Good day, and welcome to the RadNet, Inc. Fourth Quarter 2018 Earnings 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 2018 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, including 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, 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. And 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 2018 results, give you more insight into the factors that 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.

2018 was a very progressive year, which sets the stage for what we are anticipating to be an even stronger 2019, as indicated by our guidance level we announced this morning and which Mark will review in his prepared remarks. During 2018, we made progress on all strategic fronts.

And I believe our performance, particularly in the fourth quarter, demonstrated the power of the RadNet model and the multifaceted aspects to our business that make it unique in health care. I would like to begin by highlighting some of the accomplishments of 2018. First, our operations teams were successful on driving same-center growth.

After a first quarter during which EBITDA was impacted by a $5 million with unusually adverse winter weather condition in the Northeast, our business recovered nicely. We posted positive same-center procedure and revenue growth for each of the remainder of three quarters of the year.

For the last three quarters of 2019 -- our EBITDA for the nine months of 2018 exceeded that of the same period in 2017 in by 7.6%. In particular, our EBITDA increase was most pronounced in this fourth quarter, where we increased EBITDA by 13.5% over last year's fourth quarter.

When we were are able to drive more patient volume and procedures through existing facilities, even a modest 1% to 2% same-store facility growth that we think is sustainable in our business over the long term, the incremental profitability to our company is strong.

Second, the capital expenditures we made during 2017 and throughout 2018 added both capacity and new capabilities to our centers. Our ability to make substantial capital investments further distances our centers and service offerings from those of our smaller competitors.

We believe the medical communities that we serve recognize these differences that clearly set RadNet apart. During 2018 and subsequent to year-end, we announced and/or completed a number of strategic acquisitions, which furthered our market position in certain regions and positions us well for future expansion profitability.

In April, we completed the acquisition of five community centers at Fresno, California. When combined with RadNet's two existing facilities in that area, the seven combined imaging centers provide the most accessible outpatient network in the greater Fresno, California area.

In October, we began a major expansion in Long Island and the boroughs of New York City with the commencement of our first East Coast capitation contract and with a significant acquisition. Beginning October 1, we began the operation of the capitated arrangement with certain of EmblemHealth enrollees under its AdvantageCare Physicians medical group.

Under the five year contract, RadNet assumes responsibility for imaging operations in 26 AdvantageCare locations. We also completed during the fourth quarter a major upgrade in the equipment and capability at these 26 locations, which positions us to more effectively service the EmblemHealth lives and affords us expansion opportunities in the future.

Simultaneous with the EmblemHealth arrangement, we made our first acquisition in the Nassau and Suffolk Counties of Long Island. We acquired the 10 multimodality imaging centers comprising Medical Arts Radiology, one of the most established radiology practices in Long Island.

The centers add additional points of service for the approximately 175,000 Emblem lives, which we are providing capitated imaging services as well as other Emblem enrollees. Subsequent to year-end, we announced the acquisition of an established operator of five imaging centers in Bakersfield, California, a market we first entered in 2010.

This operator, Kern Radiology, has operated in Kern County for more than 50 years and provides radiology services to several of the local hospitals, including Bakersfield Memorial Hospital, Mercy Southwest Hospital and Mercy Downtown Hospital.

In addition to effecting acquisition, in 2018 and subsequent to year-end, we were also very active with our health system joint ventures initiative, those joint venture initiatives that are becoming more and more significant to our business. Today, over 25% of our centers are held within joint venture.

First, on January 1, 2018, we launched our largest joint venture with MemorialCare in Orange County, California initially with 34 centers, 24 centers contributed by RadNet and 10 locations contributed by MemorialCare. We spent the better part of 2018 refining our operations and working on improving efficiency and operating performance.

During the fourth quarter, we expanded the joint venture with the acquisitions of a single operator in Santa Ana, California and an additional four locations of Orange County Diagnostics in Laguna Woods, Santa Ana, Irvine and Mission Viejo.

Additionally, we recently expanded one of our two joint ventures with Cedars-Sinai health care system in the San Fernando Valley region of Los Angeles.

We constructed new facilities through the joint venture to expand capacity and our geographic footprint and also purchased an additional facility, both in the West Coast area of the San Fernando Valley.

Lastly, with respect to joint ventures, we've recently announced the formation of our second joint venture with Dignity Health in the Ventura County, California region. In forming the joint venture, RadNet contributed three of our Rolling Oaks Radiology imaging centers in Ventura, Oxnard and Camarillo.

