RadNet Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

Key Takeaways

  • RadNet reported its strongest Q1 in company history with record revenue of $431.7 million (up 10.5%) and adjusted EBITDA of $58.5 million (up 21.4%), driving a 120 basis point expansion in margin.
  • The Digital Health segment grew 32.3% year-over-year, led by a 118.8% increase in AI business such as the EBCD enhanced breast care detection screening initiative.
  • Management raised its 2024 full-year guidance for revenue, adjusted EBITDA and free cash flow, citing continued strong operating trends into Q2.
  • RadNet expanded into Houston through the acquisitions of seven Houston Medical Imaging and six American Health Imaging centers, completed tuck-in deals in Antelope Valley, and is developing 12 de novo facilities to meet capacity demand.
  • With $527 million in cash, net debt just over 1x adjusted EBITDA and a recent debt refinancing that reduced its cost of capital, RadNet is in its strongest financial condition to support accelerated growth.
AI Generated. May Contain Errors.
Earnings Conference Call
RadNet Q1 2024
00:00 / 00:00

There are 6 speakers on the call.

Operator

Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Mark Stolper, Executive Vice President and Chief Financial Officer.

Operator

Sir, please go ahead. Thank you. Good morning, ladies and gentlemen, and thank you for joining Doctor. Howard Berger and me today to discuss RadNet's Q1 2024 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.

Operator

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 3rd 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.

Operator

These risks and uncertainties include those risks set forth in RadNet's reports filed from the SEC from time to time, including RadNet's annual report on Form 10 ks for the year ended December 31, 2023. 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 Doctor. Berger.

Speaker 1

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 Q1 2024 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 this morning.

Speaker 1

Let's begin. I am very pleased with our performance in the Q1. It was the strongest Q1 in our company's history with record revenue, adjusted EBITDA and adjusted earnings. Relative to last year's Q1, total company revenue increased 10.5%, imaging center revenue increased 9.9% and the new Digital Health revenue segment increased 32.3%. Imaging Center revenue was driven by heavy demand in virtually all of our markets despite being adversely impacted in the quarter on the East Coast several snowstorms and in California by unusual rainstorms and flooding.

Speaker 1

Nevertheless, we continue to benefit from the increasing utilization of diagnostic imaging within healthcare as well as the shift of procedural volumes away from the more expensive hospital alternatives to ambulatory freestanding centers like the ones we operate. Also contributing to the strong revenue performance was the positive impact of improved reimbursement from commercial and capitated payers who recognize the important role we are playing as a lower price alternative to hospital based imaging. Lastly, our top line is benefiting from a continuing shift in modality mix towards advanced imaging MRI, CT and PETCT, where the revenue per scan is substantially higher than the routine imaging. This is both a function of an overall industry trend as well as the significant capital investment we have made in the last few years in advanced imaging equipment for growth and upgrades. Driving the revenue growth within the digital health was the AI business, including our EBCD enhanced breast care detection, Breast Cancer Screening AI Powered initiative, which grew 118.8% quarter over last year's same quarter.

Speaker 1

Adjusted EBITDA was also a 1st quarter record. In conjunction with the strong revenue results, which I just discussed, our focus on operational efficiency, improved management and utilization of labor, investments in information technology and effective cost control contributed to a total company adjusted EBITDA, which increased 21.4% from last year's Q1. Another contributing factor to adjusted EBITDA growth was the disproportionate growth in the higher profit margin Digital Health segment businesses. Cumulatively, these factors drove a 120 point basis point increase in our adjusted EBITDA margin as compared with last year's Q1. While we are pleased with this margin expansion, I remain convinced we have further opportunity to improve margins.

Speaker 1

The strong operating results in the Q1 relative to our internal budget combined with ongoing operating trends that have continued into the 2nd quarter, resulted in our decision to increase 2024 full year guidance ranges for revenue, adjusted EBITDA and free cash flow. Mark will discuss this in more detail in his prepared remarks. We continue a multifaceted approach to accelerate our growth. With respect to acquisitions, some of you may have seen our 2 recent announcements regarding our entry into the Houston, Texas market. Upon quarter end, we completed the acquisition of the 7 imaging centers of Houston Medical Imaging.

Speaker 1

In addition, we announced the second acquisition in April of 6 American Health Imaging Centers to be completed in June. Texas is the 1st new state we have entered since 2020. The Houston Metropolitan Marketplace encompassing about 7,300,000 people is the 4th most populous city and the 2nd fastest growing metropolitan area in the United States. We are confident of the opportunity for our further acquisitions, de novo build outs as desirable, health system partnerships and other means of expansion, which include bringing our artificial intelligence and leading edge clinical and operating digital health solutions to the patients and referring communities of Greater Houston. Also during the Q1, we completed a tuck in acquisition of 4 centers in the Antelope Valley, north of Los Angeles.

Speaker 1

New market acquisitions like Houston and the in market tuck in acquisitions like that in Antelope Valley will be a continuing part of our growth strategy. 2024 will be a year of reinvestment in our business to accelerate future growth. We currently have 12 de novo facilities in various stages of development, which will open for operations throughout the remainder of the year. These are on top of the 2 de novos, which opened in the Q1. These facilities are located in markets where we have patient backlogs, require additional capacity or where we currently lack access points to service particular patient populations.

