Good day, everyone and welcome to the RadNet Incorporated Fourth Quarter 2013 Financial Results Conference. Today's call is being recorded. At this time, I would like to turn the conference over to Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet Incorporated. Please go ahead.

Good morning. 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 2013 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 operation as estimated, and our ability to complete a successful refinancing transaction of our senior unsecured notes, 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, includes 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, 2013, to be filed in the coming weeks. Undue reliance should not be placed on forward looking statements, especially guidance on future financial performance, which speaks only as of the date it is made. RadNet undertakes no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the date they were made or to reflect the occurrence of unanticipated events. And with that, I'd like to turn the call over to Dr. Berger.

Thank you, Mark. Good morning, everyone and thank you for joining us today. On today's call, Mark Stolper and I plan to provide you with highlights from our fourth quarter and full year 2013 results, give you more insight into factors which affected this performance and discuss our future strategy. After our prepared remarks, we will open the call to your questions. I'd like to thank you -- 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. I am very pleased with our performance in the fourth quarter and how we are positioned for 2014. Simply put, our fourth quarter performance surpassed our own internal projections, resulting in our exceeding the high end of our revised guidance ranges for full year revenue and EBITDA. During the quarter, we experienced aggregate and same-center revenue and procedural growth relative to last year's fourth quarter. And more importantly, we showed significant sequential operating improvement, as compared to the prior 3 quarters of 2013. We accomplished this both through driving incremental revenue and procedures, as well as expense management as we began to execute on our previously announced initiatives to eliminate $30 million of operating expenses from our business. While we cannot determine with certainty why volumes improved in the quarter, we believe we may have benefited from the impact of increased procedures from patients in large deductible health plans, who sought to utilize medical services prior to these deductibles resetting in 2014. Also, we noted additional patient volume in our centers from those who were early enrollees in health exchanges under the Health Reform Act. We continue to hope that we will benefit in 2014 from increasing enrollment in some of these health insurance exchanges. Our financial…

Thank you, Howard. I'm now going to briefly review our fourth quarter and full year 2013 performance and attempt to highlight what I believe to be some material items. I will also give some further explanation of certain items in our financial statements, as well as provide some insights into some of the metrics that drove our fourth quarter performance. I will also provide 2014 guidance levels and discuss this morning's announcements regarding our proposed refinancing transaction. In my discussion today, I will use the term adjusted EBITDA, which is a non-GAAP financial measure. The company defines adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, each from continuing operations and excludes losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishments, bargain purchase gains and non-equity cash -- non-equity compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to noncontrolling interests in subsidiaries and as adjusted for noncash or extraordinary and onetime events taken place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or loss attributable to RadNet Inc. common shareholders is included in our earnings release. With that said, I'd now like to review our fourth quarter and full year 2013 results. For the 3 months ended December 31, 2013, RadNet reported revenue and adjusted EBITDA of $178.3 million and $31.9 million, respectively. Revenue increased $19 million or 11.9% over the prior year same quarter and adjusted EBITDA increased $7.3 million or 30% over the prior year same quarter. For the fourth quarter of 2013, as compared with the prior year's fourth quarter, aggregate MRI volume increased 16.8%, CT volume increased 5% and PET/CT volume decreased 4.7%. Overall volume, taking into account routine imaging exams inclusive of x-ray, ultrasound, mammography and…