Dignity Health contributed an imaging center colocated with its St. John's Regional Medical Center in Oxnard. Imaging locations provide multimodality radiology, including MRI/CT, mammography, PET/CT, x-ray and nuclear medicine. We are very pleased to be working more closely with Dignity.

And we are hopeful that we can find other opportunities to work together in other areas of California where Dignity has significant business.

Also during 2018 and within the fourth quarter, we completed changes to the organization of our New York metropolitan area and international operations, which resulted in various gains and charges, the financial impact of which we attempted to normalize in our financial reporting so that we can provide an accurate picture of our true operating performance in both the fourth quarter and for the full year 2018.

These organizational changes included obtaining control and thereby consolidating the operations of our New Jersey Imaging Network joint venture effective October 1, 2019. This joint venture with RWJBarnabas, the largest health system in New Jersey, was initially established in 2012 and significantly expanded in 2015.

We anticipate the financial statement consolidation of this joint venture will provide us with an additional approximately $50 million of revenue and $7 million of EBITDA during 2019.

As part of the East Coast changes and organization, we also revalued the collectibility of accounts receivable that we acquired in a number of our New York operations, taking an impairment charge to goodwill and tradename associated with our New York-based teleradiology operation and fully reserved against receivables we have on books related to our consulting operations in Qatar.

During 2018, we made additional infrastructure investments to position ourselves to the an effective and scalable platform from which to grow. These investments were made to address challenges in our business, which should result in better future performance and more efficient operations.

Most notably, we invested significantly in our revenue cycle operation. As we have discussed in the past, we are attempting to keep pace with the challenges in health care around effectively billing and collection for services.

We are required to collect more money than ever from patients as a result of higher deductible health plans and more significant office visit charges and [indiscernible].

As a result, we have recruited and hired new senior management in this area, expanded customer service call center personnel and hours of operation, increased the size of our patient collection teams and invested in new tools and technology to increase productivity.

Other infrastructure investments were made in the area of financial systems and information technology. In the first quarter of 2018, we have migrated to a new accounting system, Microsoft Dynamics Great Plains.

This is benefiting us in more timely and detailed financial reporting that will allow our field operations and executive management to have valuable dashboards and real-time data that will provide us advantages in a competitive environment.

We also invested heavily in cyber security software and compliance systems to ensure that our patient and financial data is protected and conform with all regulatory requirements. Lastly, in 2018, we made strategic investments in technologies that we believe may be important to our business and our industry in years to come.

Our businesses has always been driven by technology, whether it has been advancements in imaging equipment or in systems that support the operation of running imaging centers at scale, such as software solutions, like PACS, RIS, billing systems, contract management solutions, et cetera.

In the past, we made investments in some of these technologies that have become integral in our business. The most notable one was our creation of eRAD RIS and PACS, our software division that provides the front- and back-end software solutions that have become the backbone of our operations.

During 2018, we made two investments in technologies that we believe can play in a substantial role in imaging of the future. In February, we invested in a company called Turner Imaging, which is developing an ultra portable x-ray fluoroscopy system that we believe could add numerous support and application.

In April, we invested in a company which is developing artificial intelligence algorithms, which we believe can support both our business processes as well as provide our radiologists tools to make them more accurate and productive.

With both of these investments, we are active in collaborating with each company and are excited about their prospects, their respective products and services come into the market in the near future. At this time, I'd like to turn the call back over to Mark to discuss some of the highlights of our fourth quarter 2018 performance.

When he's finished, I will make some closing remarks..

$39.5 million gain resulting from the remeasurement of the company's equity interest in New Jersey Imaging Network upon its consolidation; $19.1 million loss from changes in the organization of our East Coast and international operations; $3.9 million loss on goodwill and tradename impairments related to our teleradiology business; $7.7 million of noncash employee stock compensation expense resulting from the vesting of certain options and restricted stock; $1.9 million of severance paid in connection with headcount reductions related to cost savings initiatives; a $786,000 legal settlement; $1.7 million charge in fair value of stock consideration related to the acquisition of Medical Arts Radiology; $2.1 million gain on the disposal of capital equipment; and $3.9 million amortization of deferred financing costs and loan discount related to our existing credit facility.

With regards to some specific income statement accounts, overall GAAP interest expense in 2018 was $43.5 million. Adjusting for the noncash impacts from items such as amortization of financing fees and accrued interest, cash interest expense was $37 million in 2018.

This compares with GAAP interest expense in 2017 of $40.6 million and cash paid for interest of $34.2 million. The increase in interest expense was the result of the additional consolidated borrowings as well as from the additional debt we are now consolidating for New Jersey Imaging Network.