Speaker 1

While these projects are requiring us to make capital investments above our normal spending, we are confident that these centers will be material contributors to our long term performance and growth. We continue to grow our hospital and health system joint venture businesses. Currently, 137 of our 375 centers or 36.5% are held within health system partnerships. Our partners have some of the largest and most successful systems in our geographies. Partners include RWJBarnabas in New Jersey, MemorialCare, Dignity Health, LifeBridge, University of Maryland, Adventist, Cedars Sinai and others.

Speaker 1

These and other systems are seeking solutions for long term strategy around outpatient imaging and have recognized that cost effective and efficient freestanding centers will continue to capture share from hospitals as payers and patients alter their site of care towards lower cost, high quality facilities. Our hospital and health system partners have been instrumental in increasing our procedural volumes with their physician relationships. During the Q1, we added 7 additional centers to our joint venture with Dignity Health in Arizona through the acquisition of facilities, which were previously owned by Cigna's Evernorth Care Group. And upon quarter close, we formed a new seven center joint venture with Providence Health System in the Northern and Eastern San Fernando Valley of Los Angeles. Furthermore, our Dignity joint venture in Ventura County recently acquired 4 imaging centers in Oxnard and Ventura.

Speaker 1

Including these joint venture expansion and others upon which we are working, we expect to have close to 40% of our centers held within health system partnerships by year end 2024. We continue to make progress in the digital health segment. As some of you remember, we announced earlier this year the formation of the RadNet Digital Health Financial Reporting segment effective January 1, 2024, which combines the ERAD and DeepHealth operating system software businesses into what was our Clinical AI Reporting segment in 2023. The financial impact of these digital health businesses has great potential for RadNet, both as a customer of the deep health OS and AI solutions and of course as the owner of these businesses, which sell their solutions to customers outside of RadNet. Software businesses and particular SaaS based models can operate at significantly higher margin than RadNet's core imaging center segment and will require less capital investment.

Speaker 1

Within Dignity Health, we continue to sell service excuse me, within Digital Health, we continue to sell service and support ERAD solutions to new and existing customers, while we focus on the ongoing developments of the next generation DeepHealthOS cloud based operating system and generative AI modules. We continue to believe that DeepHealth OS can have a major impact in lowering costs and increasing efficiency in the areas of patient scheduling, pre authorization, insurance verification, reporting, revenue cycle management and analytics. We will begin testing some of the AI enabled automation tools of the Deep Health OS in the 3rd and 4th quarters of this year and aim to have commercially available solutions in the first half of twenty twenty five. Our enhanced breast cancer diagnostic mammography offering continues its rollout in Central and Northern California. We expect implementation to be substantially complete as early as the end of the second quarter.

Speaker 1

Adoption rates continue to rise on the East Coast and are now approaching 40%. While the implementation in Southern California is more recent, we are encouraged from initial adoption rates, which are significantly higher than those experienced at the beginning of the East Coast rollout. Aidan's Lung and Quontiv Prostate and Neuro AI Solutions are also expanding their customer base predominantly in Europe. This has been highlighted in the United Kingdom where AIDENCE is the partner of choice for the 4 country rollout of the NHS targeted lung health check lung cancer screening program. Finally, we continue to improve liquidity and financial leverage.

Speaker 1

We ended the Q1 with a cash balance of $527,000,000 and a net debt to adjusted ratio of slightly more than one time. Included in that cash balance were approximately $219,000,000 of net proceeds from a successful stock offering we completed in March. Additionally, subsequent to the end of the Q1 and completed on April 18, we opportunistically refinanced our debt facilities. With this financing, we were able to reduce our cost of capital, extend maturities and add an additional approximately $168,000,000 to RadNet's cash balance. With all of this, RadNet is in the best financial condition in its history and is poised for accelerated growth.

Speaker 1

At this time, I'd like to turn the call back over to Mark to discuss some of the highlights of our Q1 2024 performance. When he is finished, I will make some closing remarks.

Operator

Thank you, Howard. I'm now going to briefly review our Q1 2024 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 first quarter performance. I will also provide an update to 2024 financial guidance levels, which were released in conjunction with our 2023 year end results in March. In my discussion, I will use the term adjusted EBITDA, which is a non GAAP financial measure.

Operator

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 non cash equity compensation. Adjusted EBITDA includes earnings 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 stockholders is included in our earnings release. With that said, I'd now like to review our Q1 2024 results.

Operator

For the Q1 of 2024, RadNet reported total company revenue of 431 point $7,000,000 and adjusted EBITDA of $58,500,000 Revenue increased $41,100,000 or 10.5 percent and adjusted EBITDA increased $10,300,000 or 21.4 percent as compared with the Q1 of 2023. Breaking this performance down to the individual operating segments, our Imaging Center segment reported revenue of $417,000,000 and adjusted EBITDA of $54,900,000 This was an increase of $37,600,000 or 9.9 percent in revenue and an increase of $6,800,000 or 14.1 percent in adjusted EBITDA as compared with last year's Q1. Driving this performance were strong aggregate and same center procedural volumes, the impact of higher reimbursement we are receiving from commercial and capitated payers, the gradual movement towards advanced imaging and tight expense control. The Digital Health segment reported revenue of $14,700,000 and adjusted EBITDA of $3,500,000 during the quarter. Revenue increased $3,600,000 or 32.3 percent and adjusted EBITDA increased $3,500,000 or 17,500 percent as compared with the Q1 of 2023.

