Akumin Inc.

Please stand by. We're about to begin. Good morning. My name is Jennifer, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Acumen 2022 Year-End Financial Results Research Analyst Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, please press star, then the number two on your telephone keypad. Thank you. Riyad Zain, you may begin your conference.

Thank you. Good morning, everyone, and thank you for joining us for today's presentation. My name is Riyad Zain, and I'm the Chairman and CEO of Acumen. I'm joined today by David Kretschmer, our Chief Financial Officer. I want to thank all of you for taking the time to join us on this call. In today's call, we will review the development at Acumen in 2022 and outline our strategy and initiatives for growth. Discuss some of the factors that impacted our results in the past year. Provide an overview of Acumen's Q4 and full year 2022 results. David will go over some of our key operating and financial metrics and discuss our guidance for 2023. I will conclude the presentation and then we will proceed to Q&A. There is a slide deck that is meant to go along with our presentation today. A copy of it is available for download from the investor relations section of our website at acumen.com. Before we begin, let me remind you that certain matters discussed in today's conference call or answers that may be given to questions asked could constitute forward-looking statements or information that are subject to risks or uncertainties relating to Acumen's future financial and business performance. Actual results could differ materially from those anticipated in these forward-looking statements. You should not place and do reliance on these statements, particularly on future financial performance. The risk factors that may affect results in these forward-looking statements are detailed in Acumen's periodic results and public disclosure. These documents can be accessed under our public disclosure at sec.gov and cdar.com. Acumen is under no obligation to update any forward-looking statements discussed today, and investors are cautioned not to place undue reliance on these statements. We may also refer to certain non-GAAP measures during this conference call, such as EBITDA, adjusted EBITDA, adjusted EBITDA margin. These non-GAAP measures are not recognized measures under U.S. generally accepted accounting principles and do not have a standardized meaning prescribed by GAAP. We believe in addition to GAAP measures, Certain non-GAAP measures are useful for investors for a variety of reasons, including we regularly use such measures to communicate with our board of directors and that EBITDA and adjusted EBITDA are used as analytical indicators by us and the healthcare industry to assess business performance and our measures of leverage capacity and ability to service debt. EBITDA and adjusted EBITDA should not be considered in isolation or as alternatives to net income cash flows generated by operating, investing, or financing activities, or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity. You can find additional information regarding these non-GAAP measures on slide 2 of our presentation, which is available in the investor relations section of our website. Reconciliation of EBITDA and adjusted EBITDA to net loss, the most comparable gap measure, is included in that presentation as an appendix. We have not provided a reconciliation for any forward-looking non-gap measure referred to in this presentation, as we would not be able to produce such a reconciliation without unreasonable efforts. As we review the developments in 2022, this is an important time to remind everyone of our vision at Acumen, which is to be the partner of choice for US hospitals and health systems. It's clear that hospitals and health systems are increasingly in need of outpatient solutions and capacity. Acumen is extremely well positioned to capitalize on these trends. which, as you know, was part of the strategic rationale for our acquisition of Alliance Healthcare Services in late 2021. Having successfully integrated the Alliance acquisition in 2022, we are already well on our way to achieving our vision. We serve over 1,100 hospitals and 23 of the 30 biggest health systems in the country are our customers today. Hostels represent almost 50% of our current revenues, and we expect this percentage to continue to grow significantly in the coming years. As you can see on slide four, outpatient service delivery is the core of our business. Over 95% of our revenues are outpatient. The shift to outpatient service delivery has been an important trend in our industry and will continue to accelerate. We recognize the significance of the shift to outpatient very early on, something that is just beginning to be fully understood and embraced in our industry. We currently operate a full suite of fixed site and mobile services which are available to hospitals and health systems. Our asset base is strategically located with dense coverage in key markets, making them well-suited to partner with hospitals in these regions. Importantly, we also leverage technology to provide clinical standardization and operational excellence, which enables us to deliver efficient and cost-effective outpatient solutions to hospitals and health systems while providing outstanding patient care and patient experience.

2022 was a busy year for Acumen.

Our focus in 2022 was to streamline the organization through a number of transformations to build a solid foundation for future growth. These included eliminating functional duplication, rationalization of existing facilities, and hiring key leaders, including our new CFO, our new head of oncology, and our new chief revenue officer. We also repositioned our oncology division after an extensive review. These efforts resulted in over 20 million in organizational savings. And as we mentioned in our Q3 call, there is more to come on that front. It's important to note that while we were implementing these changes as part of our organizational transformation, we faced significant industry challenges, specifically in the areas of labor availability and cost inflation. These issues impacted everyone in healthcare industry, and Acumen was not immune. The clinical labor shortage was a unique challenge. Despite robust demand, the lack of labor availability restricted our ability to perform procedures in many cases, therefore negatively impacting our results both on the revenue and the cost side. Fortunately, the environment has improved somewhat thus far in 2023, and we are very optimistic that the worst is behind us.