With regards to our balance sheet, as of December 31, 2017 -- 2018, unadjusted for bond and term loan discounts, we had $677 million of net debt, which is our total debt at par value less our cash balance. This compares with $576.3 million of net debt at December 31, 2017.

The higher net debt balance at year-end is the result of the consolidation of the New Jersey Imaging Network debt of approximately $60 million and having approximately $40 million less of cash on our balance sheet. As of year-end 2018, we were undrawn on our $117.5 million revolving line of credit, and we had a cash balance of $10.4 million.

At December 31, 2018, our accounts receivable balance was $148.9 million, a decrease of $6.6 million from year-end 2017. The decrease in accounts receivable was mainly from additional efforts and resources dedicated to patient collections as well as two transactions where we sold certain personal injury and auto no-fault receivables.

Our DSO was 50.7 days at December 31, 2018, lower by 6.4 days, when compared with 57.1 days as of that date one year ago. Throughout 2018, we had total capital expenditures net of asset dispositions and sales in our imaging center assets and joint venture interest of $69.6 million.

Approximately $72.2 million was paid for in cash, and we recognize approximately $2.6 million in proceeds from the sale of equipment and imaging and medical practice asset.

Capital expenditures were higher than we budgeted at the beginning of the year due to the additional approximately $10 million we spent on the acquired operation in conjunction with the EmblemHealth capitation contract and because of the consolidation of New Jersey Imaging Network capital expenditures subsequent to October 1.

I will now discuss how RadNet performed relative to 2018 guidance levels, which we released first upon our fourth quarter and full year 2017 results. For total net revenue, our guidance range was $945 million to $970 million. Our actual results were $975.1 million. For adjusted EBITDA, our guidance range was $140 million to $150 million.

Our actual results were $143.8 million. For capital expenditures, our guidance level was $60 million up to $65 million. Our actual results were $69.6 million. For cash interest expense, our guidance range was $33 million to $38 million. Our actual results were $37 million.

And finally, for free cash flow generation, our guidance range was $45 million to $55 million. Our actual results were $37.2 million. We exceeded our revenue guidance and finished the year towards the middle of our adjusted EBITDA range. Our capital expenditure has exceeded our initial guidance range because of the reasons I stated earlier.

And the higher capital expenditures directly impacted our free cash flow, which otherwise would have been within our guidance range. At this time, I'd like to review our 2019 fiscal year guidance levels, which we released this morning in our financial results press release. For total net revenue, our guidance is $1,050,000,000 to $1.1 billion.

For adjusted EBITDA, our guidance range is $155 million to $165 million. For capital expenditures, our guidance range is $60 million to $65 million. For cash interest expense, our guidance range is $38 million to $43 million. And for free cash flow generation, our guidance range is $45 million to $55 million.

The guidance levels are built on a number of assumptions. First, we expect 2019 to have stable reimbursement. Medicare rates for 2019 are commensurate with 2018 reimbursement and our relationships with private payers and capitated medical groups represent potential upside in our rate.

Second, we expect to benefit from the contributions of recent acquisitions and initiatives that either were part of RadNet for only a portion of 2018 or did not contribute at all during 2018.

These include the acquisitions of Medical Arts Radiology and Kern Radiology, the establishment of a new joint venture with Dignity Health in Ventura California, the recently operationalized capitation contract with EmblemHealth and the consolidation from a financial statement perspective of New Jersey Imaging Network.

Lastly, we anticipate driving approximately 1% organic growth from significant capital spending in 2018, which we -- which included a commitment to 3D mammography and the expansion of a number of our wholly-owned and joint venture centers. I'd now like to turn the call back over to Dr. Berger, who will make some closing remarks..

Thank you, Mark. We are very enthusiastic about the future of our business and -- as well a freestanding outpatient imaging business as a whole. Our company and our industry expect to benefit from the continuing migration of outpatient services from hospitals into lower-cost and in many cases, higher-quality ambulatory setting.

Diagnostic imaging is necessary and irreplaceable in its ability to diagnose disease more quickly and accurately and with relatively low cost that are more than recouped through earlier and more effective treatment.

In our core markets, RadNet has positioned itself the indispensable for the insurance companies, physician practices, major health systems and virtually all the medical disciplines that rely on imaging as a diagnostic tool. Through our capitation model, we are participating in and furthering alternative payment models and risk taking.

With our eRAD solutions, we are participating in the transition to the digital medical record and to the electronic healthcare information system. Through our joint venture model, we are affording health systems the opportunity to have more distributed reach and to the communities, which they serve and affect strategies, such as population health.