Operator

Digital Health's significant growth was due in part from a $2,500,000 or 118.8 percent increase in AI revenue, which climbed to $4,700,000 during the Q1 of 2024. Total company net loss for the Q1 of 2024 was $2,800,000 as compared with a total company net loss of 21 $1,000,000 for the Q1 of 2023. Net loss per share for the Q1 of 2024 was negative 0 point 0 $4 compared with a net loss per share of negative $0.36 in the Q1 of 2023 based upon a weighted average number of diluted shares outstanding of 69,300,000 shares in 20 20 4 57,700,000 shares in 20 20 4 57,700,000 shares in 20 23. There were a number of unusual or one time items impacting the Q1 including the following: $1,200,000 of non cash gain from interest rate swaps $1,000,000 expense related to leases for our de novo facilities under construction that have not yet opened for operations, dollars 2,000,000 non cash increase to contingent consideration related to completed acquisitions and $3,300,000 of non capitalized research and development expenses with respect to our new DeepHealth Cloud OS and generative AI. Adjusting for the above items, total company adjusted earnings was $5,000,000 for the quarter and diluted adjusted earnings per share was $0.07 per share during the Q1 of 2024.

Operator

This compares with total company adjusted loss of $13,000,000 and diluted adjusted loss per share of negative $0.22 during the first $2 4, as compared with the prior year's Q1, MRI volume increased 11.7%, CT volume increased 9.1% and PETCT volume increased 17.5%. Overall volume taking into account routine imaging exams inclusive of X-ray, ultrasound, mammography and all other exams increased 5.7% over the prior year's Q1. On a same center basis, including only those centers, which were part of RadNet for both the 1st quarters of 20242023, MRI volume increased 9.9%, CT volume increased 6.5% and PETCT volume increased 15.3%. Overall, same center volume taking into account all routine imaging exams increased 3.8% over the prior year same quarter. In the Q1 of 2024, we performed 2,646,951 total procedures.

Operator

The procedures were consistent with our multi modality approach, whereby 74.3% of all the work we did by volume was from routine imaging. Since we now have a table of our aggregate procedure volumes broken down by modality in our earnings release, I won't go through the numbers, but want to make the following points. In his remarks, Doctor. Berger mentioned that we are experiencing a slow shift to higher acuity procedures or what we call advanced imaging. In the Q1 of this year, 25.7% of our procedures were from MRI, CT and PETCT.

Operator

In last year's Q1, this metric was 24.5%, a shift of 1.2% of our procedure volumes towards advanced imaging. With higher pricing and better margins, more advanced imaging improves our financial results, including our operating margins. Overall GAAP interest expense for the Q1 of 2024 was $16,300,000 as compared with $15,700,000 during last year's Q1. In the Q1 of 2024, cash interest expense, which includes payments to and from counterparties on our interest rate swaps and net interest income from our cash balance was $10,500,000 This compares with $17,500,000 in the Q1 of 2023. The lower cash interest expense this quarter is primarily the result of more interest income on larger cash balances as well as the timing of cash interest paid on our term loan.

Operator

With regards to our balance sheet, as of March 31, 2024, unadjusted for bond to term loan discounts, we had $317,100,000 of net debt, which is our total debt at par value less our cash balance. This compares with $789,200,000 of net debt at March 31, 2023. Note that this debt balance includes New Jersey Imaging Networks debt of $142,500,000 for which RadNet is neither a borrower nor guarantor. As of March 31, 2024, we were undrawn on our 1 $195,000,000 line of credit and had a cash balance of $527,000,000 At March 31, 2024, our accounts receivable balance was $189,600,000 an increase of $25,900,000 from year end 2023. The increase in accounts receivable is primarily the result of some collection delays resulting from the cyber attack on changed healthcare and the normal Q1 effect of cash collections from the resetting of patient deductibles each year in January.

Operator

Despite the impact from the change health care breach, our DSOs or days sales outstanding was 34.9 days at March 31, 2024 near our historic low. Through March 31, 2024, we had total capital expenditures net of proceeds from the sale of imaging equipment of $64,400,000 This total includes $6,900,000 spent under equipment notes and the remainder spent in cash. Note that each year, we front load the majority of our capital decisions into the 1st part of the year and have been spending extraordinarily on growth CapEx to fund the 12 de novo facilities in construction, which are scheduled to open before year end. At this time, I'd like to update and revise our 2024 financial year guidance levels, which we released in conjunction with our 4th quarter year end 2023 results. Given the positive trends we are experiencing in virtually all aspects of our business and the strong financial performance of the Q1, which is continuing into the Q2, we are revising upwards certain guidance levels in anticipation of financial results that we believe will exceed our original expectations for 2024.

Operator

For revenue, we increased our guidance level for the Imaging Center segment by $25,000,000 both at the low end and the top end of the range. Also for the Imaging Center segment, we've increased our EBITDA guidance by $5,000,000 at the low end and the high end of our range. Our guidance level is now $255,000,000 to $265,000,000 For capital expenditures for the Imaging Center segment, we increased our guidance both at the low end and the high end of the range by $5,000,000 For cash paid for interest, due to the refinancing transaction and our much larger cash balance, we decreased our cash paid for interest this year by $3,000,000 both at the low end and high end of the range and anticipate our cash interest expense to be $37,000,000 to $42,000,000 and we increased our free cash flow generation guidance level by $3,000,000 to $68,000,000 to $78,000,000 For the Digital Health segment, we increased our EBITDA guidance by $1,000,000 both at the low end and the high end of the range to $13,000,000 to $15,000,000 We increased our non capitalized R and D expenditures by $1,000,000 to $12,000,000 to $14,000,000 and all other guidance ranges remain the same for the digital health platform.