Thank you, Mark. In summary, we are optimistic about 2014. Our business continues to be a strong cash flow generator as we demonstrated in the fourth quarter. We ended 2013 undrawn on our revolver and with over $8 million of cash in our balance sheet. Going forward, we plan on having a more balanced approach with respect to what we do with our free cash flow. In recent years, much of it was spent on acquisitions. In the future, while we believe we will remain reasonably active with small, tuck-in acquisitions, much of our free cash flow will be used to repay debt and deleverage our balance sheet. If successful, our proposed refinancing transaction will aid in this by potentially lowering our cash interest expense and providing additional funds for debt repayment. Furthermore, it should be noted that of our $40 million to $45 million capital expenditure guidance level in 2014, $12 million has been earmarked for the repayment of operating leases on existing equipment as part of our cost savings initiatives. But differently, we expect to spend between $28 million and $33 million on new capital equipment during 2014. This will provide free cash flow for debt repayment and deleveraging. Our near-term focus will continue to be on executing our cost savings initiatives. Our ability to mitigate reimbursement pressure is greatly enhanced by, and in some cases only exist, because of our scale. We represent important and sizable books of business for many of our operating partners and vendors. These partners recognize their responsibility in assisting us with mitigating the reimbursement pressures and have cooperated with us for the long-term benefit of all parties. Additionally, as we have grown, new opportunities for efficiency have surfaced. We remain confident and energized that our operating strategy is what is necessary for sustained success in our industry. Operator, we are now ready for the question-and-answer portion of the call.

[Operator Instructions] And our first question is from Brian Tanquilut from Jefferies.

First question for Howard or Mark, the cost savings that you outlined, if you don't mind just giving us details on what exactly we're looking at? And then, how should we think about the ramp in the realization of those cost savings? And the last part on that question would be, should we expect it to be at that $30 million run rate exiting 2014?

I'll take that question, and in reverse order. We do expect to be at run rate by the end of the year. The cost savings initiatives broken down into several components, some of it is for headcount reduction, which we have, at this point, already completed. The initial phase of that, which we indicate in the close call of the third quarter in November and are looking at other opportunities to go even beyond that. Other cost saving measures come from, as we mentioned in this close call, conversion of operating leases, as well as other areas that involve the implementation of our new IT systems related to RIS, PACS and voice recognition. All 3 of those initiatives are well underway and will be completed before the end of the 2014 calendar year. So the combination of those primary 3 sources, along with other negotiations with vendors on purchasing of supplies and materials, give us the $30 million that we talked about. The opportunity we believe, is for the substantial bulk of those to actually be implemented by the end of the third quarter, many of which, as I said before, are well underway but in particular, the rollout of our IT solutions, which has been long in coming, is now well underway and is an aggressive schedule to get the entire 250 centers of RadNet on the new platform by the end of the third quarter. So certainly, exiting the year, our ramp will be at the $30 million and with any additional opportunities that we're looking at, it may even exceed that going into 2015.

Okay. And then Howard, obviously Q4, the volumes were good but as we think about just market share shift within the industry, I'm guessing you guys are gaining share from the mom and pops, but what are you seeing now in terms of share shift into the hospital and vice versa? And I know you have your partnership in New Jersey, is that sort of the model that we should see going forward, where these hospitals would partner more? I mean, are you seeing more interest in that sort of arrangement?

Well, I'll answer that question and maybe broaden it just a little bit. I believe that there is going to be major shifts and the continuation of work out of hospitals in and into ambulatory centers. And I'm, of course, being somewhat general with that because that includes not only imaging but outpatient surgery centers, lab work, et cetera. I believe that the wake-up call to the commercial payors has now been well recognized that the cost structures and reimbursement to the hospitals is substantially greater than what is achievable in the outpatient sector. And as a result, many of the payors are now doing plan design that will help direct patients to more affordable imaging, as well as other outpatient procedures, as well as being very active in that process itself, in making their insured people aware of this and hopefully, even directing them more so. The hospital systems that recognize this are certainly going to be looking more actively about how they increase their outpatient presence. Barnabas, to their credit, was one of the first to do that and we believe that there will be others that will knock on our door to look at similar types of strategy. And the key to this, which I think is a very real one and is a word that it's creeping more and more to the lexicon of all providers is population health. The idea of just shifting business, if you will, from outpatient -- into outpatient centers from inpatient, doesn't address the overall issues that I believe the traditional fee-for-service model encompasses. More and more people are talking about taking larger groups of patients and moving them into more controlled economic alliances, partnerships, with many providers, imaging being perhaps the most prominent of those, given the prolific nature of…

Last question for you, Howard. Just to that last point, so as we think about free cash flow, you're guiding to $40 million to $45 billion roughly of free cash. How should we expect to deploy that? I mean, would you -- I'm sorry, free cash of $30 million to $40 million, would you consider going to new markets and making acquisitions or what's the plan right now for free cash deployment?