As I mentioned,

We were affected in 2022 by a number of factors, including labor constraints and cost inflation. On slide six, we have highlighted the factors which contributed to our revenue growth in 2022 as compared to our performer revenues in 2021. As you can see, 10 million of our revenue growth was attributable to the increased costs of specialty tracers. which we were able to pass through. In our geology segment, our revenue grew by 19.6 million over 2021 levels, despite the labor headwinds we experienced and the disruption caused by Hurricane Ian in many of our Florida locations. Unfortunately, our geology growth was offset by decline in revenues in our higher margin oncology segment. This was primarily a result of significantly reduced business development activities as we undertook the review and facility closures associated with the repositioning of the segment. Going forward, we are excited about the organic growth outlook in our radiology segment as the clinical labor shortage has significantly improved. We are also seeing many opportunities for growth and partnerships with hospitals in our oncology segment now that the repositioning is complete. Turning to the cost side, on slide seven, you can see the many factors which increased our cost in 2022. as compared to our performer results in 2021. As you can see, employee compensation costs came down by 11 million as we implemented our phase one synergy initiatives, which were primarily focused on eliminating functional duplication in the organization. As we have mentioned in the past, these initiatives recommenced mid-year. And as such, I'm pleased that we have now achieved our targeted phase one synergy run rate of 23 million. While these synergies positively impacted our performance in 2022, they were more than offset by cost inflation in other areas of the business.

We are able to recoup some cost increases, such as specialty tracers, which were up

over 10 million in 2022, but were passed through as I highlighted earlier on the previous slide. Note that part of our third-party and professional service costs were related to our increased use of contracted labor and increased outsourcing in response to labor constraints during the year. Many of the other cost increases we experienced in the year were a function of the inflationary environment we are in. We will obviously look to contain these costs going forward to the extent that they are within our control. Note that we have highlighted the variable and fixed cost on the chart to help illustrate the cost categories and give you a sense of the high operating leverage in our business.

Slide eight helps

to really illustrate this operating leverage. Given the relatively high fixed costs associated with our service delivery, we benefit significantly from same-store organic volume growth. As you can see, the incremental margin contribution from organic revenue growth is at least 50%, given that a portion of our employee compensation is actually fixed, including corporate back office and frontline employees. As we illustrated on slide six, the factors that contributed to revenue growth in 2022 did not result in meaningful margin contribution. For example, there is no margin contribution on increased tracer revenues. And our growth radiology was offset by the decline in higher margin oncology revenue. Going forward, organic growth in both radiology and oncology will generate more than 50% margin contribution. Many of the strategic initiatives we have underway will enable us to leverage our scale and capacity to drive additional volumes through our facilities, which will obviously have a meaningful impact on our financial performance. Slide nine highlights some of these key strategic priorities for 2023 and beyond. As we discussed in our Q3 call, we have already identified an additional 25 million synergies, which we expect to be captured in phases two and three of our integration plan during 2023. As you can see, our strategic initiatives are focused on improving productivity and efficiency around the themes of clinical standardization and operational excellence. Same-store growth is a key focus for our organization, including commercial excellence, sales effectiveness, and the optimization of our scheduling and revenue cycle to efficiently respond to increased demand for our services. We are also focused on leveraging technology to address the shortage of clinical staff standardized clinical protocols and workflows, and dramatically improve the patient experience. The investment we made in our patient journey platform is an example. All of these initiatives are centered around addressing the key challenges faced by all of our industry stakeholders, including hospitals, payers, referring physicians, and patients. Turning to our Q4 results on slide 10, you can see the same store consolidated volume growth in our key radiology service lines in our patient starts in our oncology division versus our performer results in Q4 2021. Specifically, our MRI volumes were down slightly by 0.3%, again, primarily as a result of clinical staff shortages that persisted in some of our markets in the quarter. Our PET-CT volumes were up an impressive 7.8%. PET-CT less impacted by labor constraints given the more technical skill set in that medallion. Total oncology patient starts were up 8% as momentum builds in this segment following the review and repositioning, which were completed in Q2 and Q3. Q4 revenue of 184.6 million was up 5.2 million or 3% increase from 179.4 million in the fourth quarter of last year. Adjusted EBITDA of 37.4 million was up 9.9 million a 36% increase from $27.5 million in the fourth quarter of last year. Adjusted EBITDA margins of 20.2% were up 0.6% sequentially from 19.6% in Q3. As some of the labor and inflation constraints we experienced eased slightly in the fourth quarter. On a consolidated basis, Accounts receivables at quarter end were 104.2 versus 112.4 million at the end of Q3. This equates to 57 days of sales outstanding up marginally from the record low level we experienced in Q3. I will now turn the presentation over to David who will walk you through some of our key operating and financial metrics.