Operator

I'll now discuss reimbursement with respect to Medicare. With respect to Medicare reimbursement for 2025, there's nothing to report at this time. As is typical each year, we are expecting CMS to release a preliminary rate schedule sometime in June or July, at which time we will analyze CMS' proposal and our industry's lobbying groups will provide CMS our industry's feedback. At the time of our Q2 financial results call, we will be in a position to comment on CMS's proposal and its impact, if any, upon RadNet's future results. However, we did receive some good news in March regarding 2024 Medicare rates.

Operator

Effective March 9 this year as part of the Consolidated Appropriations Act, 1 point 7 2% of the 3.4% scheduled reduction in the conversion factor of the 20 24 Medicare fee schedule was eliminated on a prospective basis. The reduction of the cut applies to all of our Medicare billings from March 9 through the end of this year. As some of you may remember, the original proposed cut was going to reduce our 2024 revenue by an estimated $7,000,000 to $8,000,000 Thus, the mitigation gives back almost half of this amount, thereby increasing our 2024 revenue by $3,400,000 relative to our original expectations and budget. At this point, I'd like to turn the call back to Doctor. Berger, who will make some closing remarks.

Speaker 1

Thank you, Mark. As we move towards the half year point of 2024, we are excited about the initiatives we have for the remainder of the year. We are particularly encouraged by the progress we are making in digital health. As we continue to improve and accelerate growth in the core imaging center business, our digital health initiatives are poised to help us drive more revenue, reduce costs and increase margins. We remain convinced that the successful future of any imaging business will be heavily dependent upon the automation and efficiency by which patients and clinical data is managed, analyzed and processed.

Speaker 1

This is the driver for our development of the new dTEL OS, which will be the delivery platform for solutions which automate business processes and more effectively manage patient and clinical data. We expect Deep Health OS to further automate processes that today principally rely on human labor in the areas of patient scheduling, clinical reporting, medical coding, sales and marketing, workflow improvement and analytics. In this vein, we are currently making investments in foundation generative AI models. It is faster and less expensive for data scientists to use pre trained foundation models to develop new machine learning applications rather than train unique machine learning models from the ground up. When trained on broad data sets, these models can support a diverse range of use cases.

Speaker 1

Task that foundation models can perform, including language processing, visual comprehension, code generation and human decision making. Advances in available foundation models will enable us to design and test AI solutions more quickly and at a lower cost, giving us a distinct advantage when applied to the enormous database of clinical information we own. While we develop DeepHealth OS, we continue to grow revenue from our clinical AI solutions for breast, lung and prostate cancer screening. Our objective is to design and deploy these tools and others that lower the cost and increase the accuracy of cancer diagnosis in a form that can be packaged to create widespread population health initiatives and screening. Our Breast Cancer AI and the EBCD program exemplifies flies this opportunity.

Speaker 1

Our Breast AI is improving the productivity and accuracy of our radiologists, while providing a valuable benefit to our patients for which they are willing to self pay. We are formulating similar screening programs for prostate, lung and other chronic diseases for both domestic and international markets as we firmly believe that healthcare needs to shift towards prevention and early detection and not just focus on treating patients who are already sick. We look forward to updating you further on the progress of our digital health initiatives in the coming quarters. Operator, we are now ready for the question and answer portion of the call.

Operator

And our first question today comes from Brian Tranquil from Jefferies. Please go ahead with your question.

Speaker 2

Hey, good morning guys. Congrats on a really, really strong quarter. Maybe my first question, just given the strength that we're seeing here, curious Mark or Howard, what you can or what you are seeing in terms of the continued strength maybe into the quarter. I know, Mark, you alluded to that a little bit, but also pricing seems strong. So maybe if you can share with us any color on the pricing strength as well?

Speaker 1

Good morning, Brian. Thank you for your question. In regards to pricing, we have over the past several years tried to transform at least RadNet from being what we have traditionally called ourselves price takers to at least the opportunity to sit down and negotiate pricing with the various payers other than Medicare, of course, and Medicaid. But this past year and starting out in 2024, we've taken a position, particularly given the enormous demand that we have in backlogs, that contracts as they come up for renewal need to be at pricing levels that we think are appropriate, not only for maintaining and sustaining the health of our company and for the benefit of our patients and referring physicians, but take into account increasing costs primarily for labor that we have been incurring now for the past couple of years. When we're not able to reach an agreement as to what we believe are fair and sustainable rates with a particular example that I can give you with our capitation contracts.

Speaker 1

We're prepared to go to fee for service and which effectively did happen over the latter part of last year and beginning of this year, where at least 2 of our contracts have moved to fee for service at rates substantially higher than what we were able to agree for renewing the contracts if we stayed with capitation. So I think this is really a function of finally being in a position where we're not just going to accept pricing from any payer that isn't consistent with the appropriate business models and need for us not only to cover increasing costs, but as you can see from our investment through our CapEx and building of de novo centers, a significant commitment that we have to improving access and improving the state of the art technology by which we pride ourselves as being top in the industry. So I think both of those have resonated well. We are successful virtually in all of our negotiations, and I think that has contributed in part to the improved margins that Mark discussed in his remarks. I think this is will be a continuing effort on our part to continually monitor not only what the appropriate rates are, but also the tools by which we and everybody else in healthcare are burdened by once we do a procedure, collecting those procedures.

