Good day, and welcome to the RadNet Inc. first quarter 2014 financial results conference call. Today's conference 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 Inc. You may begin.

Thank you. Good morning, ladies and gentlemen, and thank you for joining Dr. Howard Berger and me today to discuss RadNet's first quarter 2014 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, 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, 2013, and RadNet's quarterly report on Form 10-Q to be filed shortly. Undue reliance should not be placed on forward looking statements, especially guidance on future financial performance, which speaks only as of the date it is made. RadNet undertakes no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the date they were made or to reflect the occurrence of unanticipated events. And with that, I'd like to turn the call over to Dr. Berger, President and Chief Executive Officer of RadNet.

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 first quarter 2014 results, give you more insight into factors which affected the 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. I am very pleased with the performance of our business in the first quarter, especially in light of the headwinds we faced. As many of you already are aware, particularly those of you who reside on the East Coast, the first quarter was impacted with extraordinarily severe winter weather conditions, which caused disruption to almost every business that operates on the East Coast. Our business was no exception. In addition to bad weather, our headwinds included the previously estimated $22 million of 2014 Medicare cuts, which became effective January 1 of this year. We estimate that the two factors together, bad weather and Medicare cuts, negatively impacted our quarter by $8 million to $10 million in revenue and $5 million to $7 million in EBITDA. Despite these impacts, the strength of our business show through. What really stood out is the impact and effectiveness of our previously announced $30 million cost saving initiatives. Our aggressive approach to identify and execute cost reduction opportunities began towards the end of last year. During this first quarter, the aggregate of the cost reductions we achieved fully mitigated not only the impact of the Medicare cuts, but also that of the bad weather. On slightly lower revenue as compared to last year's first quarter, we drove an…

Thank you, Howard. I am now going to briefly review our first quarter 2014 performance, and attempt to highlight what I believe to be some material items. I will also give some further explanation of certain items in our financial statements as well as provide some insights into some of the metrics that drove our first quarter performance. Lastly, I will update 2014 financial guidance levels. In my discussions, 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 compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling interests in subsidiaries, and is adjusted for non-cash or extraordinary and one-time items 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 first quarter 2014 results. For the three months ended March 31, 2014, RadNet reported revenue and adjusted EBITDA of $168.9 million and $27.7 million, respectively. Revenue decreased $4.1 million or 2.4% over the prior year same quarter and adjusted EBITDA increased $2.1 million or 8.2% over the prior year same quarter. For the first quarter of 2014 as compared to the prior year's first quarter, MRI volume decreased 0.7%, CT volume decreased 2.7%, and overall volume taking into account routine imaging exams, inclusive of x-ray, ultrasound, mammography and other exams, decreased 0.4% over the prior year's first quarter. In the first quarter of 2014, we performed 1,115,847 total procedures. The procedures…

Thank you, Mark. The healthcare landscape continues to evolve and it is more dynamic than ever before. The rules of the game are fluid and providers must be proactive about their positioning, so as to remain relevant in this quickly changing landscape. I continue to think that we've been forward thinking about our business, which will position us as a continued leader in our industry well into the future. Our geographic density and multimodality approach makes us an attractive choice for a variety of partnerships and payor-provider relationships. We have built an imaging business with the breadth of capabilities, which include expertise and outpatient freestanding centers, professional staffing to hospitals, willingness to assume and manage utilization risk and ability to offer portfolio of information technology solutions to manage most aspects of the imaging value chain. There is nobody else in our industry that can do all we can do. The breadth of capabilities combined with a committed, knowledgeable and experienced management team places RadNet at the forefront of participants in the quickly evolving healthcare delivery system. Today, we are more excited about the opportunities that RadNet is pursuing than ever before in our history. Our unique position gives me great encouragement about the future of RadNet and our role in a changing healthcare system. Operator, we are now ready for the question-and-answer portion of the call.

(Operator Instructions) And we'll take our first question from Brian Tanquilut with Jefferies.

I guess the first question from me is you guys talked about how volumes did pretty well in California or in your West Coast operations. So just wanted to see if you can give us more detail in terms of healthcare reform benefits there? I think California is one of the better states for reform. And also, if you can just give us a little more description into, who the patients are that you're seeing that are driving the volumes higher?