Well, our primary goal for 2014, as Mark outlined in his statements, is for pay down of our debt and deleveraging. So I think you may see more comments about that in our proposed refinancing, that will be more of a commitment for that for the company. And while that is something that we will aggressively be pursuing, if there are opportunities for us to go into other markets that truly represent long-term opportunities and require us to use some of that cash for other purposes, we'll look at those on a case-by-case basis. And I believe if we do find those opportunities, they will represent significantly different types of long-term benefits and vision for the company than what we have traditionally been looking at.

Moving on, we'll hear from Darren Lehrich from Deutsche Bank.

Maybe just on that last point with regard to your views on leverage, can you just help frame, in broad terms, what you think your longer-term target leverage might be? And it sounds like you're coming to market maybe with a little bit of a different view about that, so be helpful just to frame it.

Sure, Henry. It's Mark. I'm sorry, Darren. I'm talking about your colleague here. Darren, yes, I mean at end of the year, we're finishing up the pro forma basis, currently a little bit under 5x EBITDA on a total debt to EBITDA basis. And I think long-term, we'd like to see us be closer to around 4x, perhaps even slightly below that. And I think we're very comfortable with our leverage today and given our cost of capital and where we see our cost of capital going, we have a significant free cash flow as indicated by our $30 million to $40 million free cash flow guidance range for 2014. So we sleep very well at night and we feel comfortable with our capital structure today. But going forward, I think that we'll have more financial flexibility and more opportunity to grow the business if we were down closer to about 4x.

Sure. Okay, that makes a lot of sense. And then just when we think about your cost savings initiatives and the free cash flow guidance you've provided, can you just confirm whether or not cash restructuring costs are part of that free cash flow outlook and will cash restructuring cost be material in 2014?

Sure. They will not be material in 2014. The only cost, the restructuring cost, associated with achieving the roughly $30 million of cost savings is related to headcount reductions or severance. And if you noticed in the fourth quarter, we had some meaningful severance there and so a number of these, or most all of these headcount reductions occurred within 2014, so -- I mean within 2013, so as 2014 rolls on, we don't expect to have any meaningful severance or any other restructuring costs.

Okay. And then, a couple other things briefly here. Just as it relates to your commentary in Q1, obviously, none of us would be surprised about weather impact but I guess just thinking about it in the context of the last time we had a major event, yes, I guess was Q1 of 2010. Do you think based on what you're seeing that it's similar or can you just put it into some framework? Just to help us think through how impacted the weather has been on the business here.

Well, yes, I think as we mentioned, Darren, the guidance that we gave did include what we expect to be a soft first quarter given the weather conditions in the Northeast. The weather pattern, which I think has affected virtually all businesses out there is extraordinary and there is no way to avoid that kind of effect on the business. That being said, we do separate out in our guidance and in our forecasting, the volumes on the West Coast that have been extraordinarily high, some of which I believe is a result of factors that we talked about, meaning some people getting into the new health insurance exchanges, and I think deductibles at -- people are being a little bit more diligent on where they get their outpatient services given that they've got more financial responsibility for that. And I think we're seeing that in California because of the high population here and the large number of people that we expected to see going into exchanges. We are working closely with a number of the large payors here on things like plan design and aggressive patterns, moving patients from hospitals to the outpatient facilities. And I think that what starts in California, the jet stream does blow west to east and we expect to see similar patterns there once the weather clears because, again, we are in major metropolitan areas where I think a lot of people will be moving into these systems. And I think, I'd like to just make one other point clear and I may have talked about this on other close calls, one of the unique strategies of RadNet is that we are multi-modality, and you can see by our consistent results that more than 3 quarters of our volume is from routine imaging. If…

Just that's helpful color. Last thing, just briefly, Mark, the NOL position at year end, please.