Our results in 2018 demonstrate the power of our core operating model.

As we move into 2019, our focus will continue to be executing on our multifaceted operating strategy to include driving same-center growth and efficiencies making tuck-in acquisitions, expanding our health system joint venture model, designing innovative IT capability, such as artificial intelligence and computer-aided diagnostics and furthering alternative payment model.

I look forward to updating you on the many initiatives we've discussed on our call today and during our first quarter's financial results call in May. Operator, we are now ready for the question-and-answer portion of the call..

[Operator Instructions]. We will take our first question today from Brian Tanquilut from Jefferies..

Congrats on a great year. My first question, Mark. Just to clarify.

The JV in New Jersey, the changes there, did those occur October 1, 2018? Or is that a 2019 transaction?.

2018..

2018? Okay, got it.

And then, what is your ownership percentage of the JV after the reconsolidation?.

We still own 49% of the equity interest. What occurred with the change of control is there were changes in the operating agreement and a voting proxy that gave RadNet more control, which required us to consolidate it from a financial statement perspective..

All right. Got it. That makes sense. One of the things -- as I read the press release, one of the things that you said in the press release, Howard, was that there's potential upside to rates for 2019.

Do you mind elaborating on that as it relates to the capitation and commercial contract?.

Yes. Hi, Brian. Thank you. As part of our strategy for years, we believe that the presence in each of our markets allows us to at least have a dialogue with payers, whether they'd be capitation models and the medical groups or with the health plan.

Given the growth that we've achieved, both in terms of expanding our presence and our network of centers as well as joint ventures with major health system.

We've begun conversations, which in the past, while it may have been somewhat muted, have now gained, I think, additional opportunities for us given the expansion of our presence as well as, I believe a more aggressive approach that virtually every major health plan is undertaking to help move business out of the more costly hospital stays into ambulatory centers.

And for the first time, I believe we are starting to have conversations that not only talk about rates to talk about actual strategies, whether it's health plan design or going out into the marketplace to various physician groups and consumers to educate them the benefits of going into the ambulatory side of healthcare delivery and in particular, imaging.

So in both cases, with our capitation groups where we feel the maturity of these contracts now causes us the opportunity and the need for both parties to reevaluate the economics as well as our overall strategy with the health plans coming from a number of different sources should provide us with some nice opportunities for revenue and reimbursement enhancement in 2019 and [indiscernible]..

I appreciate that, Howard. I guess, a follow-up to that. So it looks like the growth story is now shifting to the joint ventures, right? I mean, been that way for the last few years instead of traditional M&A.

So as we think about the profile of the joint venture facilities that you have, I mean, how do they compare to the legacy or traditional centers that you run in terms of same-store performance and margins and just any metrics that you can throw at us as it relates to the JV assets?.

Well, I don't think that the metrics change dramatically when our centers go into joint ventures.

I think it's more of an opportunity to protect our volumes as well as leverage the growth of the health systems that are very acquisitive in medical groups that they are purchasing and their desire, much like the health plan, to direct those patients, either for those medical groups that they acquire into lower-cost settings or be a beneficiary of that migration that is occurring irrespective of any other actions that they had on their own take.

So our opportunity with these large healthcare systems that I need to emphasize is their health care systems, not individual hospitals are really to dovetail with their own strategic growth initiatives, which include population health and bundled health services as well as essentially, writing the opportunity both for them and us as the way of those business moves out of the hospital or centers into the freestanding facilities.

So while I don't think that the growth is that materially different, I think it does ensures us of continuing their growth by not looking at the hospital as a competitor any longer but really as a strategic partner in virtually every region that we operate in. And we're looking for more of those.

So I think, if you thing on a broader scale of what's happening in healthcare with mergers and consolidation of vertical integration of providers is I think a hallmark of what RadNet is attempting to do with the large health system..

I appreciate that. Just to piggyback on that comment, Howard. I thought Peter's and St.

Joseph's with a deal that turns on every other day, so is that an example of that where you will get brought in as part of the deal down the road? And should we think about that as part of your JV pipeline for 2019?.

Yes, I think so, Brian. Thank you for observing that. What I think that that represent is again consolidation that's going on inside the industry.

Here, you're talking about two of the major healthcare systems, certainly in California, but particularly now here in Southern California, that has now found it advantageous for them to go ahead and merge their operations at least in one geographic area. My guess is that, that will happen to others.

And because we have a joint venture already in place with the Cedars system, that relationship will not only be grandfathered into the new relationship with the Providence system that I believe will open above during this -- for us to work more directly with Providence as another potential joint venture partner, either in conjunction with Cedars or perhaps other areas of California where Providence is quite dominant..

