Good day, everyone, and welcome to today's RadNet, Inc. Third Quarter 2014 Financial Results Conference. Just as a reminder, today's call is being recorded. At this time, I would like to turn the conference over to your host for today, Mr. Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet, Inc. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen, and thank you for joining us today to discuss RadNet's third 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 operations as estimated, among others, are forward-looking statements within the meaning of the safe harbor. Forward-looking statements are based upon 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 for the 3-month period ended September 30, 2014, to be filed in the coming days. 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. Howard Berger, Chairman 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 third quarter 2014 results, give you more insight into factors which affected this performance and discuss our future strategy. After our prepared remarks, we will open the call to your questions. I'd like to thank all of you for your interest in our company and for dedicating a portion of your day to participate in our conference call this morning. We are very pleased with the performance of our business in the third quarter, a quarter that in the past has often been challenged by lower utilization because of the summer vacations and holidays. I'm proud to be able to state that in this third quarter, we achieved the highest quarterly revenue, adjusted EBITDA and adjusted earnings in the company's history. During the quarter, we benefited from the continuing strong procedural volumes we've experienced in the first and second quarters. Although we experienced larger patient volumes throughout our network, California continued to show extraordinary growth. Company wide, we were able to drive aggregate procedural volume growth of 9.0% and same-center volume growth of 6.3%, relative to last year's third quarter. Our top line performance was aided by the contribution of several small tuck-in acquisitions we made during the third quarter and some new capitation contracts. As a result of the substantial volume increases, our revenue was up 5.1% over last year. This performance is even more notable in that we had to overcome approximately $6 million of Medicare-related reductions during the quarter, which was the result of CMS's 2014 changes in the physician fee schedule. While we work tirelessly to originate and service increasing patient volumes, we also continue our focus on controlling…

Thank you, Howard. I'm now going to briefly review our third 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 third quarter performance. Lastly, I will update our previously announced 2014 financial guidance levels and briefly discuss recent reimbursement proposals from CMS. In my discussion, 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 sale 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 noncontrolling interest in subsidiaries and is adjust for noncash or extraordinary and onetime events that have 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 third quarter 2014 results. For the 3 months ended September 30, 2014, RadNet reported revenue and adjusted EBITDA of $184.1 million and $33.4 million, respectively. Revenue increased $8.9 million or 5.1% over the prior year same quarter, and adjusted EBITDA increased $8 million or 31.7% over the prior year same quarter. During the quarter, we experienced strong aggregate and same-center volume performance. On an aggregate basis, for the third quarter of 2014 as compared to the prior year's third quarter, MRI volume increased 8%, CT volume increased 11.9% and PET/CT volumes increased 0.8%. Overall volume, taking into account routine…

Thank you, Mark. Each year, the diagnostic imaging industry has a principal convention that takes place in November in Chicago, which is the annual meeting of the Radiological Society of North America, or the RSNA. RadNet has attended and participated as an exhibitor for many years at the RSNA. This year, our presence will be expanded to encompass the increasing breadth of products and services we offer. We will also be launching our new tagline: RadNet, Leading Radiology Forward. And our presence will underscore the core competencies and services that make us a pioneer in our industry, including: one, operating the largest network of imaging centers in the United States; two, providing software through our eRAD brand, providing cloud-based imaging workflow solutions such as RIS/PACS and critical test reporting; three, establishing and managing joint ventures and partnerships with hospitals and health systems; four, providing teleradiology and on-site professional staffing services through our imaging on-call subsidiary; five, reporting utilization management and clinical decision support services; and six, engaging community-based research projects and clinical trials. To showcase our products and services, we would be exhibiting in a new 3,500 square-foot floor plan which will be staffed with our various functional heads and business development teams. I invite anybody on this call to visit with us during this show, and I'm confident you will walk away with the same excitement about RadNet's future and the future of diagnostic imaging that we have. We are perfectly positioned to play a major role in changing how radiology is delivered in this country, and it is clear that we are at the very beginnings of that potential for RadNet. And it's for this reason, I have never been more enthusiastic about the opportunities and challenges that we will meet in the near future. I also recommend every one of you starting your day with Special K, a wonderful start to the day. Operator, we are now ready for the question-and-answer period of our call.

[Operator Instructions] We'll go first to Brian Tanquilut of Jefferies.