Yes, I mean it's still north of $200 million both on a federal and state level so -- although we, since we've put the deferred tax asset on our books in the fourth quarter of 2012, although we've had a significant tax provision throughout 2013 as it relates to using that deferred tax asset, we still for the most part except for some state taxes where we're not in an NOL position in those states, we still have very little cash taxes that we're paying.

Our next question is from Henry Reukauf from Deutsche Bank.

On the cost savings that you have, can you say what you're -- of the $30 million, what are you entering into the -- what you entered in to the year with? How much you had realized or run rating out of the fourth quarter?

Better than half of it is what we started the year with, the 2 major cost saving initiatives which was buying out some operating leases and headcount reduction were completed before the end of the year and did have a small impact in the fourth quarter results. So of the $30 million, well over half of that was achieved as well as a couple of other initiatives with our vendors and some cost savings and purchasing initiative. So I think it's -- I'm comfortable saying that rolling into the year, we probably had already $20 million of the $30 million in place that would be realized on the run rate sometime here in the first quarter.

Okay. So we can almost say that you're pretty much going into the first quarter offset the impact that you're going to see from the price reduction?

Yes, yes.

Okay. Then since weather isn't impacting volumes in California and it sounds like things are going well, how do you see volumes in California? You mentioned they were up. What degree?

Well, are you talking about the first quarter?

I'm thinking about the first quarter because it sounds that you -- you sound very pretty optimistic about it, particularly in California. It's obvious it can be weak on East Coast.

Again, we're only barely 2/3 of the way through and even January itself on the West Coast, given the holidays and the ramp up here, perhaps are not quite as indicative. But I'm confident that our volumes here on the West Coast will be higher than what our overall guidance for volume increase is. Part of that is that we are getting increasingly more incoming calls from groups that want to go to capitation. Now these are people that we may already be doing business with, but who are looking to fix their costs, take advantage of the utilization management tools that we've honed here over 20-plus years, and start directing their business into a network of imaging centers like what RadNet has. So profoundly here in California, that I think is going to cause some significant shifts in the marketplace. So I think California, again, is a bellwether for what we can expect in other parts of the country and or let's say in the Northeast marketplace here. In terms that used to be dirty words like capitation and other forms of partnering are clearly now much more on the forefront of payors' minds and providers' minds. So given the fact that managed care is so extensive here in California, it shouldn't be considered unusual for us to be fielding more of these calls and opportunities here, but I think it's just a matter of time until it's embraced in some form in other parts of the country. And whether you want to call that population health, whether you want to call it accountable care organizations, I think all of these terms are just more of a way of talking about how the traditional fee-for-service model maybe changing for large books of population. So I think RadNet, fortunately over…

Okay. And then, last one maybe for Mark on the guidance. Am I thinking about this right? I mean kind of if I look at the low end of the guidance, it's seems like the cost savings are going to offset the -- plus a little bit, the reduction from reimbursement cut. And so kind of low end to your guidance assumes kind of a flat year with those 2 things offsetting each other and you kind of remained flat, and then the upside of the guidance kind of explain how you -- is my thinking right on the low end? And then, how do you kind of get to the high end? What are the factors there that kind of drive the nice increase?

Sure. I think that's accurate. The low end of the guidance assumes essentially a flat year with the cost savings that we achieved on a LTM basis, or the latest 12 months basis as of the end of the year, kind of equal out with the reductions in reimbursement. The higher end of the guidance assumes some growth in same-center procedure volumes, which we achieved in the fourth quarter of 2014, but was difficult to achieve and something that we weren't able to achieve in the first 3 quarters of 2013 as utilization continued to be managed and as patients have moved and migrated more towards to these higher deductible plans and have been a much more consumeristic and judicious about utilizing healthcare services, not just imaging but all healthcare services. So the top end of the guidance does assume some growth.