We are very pleased with the adoption of the patient enrollment here in California and I believe what we'll see in other areas, but particularly in California, we have seen an inordinate increase at most of our centers, particularly here in Southern California, with people enrolling very rapidly, as Mark pointed out, and we talked about 1.4 million people have now enrolled into the healthcare exchanges and other programs. And what's perhaps a little bit more unique in California is that the preponderance of these enrollees are younger people who have not previously had insurance. And when they enroll in these new exchanges, they are generally not sick people that are looking for healthcare coverage. They just have found an affordable way to access the healthcare delivery system. And as such they are more prone to getting the routine imaging procedures like ultrasound, X-rays, mammography, bone scanning et cetera. And these people are then ultimately, when necessary going to come to us for their advanced imaging MRI, CT and PET scanning as their doctors determine the needs for that. And the reason I want to underscore that is that I believe RadNet is rather unique, at least at the scale that we're at in offering the multi-modality approach, which has been a cornerstone of our strategy since RadNet came into being 30 years ago. And in California, it was primarily a driver of our capitation business, which needed to be a full service offering. So the fact that we can now do this is allowing more and more of these enrollees to find their way into our centers, either directly from the payors or through the numerous medical groups that we have both fee-for-service and capitation agreements. So I think this has caught us a little bit by surprise, the extent to which enrollment has accelerated here and the conversations that we've now started to have directly with many of the larger payors here are one in which they are aggressively looking to RadNet to make certain that these patients can be handled in our outpatient centers and not be forced to go to the higher cost, more cumbersome hospitals throughout California.

Just one follow-up to that, Howard, and this I guess is for Mark. So if the growth is pretty good in that sort of routine bucket, so should we expect the margins going forward to come down. I know you had a pretty good margin quarter in Q1, but as that mix shifts a little more to that lower margin routine bucket, how should we think about your margins?

I'll take that Brian. We think that our margins because of the systems that we have in place, even with the routine imaging procedures that we'd create very substantial margins on that business. Really the structure of RadNet and any provider that has the breadth of services is really about throughput. And because we've been so diligent in putting in our own IT system, our ability to handle large volumes with increasing efficiencies, keeps our margins very high even in the routine imaging procedures. So it's not so much about the margin on any individual patient, it's our ability to continue to have workflow capabilities that allow us to see more patients per unit of time and keep those margins high even in the lesser paying routine imaging procedure. So kudos to my IT department and all that we're working on, because we're very focused on workflow efficiencies to help absorb these additional patient demands.

Howard, you alluded to payors and how they're focusing on just cost and what you guys can do for them. So if you don't mind just touching on what your discussions are like today with payors as it relates to, whether it's partnerships, or what you can do? Obviously, hospital rates for imaging or much higher than yours. So is that an area where you could provide a solution or is this for guiding conclusion, where the hospitals have gained share and it's hard to reverse that trend?

Well, the trend can be reversed, Brian, but it really has to come not just because the payors increase the network or number of providers, but it also has to come through efforts on the part of the payors to create plan design that will focus attention on educating their enrollees as well as directing them into places where they can save money. So I think this is a combined effort, that we are starting have conversations with many of the payors in all of our markets, about how do we act together to provide access and transparency for their enrollees that will direct them into, not only lower cost solutions, but I think ultimately better quality medicine for outpatients than that what you're seeing in the hospital systems.

And then, Howard, just last question for you. You've done the partnerships obviously with Kennedy, you've got with Barnabas. So should we expect more than of that, because that's a fact, but it seems like you guys are gaining traction there. But how do you balance that strategy with the fact that you're also trying to partner or work with the health plans to pull volumes away from the hospitals?

Very good question, Brian, good insight. Most hospitals that are in competitive markets, recognize that there the disparity between the pricing at a hospital versus an outpatient center is not long-term sustainable. So I'll give a lot of credit to the hospitals in New Jersey, like Kennedy and Barnabas as well as the numerous partnerships that we have in Maryland that have recognized that they need to work together with somebody like RadNet and find ways to manage these patients in a more cost effective environment or else all they're doing ultimately is inviting more competition themselves that will fill the void over a longer period of time, if that disparity continues. So I don't think this is something that you do in a vacuum. Good healthcare leaders in these systems recognize that there maybe some short-term benefits for them, but long-term, not only is the disparity going would have to be somewhat lessened, but as some of the hospitals start thinking about things like population health and accountable care organizations, and where all the reinforcement maybe changing regardless of their presence in a marketplace, they're going to need lots of access and lot of assistance in managing these lives in a cost effective way, so long-term thinkers are at the table now. Those that take longer to come to the same place are going to be I think laggards and suffer from lack of foresight.

Our next question is from Darren Lehrich with Deutsche Bank.

I wanted to ask a couple of questions here. First, I guess just on the Meaningful Use accrual that you have in the quarter. Can you just maybe talk a little bit about the timing of cash flow from the meaningful use payments? And just thinking about the $6 million that you've identified here, do you have sense for the future attestations periods, are they going to come in any particular quarter or is that just a number that you think you can get to and it will come sort of ratably each year?

Darren, the Meaningful Use, the way the incentives work is we qualify physicians, and based upon the timing of the qualification and the submission to see a math determines when we'd be eligible to receive funds, and how much funds for that particular physician. So based upon the physicians that we've already qualified, and then the schedule of the rollout, the regional rollout of the eRAD RIS and PACS, which are the systems that qualify under these electronic health record directives, determines when and how much of this Meaningful Use money we will receive in the future. Based upon our existing timeline and that, which we've already accomplished, we are expecting to receive about $6 million over the next three years, so really in '18. And I think the best way to assume right now is that it would just occur ratably, so $2 million each for '15, '16, '17 would probably be the right way to put in your model. When during the year, in which quarter? At this point, we don't have any insight into.

Let me just amplify on that. Darren, maybe directly answer to your question. The accrual that we made in the first quarter, the majority of that money, probably about 80% of it has already been received.

Yes. More than 80%, we received in April.

Right. It's not guesswork, because we know exactly what we were expecting and has indeed come through.

And then, the number of physicians, approximately that relate to your Meaningful Use payments. Can you just give us a sense for that? And then just relative to the guidance, obviously you have upgraded it by $2 million, is that because of the Meaningful Use payments specifically or can you just clarify that?

Sure, Darren. I'm just looking at a report here. Roughly 330 physicians will be qualified under Meaningful Use. So these are physicians that work with our affiliated Medicare groups as well as Beverly Radiology physicians.

And then, relative to just the guidance question, can you just confirm that?

I think that the increase in the guidance was not necessarily reflective of the $1.8 million of additional Meaningful Use money. And by the way we don't necessarily believe that we're going to receive any more Meaningful Use money for the remainder of 2014. But really the increase in the guidance reflects just similar confidence and encouragement around the business based upon seeing some of the stronger volumes that we experienced here in the first quarter as well as seeing those volumes continue on through April and really into May. So we're seeing -- continuing to see stronger volumes from programs like Covered California and the other healthcare exchanges under the Affordable Care Act. The other confidence that we have to increase the guidance levels comes from the fact that we have been able to achieve some of these cost savings initiatives under the original $30 million program, on a more accelerated basis. And then as we said in our prepared remarks, we've identified approximately $10 million of additional cost savings initiatives that we will be executing between now and the end of the year. And so we'll some portion of that reflected in our 2014 numbers. So I think when you put all of that together, we just feel a little bit more confidence around our business.

The other thing I just want to ask, and you gave us a little bit of a forward 12-months look here in terms of the free cash flow and how that walks down from what we think would be implied by the EBITDA. I mean it does seem like you might be pushing about $7 million of free cash flow in the next 12 months. Can you just maybe confirm that that's the right level and are there any working capital changes that we are to be thinking about over the next year or so that might impeded your ability to get to that kind of level?

And what we did was we've given a little bit more clarity or updated our viewpoints on certain metrics that would allow you to create your own free cash flow model over the next 12 months. One of which is we're going to be -- we'll have the opportunity to spend less on capital expenditures. So in the next 12 months we think we're going to be somewhere between $25 million and $35 million, and that's reflective of the fact that we have invested so aggressively over the last several years, spending to the tune of about $40 million a year on capital expenditures. And really, when we look at our suite in our regional operations of equipment, they're pretty up-to-date and pretty cutting edge at this point. We also by virtue of increasing our EBITDA guidance by $2 million will have some additional cash. And then by virtue of the new interest rate on our second lien term loan, which is about 2.3% lower than that, which existed under our senior unsecured note. So we've gotten from 10 3/8% down to 8%, and it will give us about another $5 million of free cash flow over the coming 12 months reflective of lower interest expense. So when you put all those components together. We increased our free cash flow guidance for the year, and then it's even a little bit stronger than that, if you look at the next 12 months.

And it appears there are no further questions at this time. I'd like to turn the conference back to our speakers for any additional of closing remarks.

Thank you, operator. Again, I would like to take the opportunity to thank all of our shareholders for their continued support and the employees of RadNet for their dedication and hard work. Management will continue endeavor to be a market leader that provides great services with an appropriate return on investment for all stakeholders. Thank you for your time today and I look forward to our next close call.

That concludes today's conference. Thank you for your participation.