Thank you, Riyadh. As Riyadh mentioned at the outset, I will review some of the key operating and financial metrics of our business and discuss our 2023 financial guidance. Slide 11 illustrates that while the Acumen platform offers a diverse suite of services, it is very focused on areas of high growth and high value add. You can see that over half of our 54% of our radiology revenues come from MRI procedures, so MRI volumes are a key driver in that segment. Acumen is also a significant player in cancer diagnosis and treatment, with 24% of our radiology revenues from PET-CT and 17% of our total revenues coming from our oncology division. These modalities are critical to the delivery of quality patient care. and are utilized by a variety of physician specialties across the care continuum, from screening through diagnosis and treatment. But also note here that we consolidated our fixed site footprint in 2022 to eliminate underperforming sites. We closed a total of seven sites during the year, although some are still on our books from an accounting perspective. We continue to evaluate all sites on an ongoing basis with the view to further rationalize where possible. In slide 12, Acumen is well-positioned to benefit from the ongoing shift to outpatient service delivery as we partner with hospitals and hospital systems to transition care to lower-cost sites of delivery. As you can see from the slide, we continue to generate over 95% of our revenues from outpatient procedures. We have a balanced revenue mix between third-party payers for outpatient services and hospitals. with no one customer representing more than 4% of our consolidated pro forma revenues. The preferred outpatient solution provided to hospitals, approximately half of our revenues come from our hospital customers. The balance is reimbursement for patient procedures from third party commercial and government payers. Over time, we expect the revenue share with hospitals to grow significantly. as both existing and new hospital customers and partners search for outpatient solutions in both radiology and oncology. Turning to slide 13, our financial performance document is primarily driven by procedure volumes. As Riyadh pointed out earlier, we have high operating leverage given our cost structure, so organic growth and procedure volumes is a high margin contributor for us. Given that the current mix of our business includes both hospitals and independent sites, we track actual scans by modality across our radiology platform. By providing procedure volumes and mix together with the radiology procedures and percent of revenues, we are seeking to provide more transparency into our operating and financial performance. As I noted in discussing service lines and modalities, within the radiology segment, MRI and PET-CT are the key drivers as they are by far the biggest contributors to our financial performance. In slide 13, you can see the MRI and PET-CT procedure volumes during 2022 and the percent same-store changes over the last four quarters. Note that as the market leader of PET-CT, we have seen strong growth in that modality in recent years. While MRI volumes continue to grow annually, recent quarters have seen a decline in growth as we were not able to fully capitalize on the strong MRI demand due to the labor constraints Riyadh noted earlier. We have taken action which should mitigate those impacts in 2023. Our third quarter, 22, was also impacted by the disruption caused by Hurricane Ian in certain of our Florida locations. Note that labor constraints are less of a factor in PET-CT given the highly specialized skill sets of clinical personnel for this modality. In the oncology segment, we track activity level by patient start volume. On a quarterly basis, Patients start to decline sequentially on a quarter-over-quarter basis in Q2 and Q3 of 2022, as we undertook the review and reposition of that business, as mentioned earlier. Growth did rebound in the fourth quarter over the prior year. We expect oncology division to continue this improving growth trajectory over time, given our compelling value proposition in the radiation therapy. We are uniquely positioned, given the many challenges, including growth demand and aging fleets, and capacity constraints our hospital partners face in this modality. Slide 14, you will see the annual financial performance by our radiology and oncology segment. Note that the pro forma results assume the legacy Acumen and Alliance businesses, the acquisition of which was completed in September 2021, were combined for the entire period, as well as adjusted for the fourth quarter 2021 divestiture of Alliance Oncology of Arizona. As you will see in the chart on the left, radiology segment contributed $625 million of revenue for the full year 2022, representing approximately 83% of total revenues. Oncology segment contributed $125 million of revenue, or approximately 17% of the total. In our radiology segment, our Q4 adjusted EBITDA margin was 20.2% before the allocation of corporate services. Our oncology segment is higher margin, with an adjusted EBITDA margin of 34.7% before the allocation of those corporate services. Consolidated and adjusted EBITDA has been essentially flat since 2020, as we have focused on internal integration and transformation initiatives, as Riyad previously discussed. Margins in 2020 were elevated in part because of the distorting impacts of COVID on our results, including CARES Act funding in that period. As we discussed earlier, 2022 was also negatively impacted by both the clinical labor shortage, Hurricane Ian, and cost inflation, which resulted in a decline in adjusted EBITDA and margins. Given that the clinical labor issue is showing signs of improvement thus far in 2023, we should begin to see improving volume growth, driving revenue, and adjusted EBITDA growth as the year progresses, as well as improvement in margin considering our significant operating leverage. 