This is Jason Plagman for Brian. Quick question. I was wondering if you could provide kind of color on the volume trends you're seeing in your non-California markets? If those are trending positively as well, or how the business is performing in those markets?

Jason, what we are experiencing as we indicated in the call, volume increases. And while it is more prominent in California for the reasons we indicated, we are seeing nice trends the East Coast in virtually all of our markets. It's a little bit harder to attribute that to Affordable Care Act changes. Although we believe that they are beginning to creep into the marketplace at a somewhat more slower rate than we see in California. But I think it's our effective marketing and contracting as well as a continued consolidation that is more prominent on the East Coast, with providers that are either going out of business or consolidating into hospital systems. I think another element, which we are seeing more and more rapid adoption throughout the country is the recognition by the payers out there that the difference in the cost of these services between hospital-based systems and freestanding outpatient facilities like RadNet, is becoming larger and larger. And we see more efforts on the part of payers in plan design that is helping drive patients more aggressively into outpatient centers. So I see those kind of efforts impacting our volumes to a greater extent on the East Coast than we do benefits from the Affordable Care Act that we see here in California.

Yes, Jason. We've seen close to double-digit growth in California in our procedural volumes, and we attribute a lot of that to the extensive adoption of the Covered California health care exchange through the Affordable Care Act. In California alone, if you look at the national statistics, somewhere between 7.3 million and 8 million Americans signed up under these exchanges. California alone was estimated between 1.2 million and 1.4 million of that 7.3 million to 8 million Americans who signed up. And they're anticipating another 0.5 million patients in California going into the system through the open enrollment period, which begins November 15 and will last through February 15 of 2015. So we don't see really an end or a softening to the volumes that we're seeing here in California. We made some extensive investments during the quarter to try to accommodate these patient volumes. We've expanded some waiting rooms. We've had to staff up call centers, scheduling centers, front office folks so it's a high-class problem to have, but obviously, still something that we have to deal with. So we feel pretty bullish going into the fourth quarter and into early next year.

Great. And on that kind of trajectory in California, are you seeing -- has that continued to accelerate? Does that continue to accelerate in Q3? Or is it -- are you starting to see signs that it's leveled off? Or...

We saw some growth in Q3 relative to Q2 and certainly relative to Q1. Q1 generally had some seasonality to it, even here in California where you have good weather, there is seasonality now, considering that a lot of patients have signed up, or there's more adoption of this higher deductible programs. So in past years -- or it used to be in our industry that you'd see a lot of seasonality in the fourth quarter because of the holidays. And what we're now starting to see is that the first quarter is usually weaker because of the reset of deductibles. And we see some stronger volumes in the fourth quarter because of folks trying to get services done before their deductibles reset come January 1. So we actually saw some growth. To answer your question, we actually saw some growth in Q3 over Q2. It's -- we are seeing strong volumes here in October. Hard to say what November and December look like because of the Thanksgiving and the holidays in December, but we're cautiously optimistic.

Great. And Howard, you mentioned you're seeing signs of accelerating consolidation on the East Coast. Do you expect to pick up your pace of M&A activity and partnerships? And just any color you can provide on kind of the M&A and partnership pipeline would be helpful.

Well, I think, as we indicated, we did several small tuck-in acquisitions during the third quarter, and we continue to look at those as part of an ongoing effort to increase our presence and geographic dominance in particular regions. This particular quarter for the year-end, we will not be executing on any acquisitions as we round out the end of the year and focus on continuing to implement some of the rollout of our IT systems and other cost-savings initiatives. However, after the first of the year, we'll be looking for fresh add opportunities in every one of our markets. With a focus, and I want to emphasize is further consolidating in our regions, which is giving us substantial opportunity to work with our payers in plan designs and more exclusive networks. So while I can't forecast at this point how much of that will be, it is always a part of our focus. In California, in particular, I should emphasize that with the extraordinary demand that we have, consolidation out here is often a less expensive way for us to increase capacity than it is to add new equipment or build new facilities. So we will be looking at all of these strategic opportunities for us going into 2015 with a renewed emphasis on accommodating the demands that we have. And again, I want to emphasize, being the dominant player in our markets and working with the payers to improve access and the patient experience in our centers.

[Operator Instructions] Up next from Deutsche Bank, we'll hear from Darren Lehrich.

This is Josh Kalenderian in for Darren. Just a couple of things here. First, on the CapEx, how long do you think the increased CapEx cycle will last? Do you anticipate it going -- extending well into 2015, as the exchanges continue to ramp-up?

Well, I think that the -- the CapEx cycle in diagnostic imaging is not something we can ever ignore and use as a primary tool to improve both the opportunities to increase volume and the breadth of our services. So for us, the CapEx is a way of life that we've been living with ever since the company went public. The increase in this year's CapEx is more reflective of the demands here in California that we are gearing up for not only to answer the current demand that we have, but anticipated increasing demand in 2015. I don't believe when we give our 2015 guidance at the end of our fourth quarter here and year-end results, there will be an increase in overall capital expenditures beyond what we've experienced in the past. So I think, we can very nicely integrate the need for expansion, along with the need for the continued upgrading of our equipment, both of which address, I think, continued opportunities and investment in the company which are critical to its long-term success.

Okay, great. And then just looking at your EBITDA guidance, it looks like the implied margin for Q4 is implied at a lower rate than it had been for -- trending for the year. I mean, you guys did in the mid-18s for Q2 and Q3, and if my math is right, it looks like you're projecting something a couple of hundred basis points lower than that implied for Q4. So can you just give us a little color on if you think the seasonality is just going to outweigh the deductible burn benefits you'll see? If there's something else going on there, as you guys have the increased costs from ramping up the facilities that you've mentioned earlier on the call.

Yes, Josh. I'll take that. Yes, I think you might be reading into it a little bit more than we had anticipated when we adjusted our guidance levels. What we really wanted to do was narrow our guidance levels to an expected amount. We could, on the EBITDA side, go north of where we are, if we have a good Q4. The low-end, I don't know that we gave a whole lot of thought. I think from an EBITDA standpoint, we were just trying to give a range of about a $5 million window. So I don't know that we were necessarily implying a particular margin for the fourth quarter. From a revenue standpoint, we increased our range, and keep in mind that in our range -- our revenue is defined as service fee revenue, net of contractual allowances plus the revenue under capitation arrangements. So it's not net revenue on our income statement, it's before bad debt. So we we're just assuming a quarter that's more similar to where we came in, in the third quarter. But at this point, we're just through October. We haven't even closed the month of October, and we don't have a ton of insight into margins, and where that's going to be relative to the rest of the year.

Got you. And then last question here. Just on the Medicare physician fee schedule. It was better than proposed, so just wondering if you can square for us why you guys think it's going to be the same, $5 million to $6 million headwind.

No, actually, it was very consistent. I wouldn't say it was better than proposed. It was almost exactly as proposed when we did our analysis. So we -- what our analysis said, and we -- we've only had several days to work on it, is that it looks -- and we focused on the top 15 most prevalent codes by modality. It looks like it's almost exact to what the original proposal was in July. So we did not change our estimate of $5 million to $6 million impact for 2015. What was improved was the HOPPS schedule went up by 2.2%. But that really doesn't affect us because we're subject to reimbursement under the lower of the HOPPS and the Medicare and the physician fee schedule. And today, given all of the physician fee schedule cuts that have occurred pretty consistently over the last 7 to 8 years since the Deficit Reduction Act in 2007, almost all of the codes that were being reimbursed under is now subject to the physician fee schedule and not the HOPPS. So the HOPPS schedule going up, unfortunately in this case, does not impact us.

Let me add 1 other item to that. We have not also calculated any mitigation to the CMS reductions as a result of expanding and negotiating better rates for 3D mammography. As I mentioned in my remarks and Mark amplified in his, the company does over, or will do next year, well over 1 million mammography exams, and we will be investing significantly into 3D mammography and expect there to be some additional revenue that at an increased rate of $57 per exam from CMS, and it could be more than half from other commercial payers, could be a substantial mitigant to any CMS reductions. But that will be dependent upon the rate and method in which we invest and deploy in 3D mammography.

[Operator Instructions] And Mr. Stolper, it appears we have no further phone questions at this time.

Great.

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. I'm privileged to lead the best management team in the country. Management will continue its endeavor to be a market leader that provides great services with an appropriate return on investment for all stakeholders. Thank you for your time today, and I look forward to our next call.

And that does conclude today's conference, and again, we thank you, all, for joining us.