Good day, and welcome to the RadNet, Inc. Fourth Quarter 2023 Financial Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Mark Stolper, Executive Vice President and Chief Financial Officer at RadNet. Please go ahead.

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 2023 financial results. Before we begin today, we'd like to remind everyone of the safe harbor statement under the Private Securities Litigation Reform Act of 1995. This presentation contains forward-looking statements within the meaning of the 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, 2023 filed yesterday. 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 now 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 2023 results, give you more insight into the factors which affected this performance, and discuss our future strategy. After our prepared remarks, we will open the call to your questions. I'd like to thank all of you for your interest in our company and for dedicating a portion of your day to participate in our conference call this morning. Let's begin. I am very pleased with the strong performance in the fourth quarter. The Imaging Center segment revenue increased 8.6% and adjusted EBITDA increased 11% from last year's fourth quarter, resulting in RadNet's quarterly records for both revenue and adjusted EBITDA. The performance was the result of a continuation of strong industry trends and execution on a multi-pronged growth strategy focused on driving same-center performance, the expansion of existing and establishment of new health system partnerships, and investments made in de novo imaging centers and newer technologies of equipment, software, and AI solutions. We experienced a 7.9% in aggregate and 5.5% same-center procedural volume growth in this year's fourth quarter relative to last year's same quarter. Demand for RadNet's services remains robust in virtually all core markets as outpatient imaging continues to be shifted from more expensive hospital settings towards more cost-efficient ambulatory sites like the ones RadNet operates. Contributing to the record adjusted EBITDA performance was also a labor market that, while still challenging to attract and retain talent, has stabilized and improved since its most challenging post-COVID periods. We continue to focus on strengthening the balance sheet by managing liquidity and financial leverage. At the year-end 2023, RadNet's cash balance was over $342 million, and the net leverage ratio was under 2x adjusted EBITDA. Our days sales outstanding (DSOs) at December 31, 2023, was 32 days, RadNet's historic low, and we believe among the lowest in the industry. The improvement in revenue cycle operations and collections has contributed to our ability to make important investments in RadNet's future, particularly in the area of de novo facility development. We began a significant de novo expansion strategy in 2022, which continued throughout 2023. We are making extraordinary capital investments in developing facilities which should improve our capacity and patient access. RadNet should begin benefiting from the financial contribution of these facility openings in 2024, during which we expect to see our first patients in about a dozen of these new centers. These de novo centers are located in markets where we are experiencing patient backlogs that require additional capacity or in locations where we currently lack access points to service identified patient populations. A second area of investment and focus has been in expanding joint venture and health system initiatives. We currently have 24 system joint ventures representing over 35% of our 366 centers. We continue to believe that we could have more than half of our centers in health system partnerships within three years. As an example, in September of 2023, we announced a significant expansion of our relationship with Cedars-Sinai Medical Health System in the Los Angeles area, establishing a new joint venture called Los Angeles Imaging Group, as well as broadening an existing three-center joint venture, Santa Monica Imaging Group, to include the contribution of seven additional centers from both RadNet and Cedars-Sinai. Forward-thinking and entrepreneurial health systems like Cedars-Sinai are increasingly seeking a long-term viable strategy for diagnostic imaging, and RadNet represents an attractive strategic direction for these organizations. As we look ahead to 2024, we anticipate the expansion of several health system relationships and the establishment of new joint venture relationships. Tuck-in acquisitions will also remain an active part of RadNet's growth strategy and investment. The diagnostic imaging industry remains fragmented, and smaller operators are unable to provide the patient access and level of care that can be facilitated today with investments in newer hardware, software, and artificial intelligence technologies. Furthermore, the rising cost of capital, increased interest rates, reimbursement pressure from Medicare