515 provides a bridge from our adjusted EBITDA to our free cash flow generation in 2022. Loyalty debt service and capital lease payments are a meaningful impact to free cash flow. Cash minority interest primarily relates oncology joint ventures with hospital partners and is a function of the profitability of these centers, not a fixed obligation. Cash minority interest payments increase, so does their contribution to ECMN's results as a partner. and typically the operator of these sites. It should be noted that we incurred over 23 million of cash expenses in 2022, which were related to our restructuring efforts and are thus non-recurring. We also did benefit in 2022 from the sale of certain of our accounts receivable for 29 million as we announced in Q3. These two items are netted in the cash-related non-recurring column on this chart. In regards to capital expenditures, As we have noted in the past, we typically finance the majority of our CapEx through a combination of OEMs, equipment finance companies, and local banks. This, of course, reduces the initial cash outlay of new CapEx, but does increase capital lease or debt payments and total equipment debt or long-term debt, depending on the financing source. This is somewhat offset by a reduction in CapEx debt servicing costs as leases, which are typically five years in duration, roll off. while that equipment can remain in use for an extended period, often 10 years or more. This dynamic enables us to fund additional CapEx without layering significant financial leverage onto the business. In 2023, we expect to reduce burden of restructuring charges together with the additional synergy capture rehab discussed to benefit our free cash flow. This will be offset somewhat by the additional cash interest payments related to the stone peaks of board-dated notes, which go cash pay in the latter part of the year. Turning to slide 16, our 2023 guidance. As you can see, for 2023, we expect consolidated revenues to be in the range of $765 million to $775 million, and adjusted EBITDA to be in the range of $150 to $160 million. As Riyadh mentioned in our press release, our 2023 guidance reflects the fact that ongoing labor constraints and cost inflation persist in some of our markets, although we have also seen some improvement on these fronts so far this year. We are encouraged by these early developments and anticipate strong demand for our services, which we expect to continue throughout 2023. In regards to CapEx, as we did in 2022, We continue to refine our capital expenditure budget to ensure the most efficient deployment of equipment, better aligned with our strategic priorities. We continually evaluate all markets, prioritize those based on our criteria that have the greatest near-term potential for growth. We expect total CapEx spend to be between $55 and $65 million. We approximately 50% allocated the growth CapEx for new customers and sites and a balance for maintenance CapEx. Recall that we define maintenance CapEx as spend for existing customers at existing sites, while growth CapEx is primarily directed towards new hospital customer and partner acquisition, as well as capacity expansion. Our investment to new customers and sites continues to be high return, typically with a four-year payback on growth capital. We anticipate total CapEx to be funded by approximately 20% in cash and the balance to be financed by a combination of OEMs. equipment finance companies and local banks. Higher financing costs will be a bit of a headwind in the coming year. Slide 17 illustrates our capital structure at the end of 2022. As you can see, Acumen secured leverage is 5.6 times. As an organization, we are focused on reducing this over time. Near-term drivers of leverage reduction will come from increasing EBITDA as a result of synergy capture, network rationalization, technology-driven standardization, and the streamlining of delivery, service delivery. In addition, we have an abundance of organic revenue growth opportunities in our purview, which will meaningfully increase EBITDA given our significant operating leverage. As a result of these significant cost efficiencies and organic growth opportunities, we believe our secured leverage will decline to four times or less than four times over time. Note that as significant shareholders, we are highly incentivized to prudently optimize the capital structure, and we will continue to evaluate options to do so if market conditions permit. I'll now turn it back over to Riyad to wrap up before we take questions.

