuff that has to be done medically necessary. Do you have any idea, like I'm thinking about, am I getting an x-ray and an MRI before they get a total knee, they could, in theory, push that off -- but do you have any idea kind of to break down the elective versus the nonelective?

Well, technically speaking, every procedure we do is an elective procedure. If it's a true emergent procedure, which we do see a very, very small percentage, I would say that an emergent procedure with somebody who has to come in immediately is probably 1% of our volume, if even that. So the preponderance of what we believe is in fact elective and people can put it off. They tend not to put it off because once you've been told by a physician that you need a test, the anxiety you have about that overweighs perhaps other issues. But this is now a matter of people not going to their doctors for elective opportunities to either do just routine physicals or specific disease concerns, but that ultimately, again, we don't see those patients in our offices. So there is a certain selection process, if you will, that occurs well before the patients make their decision as to if and when they're going to get one of our procedures.

And maybe that telemedicine can bridge some of that?

Yes, hopefully.

And then just the last one for me, kind of a micro versus macro, what explained the jump in the CT procedures? And do you expect that to continue? And also, are you anticipating any, like, increase in CT scanning for people who might have this virus and looking for a lung damage? Do you think that -- they do most likely happen at the ER in the hospital?

Yes. The explanation on the CT scanning is that we see more and more people are coming in for screening CT that may have, in the past, not been getting it. For example, one of the initiatives that we have inside the company, which we think artificial intelligence will help accelerate that, is the new low-dose CT screening for people who may have been smokers or have history otherwise. So we've seen a substantial increase in our CT volume for chest CT screening. And at this point, in the marketplace, that's still only a very small fraction of the people who are eligible for that, but I think there is a greater recognition, whether it's CT scanning for the lung or other CT procedures that can be done very cost effectively. For example, we're starting to see an increase in CT colonoscopy, which is a much less expensive and much easier procedure than going through flexible colonoscopy. And I think we're going to continue to see those kind of increases and in fact that, as I mentioned just a moment ago, that was one of the initiatives that brought us to incorporate DeepHealth as a subsidiary of RadNet because I think we moved tools that will help identify these patients and then bring products to the marketplace that both payers and patients will find attractive. And we'll talk a little bit about that tomorrow on the special conference call.

And one for Mark. Again, I think estimates are kind of at the window for -- until we got a handle on this virus. But it just looked like -- I know there's seasonality and whatnot. But if I just -- if I take your 4Q EBITDA, then I compare that to your guidance, that guidance just looks awfully conservative relative to the quarter you just put up. So I know you talked about some labor -- some wage increases for your folks, but just how should we think about that in that context?

Yes, sure. And there is substantial seasonality in our business. Q4 tends to be strong as folks try to -- who have already blown through their deductibles throughout the year, they're miserable in dealing with imaging and medical services towards the end of the year and then as the deductibles reset, we generally see lower volumes in the first quarter as well as we're impacted by East Coast winter weather conditions. So you can't just take fourth quarter or even third quarter and just multiply that by four and come up with something outsized. Doesn't make any sort of sense. In setting the guidance, we assumed 2% same-center volumes. Obviously, we've surpassed that throughout 2019. And so to the extent that we overachieve our same-center projection, I think that there's significant upside in the guidance. We do expect and built into our budget, continuing labor inflation costs. It's a very, very tight labor market. We don't have cost of living increases with our employees, but we've had to on a case-by-case basis, and it's extremely common these days, you have to give merit increases in order to keep people and in order to fill spots, particularly technologists. For office people, we had to pay higher hourly rates to get those people. So we are assuming continued labor inflation. Who knows where the economy will be this year. And if it stabilizes or slows down, maybe there's some upside there. Clearly, there is upside on the margin part of our business as it relates to some of the technology investments that we're making in AI to the extent that towards the end of the year perhaps we could be utilizing a mammo triage product, which we'll talk about much more in detail tomorrow on the call. That could help our efficiency and productivity on the physician side. So I think we tried to set our budget fairly conservatively with the ability to -- as we go through the year to increase guidance if it were appropriate, and so I think we feel comfortable with it right now.

Yes, and I look forward to tomorrow because I do think there's a gap between sort of a high level understanding of the potential of AI in your business to lower your -- improve your throughput and lower your -- improve your read efficiency, but just how quickly that comes and what it looks like and is it 2 years, 5 years and how quickly can it go, I think there's a bit of a gap out there in understanding that. So look forward to tomorrow.

Thank you, John.

We'll now take the next question from Mitra Ramgopal at Sidoti.

Just wanted to follow up on the guidance. Mark, it seems like with that 2% same-store, you might be baking in some conservatism regarding the coronavirus. I was just also wondering if you're assuming any benefits from the TULSA-PRO system installations and any incremental immediate or near-term revenue from Cigna with their new policy.

Sure. Well, with respect to the TULSA-PRO installations, and we're expecting to have our first installation up and running by the end of March in our West Hills California market, which is in the San Fernando Valley of Los Angeles. It's a little too early to tell it. I don't think it's going to be material to our financial results. But it's an interesting opportunity because it brings RadNet from being strictly a diagnostics business to one where we're using our imaging equipment on the treatment side. And we do have a number of interventional facilities across our network that does invasive procedures under the guidance of our imaging equipment. But with respect to prostate cancer in this TULSA-PRO installation, it is very exciting. I believe, we have 4 patients already being scheduled for that, and it should be exciting. It's right now not being reimbursed by private insurance, and it is a very expensive -- or Medicare, by the way, and it is a very expensive procedure. So it's out of pocket to the patient. But the patient, we believe, will receive full functioning of the prostate and urinary and sexual functioning. So we are seeing some demand for it. But I think it's too early to tell whether it will be material or not and how successful will it be. And I think once the -- once there's a CPT code and both Medicare and private insurance start reimbursing for it, I think then it becomes a real opportunity for our company and across our network.

Mike, let me just add one other element to this. Rather than looking at revenue just from the treatment side of it, it's the fact that we're offering this in general that we believe will drive more prostate MRI scans to our facilities as part of the screening to see which patients, in fact, maybe a candidate for this. So this is a tool that while it has some interesting long-term implications regarding turning imaging into a treatment tool and generating more revenue, fundamentally what this is about is coming up with better screening tools for prostate cancer and ultimately having treatments which are substantially less invasive than the current ones available. Part of that will be a discussion that we'll have tomorrow when we're talking about artificial intelligence, is that, in fact, maybe one of the real keys to driving prostate scanning into a more routine preventative maintenance -- not preventative maintenance, but preventative health concept, much like mammography is in women. But to the extent that you have interest on this side, I would ask you to listen into tomorrow's call regarding artificial intelligence initiatives by RadNet.

There appears to be no further questions at this time. I'd like to turn the conference back to the speakers for any additional or closing remarks.

Thank you, Operator. Again, I would like to take this opportunity to thank all of our shareholders for their continued support and employees of RadNet for their dedication and hard work. Management will continue its endeavor to be a market leader that provides great services with an appropriate return on investment for all stakeholders. Thank you for your time today, and I look forward to our next call. And for those of you that can participate in the call tomorrow, regarding DeepHealth and artificial intelligence, we'll be seeing you tomorrow. Thank you, and good day.

This now concludes today's call. Thank you for your participation. You may now disconnect.