and other private payers, and the necessity of scale drive efficiencies and profitability, making joining the RadNet network more attractive than ever. In 2023, we completed several tuck-in acquisitions in Southern California, New York, and Delaware. Earlier this week, some of you may have seen the announcement that we signed a definitive agreement to purchase the assets of seven imaging centers in the Greater Houston, Texas metropolitan area from Houston Medical Imaging. Houston represents the first new geographical market RadNet will have entered since 2020. The Houston metropolitan marketplace encompasses about 7.3 million people and is the fourth most populous city and the second fastest-growing metropolitan area in the United States. Houston Medical Imaging, with its seven well-recognized facilities, approximately 140 team members, and over 20 radiologists, has been a stable factor in the radiology market in use for over 30 years. We believe HMI is a platform for which to grow a new core network for RadNet. We are confident of the opportunity for further acquisitions, de novo build-outs, health system partnerships, and other means of expansion, which include bringing our AI and leading-edge clinical and operating digital health solutions to the patients and referring communities of the Greater Houston area. As we move further into 2024 and beyond, we will continue to have a disciplined approach to evaluating opportunities to expand outside of our core markets. We continue to invest and pursue growth opportunities in artificial intelligence and radiology software solutions. The implementation of our Enhanced Breast Cancer Detection (EBCD) screening mammography service is continuing on the West Coast. We are now fully implemented in Southern California and Arizona and will begin rolling out the program in approximately 18 Central and Northern California mammography locations in March. We are pleased to report that we are experiencing higher initial adoption rates on the West Coast as a result of the learnings from our East Coast experience. We continue to work with our partners in the United Kingdom on the expansion of the targeted lung health check lung cancer screening program, where DeepHealth's agents division is providing the principal AI solution in the four-country rollout. We expect to see continued growth in AI from this program and other similar lung stream programs during 2024. In 2023, our AI segment revenue grew 278% from these initiatives, and AI revenue in 2024 is anticipated to grow over 65% with continued adoption of artificial intelligence solutions. We further believe that RadNet's AI business will reach adjusted EBITDA breakeven by year-end 2024. In 2023, we announced the development of our DeepHealth OS AI-powered health informatics portfolio, designed to dramatically drive efficiency and transform the role of radiology in healthcare. At the heart of that offering is a cloud-native operating system, which leverages both clinical AI that improves disease detection and incorporates generative AI to efficiently orchestrate patient engagement and care delivery. We will begin internal implementation during 2024 and expect that many of the DeepHealth OS tools will be incorporated into RadNet's workflow by year-end. The expectation is that external customers, including the over 200 current customers of eRAD, could begin licensing the commercialized DeepHealth OS solutions beginning early in 2025. This brings me to the final point I would like to make before turning the call back to Mark. In last meeting's financial results press release, we announced the formation of the RadNet Digital Health financial reporting segment effective January 1, 2024, which combines the current eRAD and DeepHealth OS software businesses into what was our clinical AI reporting segment throughout 2023. As we have been growing our eRAD software solutions and AI businesses separately, we have increasingly recognized that these businesses are quite different than our core imaging center business in terms of their operational and financial profiles and that they require a different level of focus and expertise to manage. Over the past year, we have been able to attract an executive team with experience in managing digital health businesses. The financial impact of these digital health businesses has great potential for RadNet, both as a customer of the DeepHealth 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 in particular, SaaS-based models, can operate at significantly higher margins than RadNet's core imaging center segment and require less capital investment. The Digital Health segment is projected to be profitable in 2024 and grow in the range of approximately 20% to 40% in 2024 over 2023. At this time, I'd like to turn the call back over to Mark to discuss some of the highlights of our fourth quarter and full year 2023 performance as well as discuss our 2024 guidance. When he is finished, I will make some closing remarks.