Thanks, David. That concludes the prepared remarks portion of the presentation. I hope that it provided an informative window into the new acumen and the potential of the platform going forward. We would ask the operator to start the question and answer period.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. And we'll go first to Noel Atkinson with Claris.

Hi, good morning, guys. Thanks so much for taking our questions and well done in Q4. It's nice to see, you know, that there's maybe some green shoots here of improved labor availability coming into the new year. So first off, so that was an interesting comment about the timeline to getting secured leverage down to sort of four times EBITDA. what kind of timeline are you talking about there?

So, first of all, good morning.

Yeah, absolutely. Good morning, Noel. Yeah, I think, thank you for the, thanks for your comments and as it relates to the question, I think we always said the operating leverage is very significant in the business. And I hope we provided some bridge analysis today to help really the investors and everyone understand which factors really impact operating leverage. So operating leverage, you'll only have it when you really have both radiology and oncology growth. I think you saw what was unique about the 2022. We didn't see the radiology growth that we expected in our initial plan, which is why we revised guidance. And I think as David highlighted, if you look at what happened to same stores, after a good start to the first half of the year, and we were actually on plan, on target with our guidance, with our initial guidance, it fell off a cliff and there was no to marginally negative same stores growth in radiology in the second half of the year. Ecology was a different story. A new leader came in, repositioning, facility closures, changes. So that was actually nothing specific in the industry. That was our own actions that are leading to that. And then I think, as you also highlighted, the other 10 million of revenue growth was not revenue growth. It was actually specialty tracers, pass-through. So when you look at this year, You know, people look at it and say, okay, there was some growth revenue, but what is the operating leverage you're talking about? Now, when you actually show this bridge analysis, you see why there was a flat, relatively flat EBITDA, as David highlighted in his slides, from prior years, right? So we are very focused on going back to that 250, 10-ish EBITDA that gets you back to four times leverage, as you know. How do you get back to that 210? You know, you look at how we finished the year. We finished the year with somewhat around 145, but then also you know that only half the synergies are in those numbers, right? Not the full 22 or 23 million run rate. So there is obviously increase in in that number from that level. You also know that there is another 25 million that we will capture, not at the beginning of 2023, but as we exit 2023, right? So now you start to basically see how you could get closer to the 180 million number. Where is the other basically 30 million numbers that you need to get to the 210 that has to come from organic growth in the business in both 2023 and 2024. So we as a management team were laser focused on exiting 2024, not 2023, but 2024. 2023 would be a step towards the right direction. So we're laser focused on exiting 2024 in the 210 range of EBITDA, which will get the leverage to four or around four. Now you're gonna tell me, I'll answer your next question. So now you're going to tell me, okay, that's actually really what you're trying to do, so why your guidance is low. Our guidance is low because, you know, we've lived it in 2022. You know, you come out and you think you're firing at all cylinders, and then you don't. You know, there are always things that are outside your control. Now, if what we start to see in the first quarter of this year continues for the rest of the year, that's a huge step toward the right direction. But we want it to be, David and I, we want it to be on the conservative side and not have a guidance that we will actually end up sort of taken down again mid through the year. And we prefer to take it upwards mid-year if what we're seeing in the volume improvements continue throughout the year.

You know, I think that, you know, a disappointing 2022, given what happened in the back half of the year. We'd rather be sitting here in 2023 with a beat, is what our guidance is. But I'd like your Greenspan reference about the green shoots and agree to Rayad's point that if they continue. And just to highlight the achievability of getting that four times, and we have to kick through the cost ways that we get there. I said, well, there was still a $30 million EBITDA gap. But, again, as you look at our, say, 55%-ish margin on organic growth, you're only talking 50-ish million of additional revenue. So, again, the guidance is the guidance. But I think that what you can see is there's opportunities there which aren't crazy to get to that four times.

Yeah. Okay. And then secondly, thanks for the break out on the free cash flow. That chart is actually quite useful. What do you guys see for 23? If you guys can kind of hit the midpoint of your guidance, not assuming all this other, you know, incremental benefits, but just the midpoint of what you put out there for 23. And assuming that Stone Peak goes off the pick in, I think it's September or something like that. Like, do you... are you able to be cash flow break-even or cash flow positive in 23?

We end up being in a similar neighborhood where we are now in that the additional cash flow we're generating from operations goes to help cover the stone peak. Keep in mind, we benefited, as Riyadh noted, from the $29 million on the sale of the AR. That was kind of a one-time pickup. And so we've got to cover that. We've got to cover Stone Peak just to get back to where we had similar cash flow we had this year.

Okay. And then Riyadh, maybe if you could just talk a bit about sort of demand trend in your, you know, I know you guys don't break out radiology between hospital and your sort of your quote unquote legacy freestanding centers that much, but could you give us a sense of what you're seeing for demand? at those independent centers as compared to sort of the headwinds of, you know, not having enough labor to maybe do all the hours and all the procedures that you hoped?