We'll go next to Duncan Brown from Wells Fargo.

Maybe following up on '14 guidance, can you talk about your expectations for commercial pricing in '14?

Sure. Our guidance assumes flat commercial pricing, which is something that we have been able to achieve over the last couple of years. We have had some reductions with the very small part of our business that has rates that are tied to Medicare, for instance Medicare advantage plans, which we categorize in our commercial insurance payor class, along with the HMOs. But for the most part, the rest of our commercial book of business has been flat. In some cases, as we've discussed last year, we received some nice price increases in the mid-Atlantic region, where we have a significant concentration of centers and where we are a very significant part of the provider network for all of the insurance companies in that region. So we're assuming flat pricing on commercial book and then our capitated book, which represents about 9% to 10% of our business, we received annual price increases as utilization continues to go up, even under our managed utilization functionality.

And for the managed Medicare, can you remind us what percentage of your overall book that is or as a percentage of commercial, depending on how you look at it?

Yes, I don't have that offhand, but it's very small. I mean, our commercial book of business is about 58% of our entire book of business and of that, if it were 5%, I'd be surprised.

Got you. And then on the Q1 guidance, you commented that it's going to be on the weak side. Can you remind us, was Q1 '13 negatively -- I mean, if I recall, it was negatively impacted by Sandy as well, obviously the bigger impacts were Q4 '12, so I mean are you saying it's going to be weaker than the Sandy or is it going to be more pronounced than the Sandy impact was in Q1 '13?

I mean, we don't have enough information in front of us given that we haven't closed 2 of the 3 months of 2014. But what I could tell you is that if you remember, Sandy occurred I think it was late October of 2012, a lot of the impact was in that fourth quarter of 2012 but there were some lingering effect into 2013 and we had some other weather issues in the first quarter of 2013. What I would tell you is, just from a gut feel here in first quarter of 2014, it's probably more akin to when Sandy hit in that fourth quarter than it was to the first quarter of 2013 with the lingering effects of Sandy and some other weather. But it's really too early to speculate, Duncan.

Oh no, that's fair, and I appreciate the commentary. I guess maybe a high level question, just in general when you have these sort of weather issues, I mean do these volumes, just maybe too high level a question, but do these volumes just get deferred and you eventually realize them or are they by and large just lost opportunities?

I think they're mostly lost opportunities. The reason I say that is the only way you realize those is if you can take the patients that weren't done and do them by having capacity in your centers to, let's say, double up your business and most of our centers are pretty busy and can't absorb that, number one, so you lose those slots forever. Number two, the bigger issue is that remember, these volumes or the impairment of these volumes is not singular to outpatient imaging. When we are not open, generally speaking, the doctors who refer us patients are not open either because they can't get to their offices or the patients can't get to their offices. And as a result, those patients wind up getting their services pushed back simply because we don't get the referrals, given that their referring doctor's offices are closed also. And perhaps the most difficult part of really understanding this is that 99% of what we do, maybe that's a little bit much, but the very, very high percentage of what we do is elective work. And as a result, sometimes people who are ill, if they get better, they may decide not to go to the doctor in the first place or not need a test. And so some of the work may never get done given the fact that there's a deferral in the entire system of having these patients go through the healthcare process of diagnostic evaluation and treatments. So it's very disruptive and I don't believe that we're going to have the chance of recovery. Think of it as an airline. When the airlines are down and those seats are lost, they're lost forever and it doesn't mean that the people who fly the airlines can get booked on the next flight, which is probably already full anyhow. So there's a lot of similarities to the airline industry I think when it comes to imaging.