Thank you, Howard. I will now briefly go over our performance for the fourth quarter and full year 2023, highlighting what I consider to be significant items. I will further explain certain aspects of our financial statements and provide insights into the metrics that influenced our performance. Additionally, I will outline our financial guidance for 2024, which was included in our financial press release this morning. In my discussion, I will refer to adjusted EBITDA, a non-GAAP financial measure defined as earnings before interest, taxes, depreciation, and amortization, excluding losses or gains on equipment disposal, other income or loss, loss on debt extinguishments, and noncash equity compensation. Adjusted EBITDA accounts for equity earnings in unconsolidated operations and deducts allocations of earnings to non-controlling interests in subsidiaries while adjusting for noncash extraordinary and one-time events that occurred during the period. A complete reconciliation of adjusted EBITDA to net income or loss attributable to RadNet, Inc. common shareholders is available in our earnings release. Now, I will review our results for the fourth quarter and full year 2023. For the fourth quarter of 2023, RadNet reported revenue from its Imaging Center segment of $415.3 million and adjusted EBITDA of $68.3 million, excluding AI revenue of $5.1 million and AI adjusted EBITDA losses of $2.5 million. Compared to the fourth quarter of last year, revenue from the Imaging Center segment increased by $32.8 million or 8.6%, and adjusted EBITDA rose by $6.7 million or 11%. Including our AI segment, total company revenue for the fourth quarter of 2023 was $420.4 million, a 9.5% increase from $383.9 million in the same quarter last year. Adjusting for AI losses in the fourth quarter, total company adjusted EBITDA was $65.8 million in the fourth quarter of 2023 compared to $57.2 million in the fourth quarter of 2022, representing a growth rate of 15%. In comparison to the prior year's fourth quarter, MRI volume grew by 13.2%, CT volume by 11.3%, and PET/CT volume by 18.5%. Overall volume, including routine imaging exams like x-ray, ultrasound, and mammography, increased by 7.9% compared to the previous year. On a same-center basis, MRI volume grew by 10.8%, CT volume by 8.2%, and PET/CT volume by 17.4%, with same-center volume for all routine exams rising by 5.5%. Adjusted earnings from the Imaging Center segment were $13.7 million, with diluted adjusted earnings per share at $0.20 in the fourth quarter of 2023, up from $0.11 in the fourth quarter of 2022. Unusual items impacting adjusted earnings in Q4 2023 included a $7.2 million noncash loss from interest rate swaps, $621,000 severance related to cost-saving initiatives, $880,000 for de novo facility leases, $222,000 in acquisition costs, and a $5.1 million loss on lease abandonment, among others. On an unadjusted basis, RadNet reported a net loss of $1.9 million for the fourth quarter of 2023, compared to a net loss of $934,000 for the same quarter in 2022. The net loss per share for Q4 2023 was negative $0.03, compared to negative $0.02 in Q4 2022, based on a weighted average of 67.9 million diluted shares in 2023 and 57 million in 2022. Our overall GAAP interest expense for the fourth quarter of 2023 was $16.6 million, up from $15.4 million in the previous year. Cash paid for interest was $5.6 million, down from $8.9 million in Q4 2022, influenced by the timing of our SOFR elections despite higher interest rates. For the full year 2023, revenue from the Imaging Center segment was $1.604 billion, with adjusted EBITDA, excluding AI losses, at $245.1 million. Revenue increased by $178.5 million or 12.5%, and adjusted EBITDA rose by $36.1 million or 17.2% compared to 2022. The adjusted EBITDA margin for the Imaging Center segment improved to 15.3% in 2023, up by 60 basis points from 14.7% in 2022. Including the AI segment, total company revenue for full-year 2023 was $1.67 billion, a 13% increase from $1.430 billion in 2022. After including AI adjusted EBITDA losses of $12.8 million, total company adjusted EBITDA for 2023 was $232.3 million, compared to $192.5 million in 2022, an increase of 20.7%. For the full year, MRI volume rose by 13.3%, CT volume by 11.3%, and PET/CT volume by 18.5%, while overall volume, including routine imaging exams, increased by 7.9%. RadNet reported net income of $3 million for 2023, a decrease of about $7.6 million from 2022. Diluted net income per share for 2023 was $0.05, down from $0.17 per share in 2022, based on 64.7 million diluted shares in 2023 versus 57.3 million in 2022. Total GAAP interest expense for 2023 was $64.5 million. After adjusting for deferred financing fees and other items, the net cash interest expense for 2023 was $38.3 million. On the balance sheet, as of December 31, 2023, we had $465.3 million of net debt and were undrawn on our $195 million revolving credit line, with a cash balance of $342.6 million. Our accounts receivable balance was $163.7 million, down $2.7 million from the end of 2022, attributed to improved collections, which reduced our days sales outstanding from 38.8 days to 32 days, a record low. In 2023, total capital expenditures were $153 million, higher than initially budgeted due to the construction of new facilities opening around the end of 2023 or expected to open in 2024. As noted in our recent press release, starting in fiscal 2024, we will modify our operating and financial reporting segments. The eRAD software and health informatics businesses, previously included in our Imaging Center segment, will be combined with our AI segment to create a new Digital Health segment starting in Q1 2024. These businesses are highly profitable, producing $37.1 million in revenue and $20.7 million in adjusted EBITDA in 2023. We are restating our 2023 segment results to reflect the new structure as if it had been in place from January 1, 2023. While I won't go through all the numbers today, I want to emphasize key points. For the Imaging Center segment, we anticipate revenue growth of up to 8.5% and adjusted EBITDA growth of 11.4% to 15.8% in 2024. Although we expect elevated capital expenditures in 2024, the total amount should be about 10% to 15% lower than in 2023. We also project that free cash flow for the Imaging Center segment will roughly double in 2024. In the new Digital Health segment, we expect revenue growth between 21% and 41% and adjusted EBITDA growth between 51% and 77%. Most revenue growth will come from the Enhanced Breast Cancer Detection implementation and AI licensing for lung and prostate applications, primarily in Europe. The AI portion of Digital Health is projected to grow over 65% and reach breakeven by year-end 2024 in terms of adjusted EBITDA. Our guidance for the Digital Health segment reflects significant investments in developing our DeepHealth OS and generative AI modules that aim to reduce costs and improve efficiency in areas such as patient scheduling, preauthorization, insurance verification, and revenue cycle management. We believe these investments will benefit both our core imaging center business and current and future customers outside of RadNet. I will now turn the call back over to Dr. Berger for some closing remarks.