Yeah, no, actually, that's a great question. And like you noted, although we don't break it down, I'm more than happy to provide that color because that color is consistent with our vision. And like I said, what we focused on early on, I think before anybody else in the industry, the outpatient trend with health system hospitals, which really, when we were sitting here more than two years ago, that was the only rationale, as you remember, Noah, for the acquisition of Alliance Healthcare. So although we don't break it down, I'm actually more than happy to provide that column because the growth with the health systems of hospitals is higher, right? And that is actually validation that we actually did buy the right asset. And it's also another validation that our independent fix site would do a lot better going forward as well. Now, having said that, there was a lot of management time and focus on the transformation in 2022. You know, whether it was even the time David spent. I mean, if you were to ask him, he's going to say 80% transformation, 20% business. The top team, the whole top team, that's kind of their focus in 2022. But then from that exercise came a lot of opportunities. That's why I said Now, as we come out of this stuff here, because people probably don't have an appreciation for what it takes to integrate two businesses of the same size. Most of actually those mergers, as you know, more than half of them completely fail. The integration just doesn't even happen. It doesn't work. So not only for us it worked, we have one management team on the same page driving towards the future. And that's going to benefit now our fixed sites, and it's going to continue to see bigger momentum in the hospitals and health systems. As I said earlier in my comments and remarks, the hospitals are looking for that capacity. The reason the growth is very high is they have unmet demand, right? And in the regions where we have those dense networks, they're very useful to the unmet demand for those hospitals and health systems. So we will continue to do what we need to do in terms of self-effectiveness in our fixed sites, and we're confident that we will get back to that mid-single-digit growth in those fixed sites again, just like we did in the first half of this year before the second half, because the clinical labor shortage is now behind us, And we start to see signs of that. But the growth of the hospital and health system side in a status quo situation, it is higher. And that's where our confidence also comes from in terms of our ability to increase the EBITDA of the company in a significant way.

All right.

I'll get back in the queue. Thanks a lot. Thanks, Nolan.

Next to Andrew Leno with National Bank.

Hey, good morning. Thanks for taking my questions. I was wondering if you guys can talk a little bit about the oncology unit, what drove that second impairment that you had in 2004, potential for any further impairments in 23. And the other thing I was trying to kind of, you know, bridge on that oncology, or you can help us bridge in there, is that we're taking impairments, but then The NCI is also increasing in Q4, which would indicate that the business is doing well. So if you could help me bridge that as well, I'd appreciate it.

Thank you, Andrea.

Maybe, David, you could take the question. Yeah, sorry, go ahead, please.

I'll jump in here at the start. And what drove the impairment was that in Q4, well, first of all, we didn't make a lot of investment in the oncology business, as Rihad noted. You know, we were bringing in a new leader. It didn't feel fair to commit him to a lot of new investments. So there had not been a lot of organic growth in 2021. And as Riyadh said, we repositioned the business in 2022. So there was not a lot of new capex. So the growth of that business is really going to come 24, 25, 26, 27. And the much higher interest rate environment where you start discounting those cash flows. So, you know, 2022 was a little bit of a disappointment. It's going to continue to take a little bit of time in the near term to really get, you know, where we want the business position. So when you start discounting back the future cash flows, which are kind of, you know, 20 out of a couple years, you start discounting them back, they just present value to a lower number. So that was really a key driver as well as, revisiting our outlook for a couple of our longer-term relationships, which might impact the actual cash flow. So you have two things, a little bit looking at the cash flows themselves and then discounting them back.

Okay. Just to add to a little bit, and thanks actually, Andre, for the question, because we wanted to We didn't provide that color in our comments, so it's a good opportunity for us to provide that additional color. But I think there was also a second part to your question. Could we see more goodwill impairment? I think what David rightly so did, other than the interest rate changes and the present value like like David explained, took really a very conservative view in Q4 on the impairment side to basically leave the impairment behind us and move forward from here as we go into 2023, because to your point, Andre, it's not something you want to reopen in 2023. Now, what actually I could tell you is going to happen in that segment is our focus and our expectation is new partnerships and new relationships and new facilities that will open later this year. So it will be actually new oncology revenue business because obviously with the new leadership, not only the repositioning happened, the pipeline has been building and new doors will open and announcements will be made when when it's the time to do so. So we're excited about our oncology business from now on.

That's great to hear. Thank you. And on that note, I mean, are you able to provide at least a rough guidance on the NCI for 23?

I think we missed that NCI question. It was a question about, we're not going to, I don't think right now.

I think that was also, that was actually related, and that was also related to the impairment. So I think what's more reflective of NCI is looking at prior periods.

Yeah, that's exactly right. Look at the first three quarters. The Q4 was impacted as reacted by the impairment.

Yeah, so that's not, that's not, that's not, the new run rate. So if you're going to model it in 2023, please ignore that NCI in Q4 and look at prior periods. That would be more reflective of what you would see in 2023, Andre.