Speaker 1

So our revenue cycle management group as well as the contracting groups work hand in hand as we come up with these contract renewals to make certain that we get paid for every procedure that we do and at rates that we think are not only consistent with our needs, but still remain far lower than the alternative in many of our markets for hospital based work.

Speaker 2

And then Howard, maybe just on the volume, just your expectation for the continuation of the strength you're seeing there?

Speaker 1

Yes. Well, I think that's perhaps one of the hidden milestones in our reporting here, Brian. There is clearly a trend towards using more advanced imaging as both the technology improves and as the marketplace realizes the benefits and begins to adopt these, a 1.2% increase in our overall procedural volume shifting from routine imaging to advanced imaging has been a remarkable achievement to demonstrate this. In particular, I would like to point out the enormous increase that we've seen in which we will continue to accelerate is PETCT. As I've discussed on previous remarks and post calls, we are the largest providers now of what they call PSMA PETCT scanning, which has been transformative for the diagnosis and treatment of prostate cancer and is a substantial component of the almost, I believe it was 15% same store increase in PETCT scanning between 2023 and our Q1 of 2024.

Speaker 1

So that we think will continue to accelerate as this becomes more and more adopted by not only the urologic community, but others who oversee the treatment of prostate cancer. I also think that we may eventually in the latter part of this year seeing similar increase in PETCT scanning as well as MR scanning from the new Alzheimer's drugs that has now been approved, but which require both PET CT scanning and ongoing MRI scanning for monitoring. At this point, I think in the Q1, we've done about 300 of these exams on a national scale with backlogs and demand for far more than that as more and more people not only become aware of this, but as the criteria for doing these become more adopted and accessible to make certain that the patients get reimbursed adequately or appropriately, I should say, from the various payers. So the trends that I think we're seeing in imaging, particularly advanced imaging will continue. We hope to also continue a shift into cardiac imaging and preventative cardiovascular disease that we will be investing more time and human resources in to building up for a procedure for screening for cardiac disease, which I believe will be a standard as far as population health and cardiovascular screening probably in the very near future and for which imaging is the poster child to managing good care and good outcomes.

Speaker 1

So I expect advanced imaging to also benefit from the technology improvements, which are allowing us to do better throughput on our existing systems, which we can upgrade or new systems where the processing time or scanning time has been reduced significantly and which allows us to facilitate and handle some of our back wall, which is another reason why we're increasing our advanced imaging business. So I think we'll be very happy to update you on our progress in all these regards in our second and subsequent quarters of this year.

Speaker 2

Awesome. And then maybe just a follow-up question for Mark. How are you thinking about balancing this spend on CapEx between maintenance CapEx and growth CapEx? Just curious what your philosophy is there at this point? Thanks.

Operator

Yes. Thanks for the question, Brian. That philosophy changes year by year depending upon what's on our plate. And but what I would tell you is that this year, we're projecting upwards of about $130,000,000 worth of CapEx spends. More than half of that is going to be earmarked for the construction and development of the de novo facilities.

Operator

As Doctor. Berger mentioned, we opened up 2 facilities in the Q1, 1 in Maryland, 1 in California. We've got 12 other facilities that are in various stages of construction and completion that should open up by year end. Most of these centers cost on average $5,000,000 to $6,000,000 to build. So if you're talking about 12 centers at $6,000,000 we're talking about $70,000,000 of CapEx spend just on those de novo facilities, which is more than half of our spend this year.

Operator

So we have shifted a fair bit of our CapEx and we are spending extraordinarily right now to accelerate growth, which we expect to start seeing some contribution from these centers in the latter half of this year and into 2025. So it's been a strategic Congrats again. I'm sorry, Gray? Did you say something? Sorry.

Operator

Yes, no problem. So we have had a strategic change or strategic shift in our thinking around CapEx because of the opportunity that exists to accelerate growth due to the fact that there's just significant volumes out there, heavy volumes that today we're not able to avail ourselves of either because we've got capacity constraints in some of these markets or we just simply don't have access points that can service patient populations that currently today we're not servicing. All right. Got it. Thank you.

Speaker 3

Thanks, Brian.

Operator

Our next question comes from John Ransom from Raymond James. Please go ahead with your question.

Speaker 3

Hey, good morning. Just kind of an obvious question, but when you guys have a 100 basis point mix shift to higher cost scans. Is that pretty much dropped to the bottom line?

Speaker 1

Yes, it does, John. Are you talking about our margin improvement, John?

Operator

Yes.

Speaker 1

Yes. It was 120 basis points, but okay. Yes, but it's

Speaker 3

Well, hypothetically, every 100 bps I'm not saying hypothetically, every 100 bps is 100 bps would

Operator

be best as well. Yes.

Speaker 1

I think a substantial portion of that probably 80% of it in that range drops down to the bottom line, which is one of the reasons why we're very focused on reporting that this year more so than in prior years.

Speaker 3

And is that I know you've kind of talked about this, but I mean, it seems like that's just sort of a structural trend that will go out into the future?