Thank you, Mark. As we look to 2024, we have reasons to remain enthusiastic about our future. The core imaging business is healthy and growing. Procedural volumes and patient demand are strong. Payers and patients are increasingly moving procedural volumes to our centers and away from hospital-based imaging operations that charge prices that are unsustainable in a healthcare system attempting to manage costs. In addition to the site of care shift taking place, the overall industry continues to grow, driven in part by advances in technology, which drives more medical indications for ordering diagnostic imaging procedures. Additionally, the population is aging and growing and continues to see non-basic preventive and cost-effective services. All these sectors continue to see patient demand. RadNet is ideally positioned for long-term growth and success in this dynamic marketplace. In a period where the cost of capital has risen significantly, we remain modestly leveraged and have more liquidity and capital resources as compared with virtually all of our other scale operators in the industry. This places us in the best position to pursue growth opportunities both organic and inorganic in a time when many others do not have the financial capacity or flexibility. But perhaps the most important aspect of this report is the formation of the RadNet Digital Health position. The future of healthcare will be substantially driven by artificial intelligence, and radiology can lead the way. A successful AI initiative relies on scale operations and access to large data sets. RadNet has accumulated both of these components over several decades of existence. The newly created digital health division will allow our stakeholders to better recognize the growth and success of this essential component of the RadNet family of services. In conclusion, we have never been more excited than we are today about what lies ahead for RadNet. We feel as if we are better positioned today than any other time in our history to execute on the multifaceted strategy that we have created. We look forward to updating our stakeholders throughout the rest of 2024 on our progress. Operator, we are now ready for the question-and-answer portion of the call.