That's great. Thank you. My next question is regarding, and you touched a little bit on this, but on the PIC interest, on that StonePIC loan, I'm just kind of wondering, like, what other options might you explore? What might be there, you know, short of reverting to cash interest?

That's obviously a good question. I think you know that StonePeaks has supported the business, believes in the vision, believes in the cash flow generations and the outpatient opportunities and hospitals and health systems partnerships ahead for this platform, which happens to be one of the two largest in the country. So, they understand the operating power and they understand the heavy lift thing that we had to do to kind of put the two platforms together and make other tough decisions, as you know, of closures. And, you know, when we actually really need revenue, we did all the right decisions to deploy those assets for better higher revenues and higher margins. So although it impacted 2022 in a negative way, it should impact 2023 the other way. So they're aware of obviously what we've done with the business. So it's really time to execute here. So at the end of the day, it's going to come down to what else we could do on our capital structure and what other alternatives are available to us to address the capital structure. So the capital structure, like David said, we could pay cash and we see a way to do that and continue on. But also, as the performance of the business improves, we could look at what other options are available to us so that we as a management team, we continue to execute without having to worry about the capital structure as much as today. So we will explore those alternatives and those options, of course. That's part of our job.

Thank you. And the last one for me, it just kind of relates more. And again, like you touched on this one, but just wanted to clarify. In terms of the guidance provided for 2023, and that the situation is improved. So if you're looking at the guidance for 22, when it was taken down by around 20 million, given those issues in the second half, and as those issues are starting to resolve at the beginning of 23, is that 20 million that was taken down in 22, could that be the swing factor in 23 that you're being conservative, or is it more of a fraction or even a multiple of that?

I would say it's- Yeah, I would say at this point, our guidance is our guidance. You know, we need to continue to see how Q1 evolves and we'll, you know, update during our first quarter earnings.

Okay, thank you. That's it for me. Thank you.

We'll go next to Rishi Parikh with JP Morgan.

How are you doing, guys? Thanks for taking my questions. First, you noted that the worst is behind you, and I know it has subsided, but I think you're still facing labor cost pressure, which may have also continued to affect your capacity utilization. So can you just, one, walk us through what you're seeing today, your visibility around the drivers that may reduce these costs, and what is that facility capacity utilization today relative to what it was in the second half of 22? And a few follow-ups.

Thank you. No problem. Thank you, Richie. And as always, thank you for your questions. I think it's obviously all related. So I'll actually answer all these questions. I think you had a question on the drivers. You had a question on the availability of labor, the cost of labor. And also I think the other question you had is on the utilization. So on the drivers, for the first time in the beginning of the year, we hired drivers in open positions that were open for a significant time period in excess of 12 months. So that's really a good sign, I think, in the labor side. So, I mean, for us, Being able to do that obviously increases our opportunity to generate more revenues. On the availability of labor, obviously the reason we start to see the organic growth back, it's not because demand is back. Demand was always there. So the reason we start to see organic growth again in the business in the beginning of this year is because actually our access to labor is much better. Meaning what? Some of the contracted labor that kind of left the business in the second half of the year and was referred to in healthcare as the great resignation is coming back. It's coming back full-time in our business. And some of those signs, we start to see some of those signs, which actually does two things. Allows you to do more procedures and satisfy that demand that you could have in service in the second half of last year. But also the other thing it does is it helps you by having lower cost as well. So in the second half of last year, it wasn't even just the cost, the cost went up. And I think you heard that a lot from many healthcare services, but it wasn't the cost. The cost was actually a theoretical cost because the labor was not there. So even if we were actually happy to pay that cost, The availability was not there. That's why the same stores went down for MRI from the 5% range in the first half to pretty much nothing to zero in the second half of the year. Now, that has early signs again. It's still early in the year, but the early signs show that that story of not finding labor at all is behind us. or has eased in a significant way. Let's actually put it in a conservative way. The worst is behind us. I think that's what I said in my comments earlier today. The worst is definitely behind us. That is a factual statement. Now, we'll see if that continues throughout the year, which so far shows that that's the case. You had another question on capacity. Capacity and utilizations. So our utilization, as you know, as you increase, as you have same stores and labor is available, obviously your utilization of the assets will get better. And that's important because there is a limit to how much you could adjust as your cost base for tech hours, right? It's not exactly one-to-one, right? There's a certain minimum of tech hours that you need in clinics. So that is improving. And if it continues to improve in certain clinics, every region is different, every market is different. But our response has always been add operating hours. If you kind of think of really back to normal and we start to see capacity being used, then we just extend the hours of operations to extend that capacity and take on more demand available to us in certain markets. So I would say, is it back to normal? But I think we would, I would say we're actually returning back to normal.