Speaker 1

I believe so. Given all of that.

Operator

Yes. Okay.

Speaker 1

Yes. I think last year, I think it was contributed by the improvement in reimbursement and shift of higher profit margin business, the advanced imaging. I think in subsequent quarters years, it will be impacted by the implementation of our new DTE Health operating system and automation of what have been up to this point largely manual processes.

Speaker 3

Great. And just 2 others for me. As we think about the cadence of the year for AI ERAD, is that still on track to be is there any acceleration in that profitability curve or is it still on is that part of your $5,000,000 or is it still kind of on is most of the $5,000,000 in the core imaging sector?

Speaker 1

Yes. I think we expect some acceleration on two fronts. 1 is further implementation and adoption of our EBCD program, which we're very pleased with and I think has provided some outstanding results, one of which I'll mention and that was released interestingly this morning from the Cancer Moonshot White House program is that we have detected 450 cancers so far with the use of this breast screening tool that might have otherwise gone undetected. So that the notion of enhanced or earlier breast cancer detection is a reality. As we get further implementation on the West Coast, which is continuing to ramp up And as we continue to improve, I think the patient adoption of this, we could alter our guidance on that perhaps later or in subsequent quarters.

Speaker 1

Also some other initiatives that we're starting, one of which is what we're calling EPS or enhanced prostate screening is something that we're now rolling out as a self pay opportunity for men to come in at a fairly nominal price, get an MRI scan with artificial intelligence, even if they're asymptomatic and are just looking for greater confidence than routine blood tests that are used primarily for prostate screening. We expect that to be something that probably will become more apparent in our financial results towards the end of the year. But we've had some very good results and some test sampling that we've done on much like in breast screening, finding early cancers that are certainly going to lead to better outcomes for men who choose this pathway.

Speaker 3

Great. And then the last one for me, just on M and A. I know you don't put future M and A in your guide, but if we're spitballing and we're 6 months down the road, should we expect the probability of just more tuck in deals in existing markets? Or what are the odds do you think you'll wrestle one of these elephants to the ground? Thanks.

Speaker 1

Okay. I think tuck ins will be a continual part of our acquisition and growth opportunity. We find those to be very targeted in our existing markets, if you will, and both on the East Coast and West Coast, there's a constant pipeline of requests that we're getting for further opportunities in our existing markets. Much like we demonstrated in Houston, when we entered that market just this quarter, April 1. If there's other markets where we can find a good platform company to build a longer term presence in a market, we would look at those.

Speaker 1

Those may become a little bit more expensive than the tuck in acquisitions, but they do represent a longer term platform to expand our reach. So I think you can continue to see those along with the de novos as being a very important component of this year's growth.

Speaker 3

Great. Thanks so much.

Speaker 1

Thanks, Chad.

Operator

Our next question comes from Andrew Mott from Barclays. Please go ahead with your question.

Speaker 4

Hi, good morning. Wanted to follow-up on the Digital Health segment and the deep health capability. 1, can you help us understand what the adoption rate is for the EBCD AI option? And then would love to hear more on the cost savings and throughput efficiencies that this could drive in imaging centers? Thanks.

Speaker 1

Sure. Good morning, Andrew. Well, as I mentioned, I think in my remarks on the East Coast where we've had the longest experience with EBCD, our current adoption is about 40% of all of the patients that are offered EBCD that actually enroll and pay $40 for that procedure. We have found that to be consistent with our expectations and believe though that we can drive that number higher. We're hoping at least on the East Coast perhaps even by the second half of this year, that number could approach 50%.

Speaker 1

On the West Coast, the adoption rate is in the 32%, thirty 3% range. But that is also very comforting to us because that's higher than what we started off with on the West Coast. I'm sorry, on the East Coast. And the West Coast has learned some of the tools. But I have to caution everybody that this is an educational process.

Speaker 1

It's not something that we simply ask somebody to sign up for without giving them a lot of the background and benefits of these tools. So as we learn more and more about what the issues are that and questions that our patients have for these procedures, the more I think effective we are in communicating that benefit and the more receptive our patients are. I would tell you it is my firm belief that artificial intelligence as it relates to breast screening and mammography is state of the art and will be the routine sometime in the future and we expect there to be some form of reimbursement for it. But during this period, we want our patients to benefit from the investments that we've made and the opportunities. I would also like to include that not only do we detect the breast cancers more accurately and earlier, we're also having an impact on recall rates.

Speaker 1

So that fewer of our patients when some sort of further diagnostic work is necessary is being determined, artificial intelligence is giving greater confidence that some of these callbacks in fact just need to be watched and don't need to go through further diagnostic workups such as biopsies and other procedures. So the benefit here is substantial in both regards. In terms of our radiologists, I think we're comfortable feeling that our radiologists are more accurate and confident now as they get more and more use of artificial intelligence. And we think we can get perhaps as much as a 15% to 20% improvement in their productivity simply because the majority of the breast screening that we do are normal scans and they have a greater mammogram being normal. So I think mammogram being normal.

Speaker 1

So I think there's a win, win, win for everybody in this remarkable new achievement for which we are continuing to evolve further tools not only in breast, but as we mentioned in lung and prostate, where we expect similar results and benefits. I'd also like to again mention the fact that we're going to embark on an accelerated program for cardiovascular screening for which artificial intelligence tools have now been approved for reimbursement that give further benefit to our patients rather than just doing the CT scan itself. So I think all of this will be part of our deep health operating platform. And I think you can look forward to us talking about other AI tools that we will expand into to help improve both diagnostic accuracy and productivity for our radiologists.