The first question today comes from Brian Tanquilut with Jefferies.

Congrats on a solid quarter and a solid year. Maybe Howard, I'll ask you first. Obviously, volumes have been pretty strong and the outlook for 2024 looks like you're expecting continued strength in volumes. Just curious what you're seeing there. And then maybe if there's anything you can share with us in terms of the differentiation and performance between your JV centers versus the non-JV ones from a same store or from a volume perspective as well?

Brian, thank you. Let me try to answer this in two parts. As far as overall volume is concerned, we do have significant backlogs virtually in all of our markets. Part of that is driven by demand, and part of it is driven by the continued challenge that we have for labor. While I believe that this has improved and began that turnaround in perhaps the second part of 2023 and is continuing into 2024, it still compromises our ability to access all of the capacity that we've created. However, we feel that this issue will continue to be mitigated both through aggressive talent acquisition tools that we're employing as well as programs that we're using to help provide educational support to overcome the shortage of technologists and other administrative personnel. Part of this issue may relate to the announcement with a collaborative venture that we have with a nonprofit organization here in Southern California called JVS that we announced about two weeks ago. So this will be an ongoing initiative on our part. In regards to the differential in volumes, I should say that our enthusiasm stems from the understanding that when we combine RadNet's talents with the health systems' aggressive nature of incorporating physician delivery services, we've seen a shift from local competitors or even their hospitals into our centers, which has driven better profitability for them and for us. If it were possible, I wouldn't mind having all soon-to-be 400 centers in joint ventures because I believe that in addition to operational efficiencies and volume drivers, we also have better discussions or more robust conversations with payers for reimbursement. So that portion of our business, which we began to pursue more aggressively three years ago, has been a major contributor to the company's success. We think this is a very appropriate place for us to be in the overall healthcare marketplace as well as under the current economic circumstances.

I appreciate that, Howard. And then maybe my second question, as I think about your decision to enter Houston. Obviously, a little bit of a deviation from your legacy strategy on the coasts, right? So just curious what the thought process was and what it is about the Houston market that attracted you there? And then maybe sort of the expansion plan, right? Because you obviously price part of your strategy like being deep in the market so, and even joint ventures, as you said. So I'm just curious how you're thinking about the rollout of your RadNet model into the Houston market?

Well, as I've talked about in the past, Brian, we don't necessarily have a business development team that goes knocking on doors. We're looking for motivated sellers, and whether those sellers are in the markets that we're currently in or whether they're in markets that we might look to grow into. This was a situation where the operator had been looking for an exit strategy and didn't want to roll up into a larger operation, both for a number of reasons that Mark mentioned in his remarks about scale, stability, and access to capital and new technologies. When this operator approached us, they had already assessed the landscape of opportunities and felt that we were clearly the best of breed. Over the last several months, we've had active negotiations with them as we assessed the marketplace. Perhaps one of the major drivers is the significant size of the Houston marketplace and the relatively fewer regulatory issues than we experience in some of our other major metropolitan marketplaces. So Houston tends to be a more friendly environment, and we were looking for the right entry point. We had opportunities in the past, but never one that we felt was a good platform company. This operator has a history of successful operations and growth in that market, a very well-recognized professional group, and the desire to expand. We are assessing other opportunities as we continue discussions within that marketplace, which I think you'll hear more from us later this year. The expression that we like to use is that we're not a buy and hold or a buy and build company. So in any market that we want to grow into, we look for a growth strategy that considers the demographics of that marketplace, the size of the population, and similar problems that other markets experience. We felt it was a good opportunity to raise the RadNet flag in Houston, and we have high expectations for the area as part of our next core marketplace.

The next question comes from David MacDonald with SunTrust.

Congratulations. Just a couple of quick questions. One, kind of coming back to Brian's capacity volume backlog question. I was wondering, can you just spend a minute talking about some of the ongoing investments you guys have made around new equipment and the benefits that that's driven in terms of freeing up capacity, shorter scan times, etc.? And is there additional opportunity around technology to further alleviate some of the pressure on the capacity side?

David, absolutely. We've made a number of investments to test the theory of shorter scan times and remote operational control, both of which have been very successful and will continue to invest in, particularly regarding MRI scanning, where the history of MRI over the years has reduced scan times from 45 minutes to an hour down to 30 minutes and down to 20 minutes. The new technology, which is a total software implementation, can potentially reduce that scan time even further, perhaps down to as little as 10 minutes on certain exams. Buying this software is relatively less expensive than purchasing another MRI system, and you avoid the costly investment in facility space for new equipment. I believe that this is one of the benefits we are seeing from the increased volumes that we had in 2023, particularly in the second half of the year. Another technological advancement related to having one remote technologist control the operation of several scanners, which can apply to MR and CT scanning. We believe we can extend this capability into ultrasound and perhaps even mammography. We're now developing some of these tools internally which can be amortized over our systems, not necessarily requiring a serial investment for each piece of equipment. Given the success we had in the second half of 2023 and the rollout of more of these centers, it will help us with scan time efficiencies and address the personnel shortage, particularly of technologists, which allows us to have what we call 'Supertex' overseeing the operations and not necessarily needing fully licensed technologists. Our business is highly technologically driven, and all the tools we can use to let technology do the work will ultimately benefit our performance, particularly in terms of new procedures, adding capacity, and lowering overall costs. This multifaceted approach to our investment thesis allows us to develop tools we can potentially sell while also leveraging our scale and data.