Rishi, the one additional point I would make is Riaj is exactly right on the volume beginning to return normal. As the labor has come back, while the cost may not be where it was at the peak, it's still higher than it had been previously. So, you know, we have responded by, like everybody, paying more sign-on bonuses, giving more than typical wage increases, particularly on the clinical labor side. So while that's a great tradeoff for us, getting, you know, people, because it's the operating leverage, as we discussed, there is a bit of a headwind resulting from those labor costs.

Great. And on the contribution margin, can you just give us an idea as to what that contribution margin was prior to the increase in MedTech costs? And, you know, with everything that you just said, how should we think about that margin or that contribution a year from now or, you know, two years from now as those costs come down? Is it going to remain where it is, or do you think that it could increase and get back to prior levels?

Yeah, I think the contribution margin, like we used to maybe talk about earlier, even if you actually look at your... Because the way we do the contribution margin in a conservative way, we assume that, as I mentioned earlier in my comments, we assume that the employee compensation is 100% variable. The employee compensation is not 100% variable because the corporate employees, the back office employees, and some frontline employees are somewhat fixed. You could add... probably another $200 million of revenues and we're not going to make any significant changes to corporate back office and front line or part of the front line. So we take that conservative approach on that is 100% variable. I think you remember when we used to do this math, we were more like in the kind of 51, 52% margin contribution. I think right now it's kind of 48, 49%. So it came down three points. But I believe as you grow again and you have the corporate office, the back office, and the front line to absorb it, you will do more than 50 cents on every dollar of growth.

Thank you. And just the last question. You've talked about partnership opportunities where you're working with the Alliance Healthcare partner hospitals and leveraging your legacy Acumen cluster locations. So, one, can you just quantify what percentage of your Alliance Healthcare locations and Alliance Healthcare revenue overlap with these legacy Acumen facilities? I'm just trying to better understand, and if you could just frame that opportunity. I assume it's not a hundred percent. I don't know if it's, you know, 20%, 40%, 60%, just trying to get a better understanding as to what that opportunity is. And then second, how far along are you in those opportunities? Meaning that are we close to hearing any announcements, um, uh, JV investments, et cetera. And I'll follow up. Thanks.

Sure. Thank you, Rich. So I think I'll start with oncology actually first before radiology. So, um, uh, because we have, uh, we were working on oncology, there was some pipeline earlier than on the radiology, and with the new leader, that pipeline was basically quickly turned into action. So I think we will start to see new joint ventures, announcements on oncology first, And then on the radiology side, it's going to take time. But I think we will start to illustrate it with some examples in the next 12 to 18 months. The good news on the radiology side, though, there's only one. So the timeline is probably more than what you expect. So it's not 12 months, it's going to be more than 12 months. However, the overlap is not 20%. It's actually the other way around. I would say it's 80% of the legacy sites of acumen are on the table today for capacity solutions for health systems and hospitals coming from the legacy alliance relationships. Actually, so it's the other way around. So the answer to your question is where we have opportunities is not 20% of what we own, it's 80% of what we own. But it's not going to happen inside the next 12 months, but it will happen inside the next 24 months.

Thank you. Thanks, Richie.

At this time, there are no further questions. I'll turn the call back to Riyadh for closing remarks.

Thank you, everyone, for your participations on today's call. Acumen's vision is to drive patient-centered innovation, service delivery standardization, and exceptional healthcare value, all in an outpatient care setting. We are a leading outpatient healthcare service platform with significant scale, longstanding hospital and health system relationships, and freestanding operational expertise. Acumen is extremely well positioned to capitalize on the outpatient trend. We have a full suite of fixed site and mobile services available to hospitals and health systems. Our asset base is strategically located with density in key markets, making them well suited to partner with hospitals in these regions. Importantly, we also leverage technology provide clinical standardization and operational excellence, which enables us to deliver efficient and cost-effective outpatient solutions to hospitals and health systems while providing outstanding patient care and patient experience. In 2022, we generated $750 million in revenues and served patients in more than 210 fixed sites of radiology and oncology with more than 4,000 team members across the U.S. Our transformation and growth initiatives are well underway, and we expect 2023 to be a milestone year as we build on this solid foundation. Our company has never been better positioned to capitalize on the trends and growth opportunities ahead in our industry. I would like to take this opportunity to thank our staff, radiologists, and all of our stakeholders for their efforts and ongoing support as we continue our transformational change at Acumen. This concludes our call.

Thanks again to all participants for your interest in Acumen.

This does conclude today's conference. We thank you for your participation.