Speaker 4

Great. Thanks for the color. And then secondly, I think your other category and your payer mix ticked up about 100 basis points sequentially. Just want to clarify what that other category is and what's behind that uptick? Is that tied to the higher EBCD volumes as well?

Speaker 4

Thanks.

Operator

Yes. It's everything that isn't just patient scanning. So it's management fees. It's the category that doesn't fit into MRI, CT, X-ray, ultrasound and mammography procedures such as certain interventional procedures. And part of it had to do with when we the reason why it shifted, I think, about 1% over quarter over quarter.

Operator

It had to do with when we rejiggered our operating segments between the imaging center and the digital health segment and moving that eRAD business out of the Imaging Center segment changed the proportions of those exams. But nothing fundamentally has changed with our business. I was actually talking about

Speaker 4

the other category, the payer mix, not the procedure mix.

Operator

I'm sorry. I thought you're talking about the procedure mix.

Speaker 1

The Yes, that would be from ABCD because that's self paced, so it's in the other category.

Operator

Yes, that's likely the case, Andrew. I'll double check the reports and follow-up with you.

Speaker 1

Yes, that

Speaker 4

makes sense. And then are there any metrics you can share to give us a sense of the backlog or unmet demand? I think it's clear that there's strong demand backdrop and you have this patient backlog, but just curious if there's anything you can share with us to give us a sense of that unmet demand. Thanks.

Speaker 1

I think that the backlogs are a function of number 1, more use of imaging, greater adoption of it, aging population, growing population, all of which require more and more imaging. And I think a greater than previously determined shift away from hospitals. I think there's more effort on the part of payers to direct the business away from hospitals, again by education and giving the patients an alternative that they might not have previously realized were available to them. And I think this is important and has become more important as deductibles have risen with some of the newer products. When you stop to think about how much if a patient goes to a hospital, they have to pay for their co pay segment of a scan.

Speaker 1

These numbers are rather substantial and yes, eat through their deductible very, very quickly and their effective use of that cash to go further for more health services if they elect to go to an outpatient facility, where as we've talked about in the past, the scanning differential can be 3 to 5 or even more times in a hospital. So I think all of these are coming together. And I think perhaps the other reason is that things that were more esoteric in the past that are now becoming more familiar and patients more comfortable with things like PET CT scanning. Maybe in the past people were thought were only done at veterinary clinics, but particularly as things like prostate screening and now for Alzheimer's screening, as well as the general use of it in cancer for diagnostic staging are now just being recognized by everybody of the enormous value that these tools are. So there's greater adoption and greater demand for this coming from all sectors.

Speaker 1

I would say that also our experience for increased demand is not unique to RadNet. I think almost all of the people that we talk to in the industry, other large chain operators as well as acquisitions, when we talk to our various opportunities here, are all experiencing increase in demand. So what makes RadNet a little bit different is that our ability to take advantage of this by deploying capital either by doing acquisitions or building de novo centers allows us to address these kind of opportunities, which benefit not only our patients and referring physicians, but our communities as a whole. So I just think that right now, imaging is enjoying a very important role in delivery of healthcare. And as I've said previously, I believe it is the gateway for population health and I believe more and more people are coming to agree with that statement.

Operator

Yes. And specifically to your question, Andrew, from the standpoint of what KPIs we look at in order to determine how big our backlogs are and whether we have to invest in those centers to expand them or build new centers, we particularly look at advanced imaging and how long it takes when a patient calls into our scheduling department, how long it takes them to actually come in and get their exam performed. And if for advanced imaging, if someone's calling up for an MRI or a PET CT and is concerned with that they have a serious injury or serious disease process, if we can't get that patient with a matter of 3 or 4 days, we're going to end up losing some of that business. And because the patient is not going to wait around a week or 2 to figure out if he or she has cancer. So we manage those that scheduling, we try to as much as we can, load balance with our scheduling departments that are centralized in that region and we'll try to direct that patient to another center that might have a scanning slot that's open with less waiting time.

Operator

But unfortunately, what we're facing right now are some real scheduling difficulties, which is why we've determined that we need to build new centers and increase capacity. The newer equipment, particularly in the areas of MRI have faster throughput these days, better post processing software. So we are able to do more scanning in the same amount of work hours. And we've been as much as we can over the last couple of years trying to upgrade our MRI scanners the newer technologies. But this is the highest class problem we can have, but it's still a problem nonetheless because we don't want to lose this patient volume to our competitors.

Operator

And referral patterns, physician relationships tend to be sticky. And so once you lose business to someone else, it's hard to get that business back, which is why we're trying to expand our capacity so quickly.

Speaker 4

Great. Thanks for all the color. Appreciate it.

Operator

And our next question comes from wanxi from B. Riley Securities. Please go ahead with your question.

Speaker 5

Good morning. Congrats on a great quarter and thank you for taking our questions. I have a couple of them. So first, if we take a step back, you have different market shares in different states. I'm curious what was the reason to have higher market share in some states and the lower market share in the other?

Speaker 5

In other way, was it because of lack of good acquisition targets? Or do you think you've reached certain critical mass in that states? I think here in Texas or even new states, if you are expanding further, what would be the criteria or goal there?

Operator

Sure. Good morning, Yuan. So when we look at a market, we don't necessarily have a market share in mind. We have found in our operating history that there are tremendous benefits to operating at scale in local markets, most of which are around centralizing a lot of the business processes that we perform on behalf of our centers. For instance, we have the centralization of scheduling, pre authorization, insurance verification, revenue cycle, among other marketing, among other things.

Operator

And so when we think about building scale in a regional market, it's not necessarily driving towards a particular market share. It is really the result of how we can grow the business profitably using the benefits of scale. And so when we look at all of our markets, we want to have that benefit or we want to be able to achieve those benefits of scale. And there isn't necessarily a magic market share that where we can do that. When you look at where our sites are today, we certainly don't have a lot of scale in the state of Florida.

Operator

All 4 of our centers are in one particular market there in the Treasure Coast, Port St. Lucie, Stuart area of Florida. But that's a state where we would love to expand given the right opportunities. Arizona, we feel like we're not yet getting the benefits of the scale that we could possibly have in the Phoenix area. And we did make an acquisition there with our partner Dignity Health, where we acquired 7 additional centers this quarter, as Doctor.

Operator

Berger mentioned in his prepared remarks. So I think the short answer to your question is we'd like scale in all of the markets that we have because of the ability to manage these business processes more efficiently and get better profitability from our assets.

Speaker 5

Got it. That's very helpful. And maybe one additional housekeeping question here. Great to see the increase of PETCT volumes related to PSMA. I'm curious, did you guys see any update or update on iospermor related procedures, both the PETCT part as well as the MRI part in 1Q or recently in April?

Operator

Yes. We are starting to see more volume come in, in the Alzheimer's area, both on the initial PET CT screening for the presence of these amyloid plaques as well as some ongoing MRI monitoring once these patients are on these therapies. Although we're not seeing a lot of that because these patients are just starting to go on to these therapies. There's been a delay in qualifying a lot of these patients on to some of the newer drug therapies and getting the initial diagnostic imaging approved to qualify these patients. The decision for this was passed down to the individual regional Medicare administrators or what we call the MACs.

Operator

And that has caused a delay, but we are starting to see some uptake. But we're talking about patients in the 100 of patients, not the 1,000 or tens of thousands of patients that you would expect we would have expected to see by now. We still remain optimistic that this is going to happen. I think these therapies prove to be efficacious in their clinical trials. It's going to lean heavily on advanced imaging, both on the initial PETCT screen to determine whether these patients are available are eligible for these therapies as well as the ongoing MRIs that are indicated every 3 to 4 months for at least 18 months when these patients go on these therapies.

Operator

So I think this is just another example that gives us encouragement and optimism about the continued use of advanced imaging. I mean, Doctor. Berger mentioned cardiac imaging, which is growing in popularity, at the PSMA test on the PETCT side, Alzheimer's and there's others that are coming down the road, particularly in the area of PETCT, where there is a lot of development of some of these new radioactive tracers that are targeting very specific solid tumors, cancer tumors in the body. So I think it's going to be an ongoing process that unfolds here. And our next question comes from Jim Sidoti from Sidoti and Company.

Operator

Please go ahead with your question. Hi, thanks for taking the questions.

Speaker 1

I know it's been a long call. Just two quick ones for me. Can you update us on how things

Operator

are going in Texas? I know it's been a while since you entered a new market. How do

Speaker 1

you find this market? Is it easy to get paid? And is it easy to do business there?

Operator

Yes. Well, I mean, it's a little hard to say now. So we completed the first acquisition of 7 centers. We completed that on April 1. So we don't have a whole lot of operating experience there as of yet.

Operator

I think the integration of that business and what we call the ratanization is just at the very beginning stages. The other acquisition that we've announced of the American Health Imaging Centers in Houston, that's scheduled to close kind of in the June, July timeframe. And we anticipate some further integration of those two operations to create a platform from which we can grow at that point. So I think we'll have a lot better feeling of and a better way of answering your questions in the coming quarters. But early indication is that this is a very attractive market, good demographics, good payer relationships.

Operator

We think that we've identified and partnered with an excellent group of radiologists and they're motivated as are we to really grow that platform through further acquisitions, de novo centers. There's a number of hospital relationships in that market that could be interesting to us as we continue to grow there. So I think we're highly encouraged from what we see so far. Okay. All right.

Operator

And second one,

Speaker 1

can you just give us updated share counts what we should be using for Q2 and Q3 this year?

Operator

Could you repeat that? Sorry, it's a little difficult to hear you. Sorry, it is a question on what's the right share count for the rest of the year? Sure. So I think we have somewhere in the 73,000,000 to 74,000,000 outstanding shares.

Operator

We typically wouldn't unless we're doing any acquisitions using our stock for the remainder of the year, We don't expect that share count to go up significantly. Generally speaking, it's the Q1 where we issue equity to our existing employee base as part of their annual compensation. So that was already completed in the Q1. So I wouldn't expect anything to increase our shares materially between now and the end of the year unless there's some acquisition where we choose to use stock. Great.

Operator

Thank you. Thanks, Jim. And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the floor back over to management for any closing remarks.

Speaker 1

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.

Operator

Ladies and gentlemen, with that, we'll be concluding today's conference call and presentation. We thank you for joining. You may now disconnect your lines.

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