And then I guess just two other quick questions. Look, I realize it's extremely early, but I'm just curious the reaction, if any, that you've gotten within the Houston market. I mean it's a huge market. There's a ton of hospital systems in that market. And I'm just kind of curious, any initial reactions or inquiries in terms of conversations, opportunities, etc.? Just any general comments there.

Well, I don't think we've had much reaction as yet, David, because it's very early on, and we haven't closed the transaction. We've signed a definitive agreement. We expect to close the transaction next month in April. Some early indications show that people are excited about us coming into the marketplace to bring tools that we are now identified with, compared to other operators that may not have the same level of appeal in consolidating into a bigger operation. So we're in discussions right now, and we expect that we will hear from some of the hospital systems in that marketplace, as some of the hospitals we have joint ventures with are on a national scale and have operations in Texas. I think there will be a reaction that will have a ripple effect, not just in Texas, but across other areas, signaling that we're ready to look for win-win opportunities no matter where that market might be.

Okay. And then just last one. I'm curious, are you servicing or have you begun to service any Alzheimer's patients at this point? And if and when that opportunity starts to ramp more meaningfully, is there anything we should think about in terms of either disproportionate opportunities or challenges as that volume starts to ramp?

Yes. Another good question, David. We just recently went through the credentialing process to ensure that the systems, particularly the MR scanners and the PET/CT scanners we have, have the appropriate protocols in place. So far, we have either performed or have scheduled 100 of these procedures, and requests for this are coming in daily. We expect this to be a significant opportunity for the company as we move forward. Drawing any comparison to the success we've achieved in PET/CT scanning for prostate cancer, this should be a substantial contributor in 2024, but likely even more so in 2025. It's important to note that it's not just performing scans for Alzheimer's disease itself, but also the requirement for follow-on MRI scans of the brain to assess any side effects that some of these drugs can have. The protocol we're adhering to will involve a minimum of four MRI scans for any patient identified as a candidate for the new Alzheimer's drug therapy. Therefore, the ripple effect of this could be quite substantial. We need to remain focused on capacity issues.

Yes. And it's pretty exciting, David, because our PET/CT business is already the fastest-growing part of our company, albeit it's a small percentage of our overall volume, roughly 0.6% of our volume, but it does represent between 6% and 7% of our overall revenue. It grew 18.5% in the fourth quarter, and from the full year of '23 to '22, it grew 18.8%. That's mainly due to the PSMA prostate scanning that has been exploding. Adding in this Alzheimer's opportunity, which we believe is ramping up with the 100 patients we've scanned over the last four months, is poised to significantly drive growth in '24, and certainly beyond.

The next question comes from John Ransom with Raymond James.

Congrats, guys. So Mark, I'm going to challenge you with a math question. Are you ready?

He doesn't have the math skills but he has his pen, John.

Sure. With respect to EBITDA in '24, how much of that is from acquisitions and de novos that did not exist in '23? To follow up, what's the run rate of that EBITDA going into '25, including acquisition and de novo contributions? Sure. Regarding acquisitions, the contribution is quite minor. Since the Houston deal was already announced, we accounted for the remaining period of this year following the transaction's closing. Earlier this year, we also made a small acquisition in Antelope Valley, California. Therefore, the contribution to our EBITDA for next year, projected at $250 million to $260 million, is less than $10 million from our acquisitions. As for de novo facilities, I don't have an exact figure, but I remember that the centers opened in 2023, which will be factored into the de novo calculations, will likely add another $5 million to $6 million. Thus, I would estimate that combining both sources, about $10 million to $15 million, likely closer to $15 million, of our $250 million to $260 million EBITDA will come from acquisitions and de novo centers.

And my other question is, if we look at eRAD plus AI, what's the exit rate of EBITDA as AI gets to breakeven? What are you contemplating in terms of the exit rate of that EBITDA versus the full year, especially for '25?

Yes. The revenue we have projected for the year is $60 million to $70 million. There's expected to be higher revenue in the fourth quarter due to the ramp of EBCD. I would say if you divided the $60 million by four quarters, you might see $15 million a quarter, but by the end of the year, we could hit closer to a $20 million quarter, based on projections. AI is anticipated to break even from an EBITDA standpoint by the fourth quarter.

Yes, okay. So that's a lift. To wrap up, when do you think we will see meaningful payer participation in covering your AI costs? Or do you think that, for the foreseeable future, it will remain an out-of-pocket expense?

I don't think I could predict, John, when we're likely to see that. Unfortunately, conversations we’ve had with payers indicate there's always a hesitation on their part to incur additional expense when they may not feel comfortable with what that return would be. I believe that as the adoption of AI continues on a private pay basis, the pressure will mount on commercial payers to reimburse. However, we will need more time, probably another year to 1.5 years, to accumulate enough data to build a compelling case. It's not simply about reducing treatment costs but demonstrating the efficacy of early cancer detection and implementing solutions that lower false positives, which also represent significant healthcare costs. Right now, given my extensive experience, I find the opportunity for earlier cancer detection especially compelling. Presently, our focus is primarily on breast cancer, while we see similar advantages in the UK with our program there, as well as the National Health Service having made annual lung cancer screening reimbursable. We believe we need time to gain momentum with this and other tools to capture the attention of a wider group of payers and regulators.

The next question comes from Gary Taylor with TD Cowen.

Actually, it's TD Cowen now. JPMorgan is a little bit stale, but nevertheless, just a couple of questions. First, on the Imaging Center CapEx guide of $130 million. Mark, we've talked about this a bit, but is the right way to think about that $130 million as half for routine maintenance and the other $60 million as development CapEx for de novos?

Yes, that's not too far off, Gary. We've been spending a lot of money, as you saw in '22 and '23 on the ramp of these de novo centers, which still haven't contributed materially to our financials. That spending on growth CapEx and de novo centers will spill over into 2024. We have more than a dozen of those centers still in various stages of development and construction. So 50-50 on that CapEx budget in 2024 is pretty close to actual.

And then my second one, just thinking about the number of competitors around AI and cancer diagnosis. It's a big market with many players trying to get in that game. In theory, given that you're also an operator, I would think your go-to-market strategy outside of your own centers would be somewhat advantaged by your role as an operator versus just being a technology company. Could you talk about that a little bit, about how you will compete with the other folks that are developing AI solutions?

Yes, that's a good question, Gary. The challenge with artificial intelligence is that the pressing question is who will shoulder the costs. The slow adoption of what I think are some very good tools is due to the reluctance of payers to expend funds unless they can see a clear value proposition. I expect there will be considerable consolidation in the AI space for two reasons. Many of the new companies have not been able to demonstrate revenue, making it challenging to attract further venture capital. Moreover, rising interest rates are placing limitations on what venture and private equity companies are willing to spend on AI development. We think we'll see this consolidation in the near term, and there are already groups that have approached us to discuss the possibility of being a distributor or even an acquisition target for us. I want to emphasize the distributor part because our platform, DeepHealth OS, allows us to integrate AI products and offer them both internally and externally to other customers in a seamless manner. I believe that we can develop a lot of this technology and generate value for ourselves, even if the immediate returns may not seem substantial. Given our scale, we do over 1.5 million screening mammograms a year and growing. Presently, about 35% of these women choose our AI solution for an added fee of $40. The revenue from that alone generates more income for RadNet than nearly any other AI radiology product. Thus, scale of operations and access to data will drive the opportunities for AI, which I firmly believe represents the future of healthcare and is a critical component for RadNet and other imaging providers moving forward.

To your question about our potential advantage in development and selling these solutions, Dr. Berger mentioned our data set. We now have over 100 million digital images and are growing by 10 million a year, given our current size. This is a significant advantage in terms of developing and training algorithms. Moreover, as we deploy these algorithms in RadNet's 366 and growing number of centers, we can serve as a testing ground for our technology, making external customers more comfortable with an established operator already utilizing these algorithms effectively. That presents a strong opportunity to sell these solutions externally, once deployment becomes more common, which is expected to occur once there is third-party reimbursement from commercial and other payers.

Additionally, we have a built-in marketplace with our hospital joint venture partners. Most of these hospital systems will want to utilize the tools we are developing. Use cases could extend to other parts of the system not directly connected to our joint ventures. Thus, there’s a considerable marketplace available where we anticipate a very receptive audience, wanting to implement our tools while creating a seamless flow of data between inpatient and outpatient settings to boost efficiencies and lower costs.

The next question comes from Larry Solow with CJS Securities.

Great. Congratulations on wrapping up a solid year. My first question, Mark, is regarding your target of 8% to 8.5% revenue growth in the Imaging segment. When we look at volume growth in 2023, or same-store growth, it seems to exceed the annual target of 3% to 4% every quarter. I'm not implying we've reached a turning point, but how do you evaluate last year's growth? What are your targets for this year within the 8% to 8.5% overall revenue growth? I understand that a couple of percentage points may come from acquisitions, but what would the net growth be, around 6% or 7%? Can you share your insights on these factors as you look forward?

Sure. On the procedure volume front, we typically tell our stakeholders that we can grow kind of in the low single digits on a same-center basis over the long term. Obviously, that becomes harder the more efficient you get and how busy your centers are. However, we've been making substantial capital investments and tech investments to drive better throughput in our centers while continuing to achieve sort of low to mid-single-digit performance in same-center comparabilities. In next year's guidance of plus growth, we are assuming mid to low single-digit same-store sales performance. If you look at 2023, we exceeded that, demonstrating north of 5% or 6% same-center performance. The remainder is made up of contributions from centers that weren’t included or opened, emerging from acquisitions or de novo activities. I believe we might do even better than outlined due to tailwinds we've talked about, industry trends that are driving patient flow from expensive hospitals to ambulatory sites, advancements in technology, and successes of certain modalities.

Okay. And regarding pricing, if we examine last year, I think the average price per procedure increased by about 3% as well. While struggling with reimbursement on the government side, how do you view the ability to increase commercial pricing and offset inflationary pressures?

Yes, we are indeed facing a small headwind with Medicare pricing due to a reduction in the conversion factor of the Medicare fee schedule by 3.4% affecting all providers in this segment. We estimate this translates to approximately $7 million to $8 million of impact. However, this is dwarfed by pricing increases we're receiving from our commercial book of business and capitated payers. In our capitation contracts, while we're effective in managing utilization, diagnostic imaging utilization continues to rise yearly due to the benefits of technology and our aging population. As utilization rises, we receive pricing escalators in these contracts. Our commercial side of payers recognize that moving patients to our freestanding centers is almost always more beneficial for them, considering hospitals charge between 2x and 5x the prices that we charge. Many payers have come to acknowledge that it's beneficial for their costs to work with us, resulting in pricing increases that positively impacted us in 2023, with more expected in 2024.

Great. Lastly, on the enhanced breast cancer screening test, I believe you mentioned adoption on the East Coast had reached 30%? Has this continued to grow as your marketing efforts improve, and is it at a similar level on the West Coast post rollouts?

Yes. We are approaching an adoption rate of close to 35% for EBCD on the East Coast, which has matured significantly compared to the West Coast, where we started rollout in the fourth quarter of last year. The rollout has been a bit slower on the West Coast; however, we're now seeing higher initial adoption rates than on the East Coast. The West Coast adoption rates currently exceed 30%. It took the East Coast numerous months to reach this level, and our advanced learning has made our communication with patients and referring physicians more effective here. We started at a more competitive $40 price on the West Coast compared to $60 on the East Coast, which created resistance earlier on. We're optimistic as we continue the rollout of the program, which reflects in our guidance as we anticipate revenue of around $13 million for EBCD in 2023, expected to rise into the low 20s in 2024—a projected growth of roughly 65%.

Curious if you have gotten interest from centers beyond your network for this technology?

We have some interest, mainly from entities that self-insure. Two of our hospital joint venture groups are extending the EBCD program to their employees and dependents. RWJ Barnabas, for instance, is rolling this out as a benefit for about 30,000 employees and dependents. We anticipate that this different approach may lead to further expansion beyond just commercial payers. As we demonstrate value, we may find easier adoption by commercial payers as well.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.