We'll go next to Elie Radinsky from Cantor. Elie Radinsky - Cantor Fitzgerald & Co.: Just 2 quick questions for you. Now that you're in California and many other states that are participating in the Medicaid expansion and the Affordable Care Act, can you discuss any thoughts that you may have on that program for the year given that you've had 2 months of experience in that, if any? And the second thing is, is when you talked about refinancing your bonds, you mentioned that your proposal to do a second lien and other debts or other financing, what would that other financing be?

I'll take the first part and then I'll defer the second part, Elie, to Mark. What we're seeing and probably didn't anticipate would be the case is that a number of these new insured are rolling into the large medical groups, who we already have capitation arrangements with. And that process didn't really start getting some legs until probably the month of February, where we are now getting contacted by our groups and telling us to be prepared for some significant upward enrollment in their HMO products. So what we're now moving towards is a recognition that these patients who primarily were either not being -- did not have access to healthcare because they didn't have insurance or were just winging it if you will, and doing only what they had to, are fairly aggressively making their way into the various exchanges here in California, in particular that is resulting in, at least what we're seeing, a fairly exciting and growth of the HMO products that we just didn't anticipate and I'm not sure if anybody did. But it is going to, I think, increase our volumes at our centers. And more importantly, because so many of these are falling into our existing capitation arrangement, we're going to see some nice increase in revenue even if these people are not immediately seeking outpatient imaging procedure. So this is something that we thought might happen but couldn't put any real definitive or certainty to it, and it appears to be gaining some significant momentum here as we move through the month of February and into March where we'll be notified that these people are beginning to fall under these programs. I doubt that we will see this as quickly on the East Coast because of weather-related issues but I believe the phenomena, given the fact that we're in high-demographically populated states, will ultimately be the same in places like New York, New Jersey, Delaware and Maryland. So it may be a little bit of a delayed reaction on the East Coast, but I think we're very buoyed by what we're seeing here on the west coast.

Elie, I'll take the second part of your question, which was a question about the sources of funds in our refinancing. What we're contemplating is to raise $180 million in a second lien term loan and $30-million tag on to our existing Term Loan B, our first lien term loan. So part of the interest rate savings will come from an expected lower interest rate on the second lien term loan and the other part will come from the fact that we're replacing some junior capital with more senior capital. Elie Radinsky - Cantor Fitzgerald & Co.: And the expectation is for at least the 300 basis points improvement in that refinancing, is that fair to say?

I can't publicly comment on that right now as we're going to be hitting the private markets this week inclusive of a bank meeting on Thursday. But yes, I can't really say much more than that. I think that it's safe to say that we wouldn't be going out into the marketplace unless we thought that there was a material interest rate savings to the company.

[Operator Instructions] We'll go next to Alan Weber from Robotti and Company. Alan W. Weber - Robotti & Company, Incorporated: Can you talk about -- you see more publicity about doctors joining hospitals and kind of what you're doing and what impact do you see that long-term both in California and on the East Coast?

Alan, well I think it's less of an issue on the West Coast here, just given the nature of the hospitals and the landscape here, particularly with managed care. So we don't see a lot of that here on the West Coast. We are seeing some of it but just given the number of doctors, the population here, the impact overall would be very, very small. The East Coast is a little bit different, I think there's more aggressive competition for groups on the East Coast. And while we are seeing it in some markets, it really hasn't had much of an impact here. Again on the East Coast, which is a little bit different particularly in New Jersey and in Maryland, which are 2 of our bigger regions, we are aligned with major hospital systems, 4 of them in Maryland and 1 of them in New Jersey. So to the extent that those hospital systems wind up being part of a physician consolidation and acquisition, we actually expect the benefit from that and that has been something that we have been seeing. But overall, I don't expect this to be a major impact at all in any of the markets that we're in.

[Operator Instructions] And it appears there are no further questions at this time.

All right. Well, I want to thank everybody for taking the time to listen to our close call here. Management will continue its endeavor to be the market leader that provides services with appropriate return on investment for all the stakeholders. Thank you for your time, and we look forward to our first quarter close call in May.

And that does conclude our conference today. Thank you, all, for your participation.