We'll take our next question today from Mitra Ramgopal from Sidoti..

Just wanted to follow-up on the joint venture questions. I believe, Howard, you've mentioned you have about 25% of the facilities now with joint ventures with the leading health systems.

I was just curious if you had to sort of take a longer view, 3, 5 years out, where do you see that number sort of approaching?.

Currently we expect that, Mitra, but given the fact that I believe that we're getting more and more interest from health systems that I would not be surprised within 3 to 5 years if we would double the number of centers that we have with our joint venture partners.

We have to remember also that, when we do these joint ventures with these healthcare system, the joint venture itself has a acquisition profile. So as those centers that are acquired, whether it's through the joint venture or independent centers that we own a 100% of, both of those are ways for us to grow the company.

And in each of our joint ventures, by and large, those health systems have, as part of their regional strategy as well as their outpatient imaging strategy, the charge for RadNet, who manages all of these joint ventures and is responsible for various strategic initiatives to grow the number of centers in those joint ventures.

So I believe within 3 to 5 years that, that may be 0.5% in joint ventures..

Yes, Mitra, and we've demonstrated that. In our prepared remarks, we talked a little bit about two acquisitions are MemorialCare joint venture we did, one in Santa Ana, did another one with a multicenter operator had four centers in Orange County, called Orange County diagnostics.

And then in our Cedars, San Fernando Valley joint venture, we acquired a facility in West Hills near -- very close to actually to the HCA-West Hills Hospital.

So we're already looking to expand these joint ventures and RadNet, in all cases is the day-to-day operating partner, so it is our responsibility to go out and figure out how to grow these businesses. And we don't treat these joint venture centers any differently than we treat wholly-owned facilities.

They get the same time and attention and the same focus on business development..

Okay, noted. That's great. And then shifting a little in terms of -- I'm just curious regarding Anthem and UnitedHealth, the initiatives they've started in terms of shifting some of this business towards more outpatient to your so kind of facilities.

Are you noticing any difference there? Or is this still too early to gauge any effect?.

I think it's still a little bit too early as I've said in prior close calls here. It's a big shift and it turns slowly. And just because the health plan itself decides to take that kind of an initiative, it doesn't mean that the patients and the referring physicians embrace it just as quickly.

So what we're beginning to have in the way of conversations with virtually all of the major health plans are ways that we can comarket and strategize about how we get to the primary consumers as being the referring physician and as being the patients into play, educate them, both on the benefits of going into a more friendly and perhaps even better quality imaging facility as well as the substantially reduced cost that they're likely to incur based on their higher deductibles and co-pays.

So these conversations are bubbling up, and while I expect there to be a continued transition here, I think it will be one that will be slow given the educational process. Should they really get some real steam and initiatives here, perhaps later, here is our typical 1% to 2% growth could improve.

But for the next year or two, I don't necessarily see that impact as being much different than what our difficult organic growth has been..

Okay, no, that's great.

And I know you'd mentioned you'd be ending integration of the Medical Arts Radiology, and I was wondering how far along are you with that? And if all this already are completed?.

Oh, gosh. It's not even started yet. With all the things that we have going on in the New York marketplace and in particular with our operationalizing our first CUP patient. The Medical Arts entity itself and it's 10 centers has been left pretty much unattended.

So we expect starting here in the second quarter and extending throughout the rest of the year, we'll begin our process of what we call brand advertising the centers which would mean putting them onto our IT platform beginning to operationalize the staffing and integrating them more into the RadNet network.

So while we believe there's significant upside there but it was there for us to leave that unattended. Now our integration teams and implementation teams were focused on the bigger opportunity in that New York marketplace so with our EmblemHealth relationship..

And then finally, I know, Mark, you'd mentioned in the quarter, I think, the California wildfires had an impact.

I was wondering if there's a way of quantifying some of that?.

Yes. And we were initially thinking it was going to be larger than it was. We were impacted in the -- in what we call our Ventura, Thousand Oaks, Westlake region, and we were also up in Northern California. And we estimated to the tune of about $1 million..

[Operator Instructions]. It seems we have no further questions at this time. I'd like to turn the conference back over to your host for today for any additional or closing remarks..

Thank you, Operator. Again, I would like to take the opportunity to thank all of our shareholders for their continued support and in particular, the employees of RadNet for their dedication and hard work. Management will continue its endeavor to be a market leader and provide great services with a proper return on investment for all stakeholders.

Thank you for your time today, and I look forward to our next call..

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect..