Good day ladies and gentlemen, and welcome to the RadNet Inc First Quarter 2017 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to 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 Dr. Howard Berger and me today to discuss RadNet's first quarter 2017 financial results. Before we begin today, we'd like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. This presentation contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Specifically, statements concerning anticipated future financial and operating performance, RadNet's ability to continue to grow the business by generating patient referrals and contracts with radiology practices, recruiting and retaining technologists, receiving third party reimbursement for diagnostic imaging services, successfully integrating acquired operations, generating revenue and adjusted EBITDA for the acquired operations as estimated, among others, are forward-looking statements within the meaning of the Safe Harbor. Forward-looking statements are based on management's current preliminary expectations and are subject to risks and uncertainties, which may cause RadNet's actual results to differ materially from the statements contained herein. These risks and uncertainties include those risks set forth in RadNet's reports filed with the SEC from time-to-time, including RadNet's Annual Report on Form 10-K for the year ended December 31, 2016 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 2017 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. I am very encouraged about our results this quarter. I believe it is a strong start to the year and our performance is in line with our 2017 internal projections. Our first quarter, because of the normal seasonality in our business, is typically a slowest quarter from a patient volume standpoint, and because a majority of our operating costs are fixed, the first quarter's EBITDA and profitability are generally more challenged. Despite this, our metrics improved nicely relative to the first quarter of last year, and our improvement was primarily from same center gains, as we have not made any significant acquisitions since the last quarter of 2015, our revenue increased 5.8% as a result of a combination of strong aggregate and same center volume performance, as well as placing increases. Aggregate volumes increased 2.5% relative to last year's first quarter. The increased volumes were particularly notable in our West Coast operations, where total volumes increased 5% from the prior year's first quarter. Although East Coast volumes also increased, these increases were more modest and were negatively impacted by a severe snowstorm in the middle of March. On the pricing side, we received increases in several of our markets from private payors. We are seeking more and more of the health plans, with…

Thank you, Howard. I am now going to briefly review our first quarter 2017 performance and attempt to highlight what I believe to be some material items. I will also give some further explanation for further 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 reaffirm 2017 financial guidance levels. 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 operation, and excludes losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishments, bargain purchase gains and non-cash equity compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling interest in subsidiaries and is adjusted for non-cash or extraordinary and onetime events taking 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 2017 results. For the three months ended March 31, 2017, RadNet reported revenue and adjusted EBITDA of $229 million and $28.7 million respectively. Revenue increased $12.6 million or 5.8% over the prior year same quarter, and adjusted EBITDA increased $1.6 million or 5.8% over the prior year same quarter. Revenue increased from a combination of volume and pricing growth, relative to last year's first quarter. Aggregate procedure volumes rose 2.5%, while same center volumes rose 2.1%. As discussed earlier by Dr. Berger, also contributing to the increase in revenue were pricing increases we received in several of our markets, as well as increases in enrollment and pricing in…

Thank you, Mark. In the coming quarters, we expect that much of our focus will be on continuing to improve our operations, pursuing health system partnerships and completing tuck-in acquisition. We delevered our balance sheet by over half a turn of leverage during 2016, and I anticipate that we can also deleverage in 2017, particularly in the second half of this year, when we will have already completed the majority of our capital spending. I continue to believe that RadNet's model characterized by geographic concentration, multi-modality approach, health system partnerships and capitation, ideally position us for the changing landscape of healthcare. Regardless of what happens with healthcare on a legislative level, the practical economics of the rising cost of healthcare in this country will require a change and a new payment model. Models that address population health and risk taking, rather than the traditional fee-for-service approach. RadNet has always been on the forefront of entrepreneurial payment models, business structures and partnerships. We have been managing imaging for and taking utilization risk associated with large patient populations for over 20 years. We have established key health system partnerships on both coasts under variety of operating and financial structures. With preserved [ph] related business opportunities such as radiology software, in-patient staffing, teleradiology and breast disease management. We have grown to be the largest provider of outpatient imaging in all of our core markets. I believe that the great efforts associated with creating all of this, has provided us with the background and experience necessary to be successful in the changing future landscape of the healthcare delivery system. I look forward to updating all of you on our progress, as the year progresses. Operator, we are now ready for the question-and-answer portion of the call.

[Operator Instructions]. And we will take our first question from Brian Tanquilut with Jefferies. Please go ahead.

Hey, good morning guys. Congrats. Pretty strong quarter. Howard, first question for you; so on that last point that you just made, as we think about health systems and what we see on the radiology side? Where I mean, you have got Envision, you have got Mednax, both trying to acquire and win contracts from the hospitals, and then you guys are obviously trying to do your joint ventures. I mean, what is the decision process, from a hospital's perspective, either outsource a contract to one of those guys or to JV with you, and what is your pitch, in order to make the JV structure a more attractive proposition for a hospital CEO?

Good morning Brian. Well our pitch isn't so much to the hospital from an inpatient standpoint. Our pitch to the hospitals are really what they need to be focused on, in terms of the larger population health management and how imaging is really the gateway for so many diseases today, particularly those that lend themselves well to screening processes. So while I am quite well aware of the activity going on in the inpatient space, with screening or amongst the people that you mentioned, Mednax, Envision, TeamHealth is another, etcetera. That model is a little less attractive to us, given that our focus is primarily outpatient business, number one. Number two, the long term models that I see are going to be favoring more of the ambulatory and outpatient providers than they are inpatient, as the efforts to ramp down hospital utilization by reducing the length of stay and having alternative systems to manage patients, before they get to the hospital, I think continues to put pressure on hospital systems. So our focus will be not necessarily on what is in the best interest of a particular hospital or radiology group, but how does that hospital or health system position itself in a marketplace that needs to have a greater reach for its services than just those provided on its immediate campus.

All right. And just a follow-up -- sorry, go ahead.

I was just going to add Brian, that there has been a multi-decade migration of business that has been leaving the hospitals in favor of ambulatory providers. Whether that's imaging, laboratories, surgery centers, physical therapy, you name it. Anything that can be done outside the four walls of a hospital these days, is migrating towards the patient players. And so what we have recognized, is that the hospitals, who are forward thinking, have been seeing this migration, and they are looking at ways and mechanisms where they can recapture some of that outpatient business, instead of trying to fight that trend, how do they participate in the trend. And so those forward-looking hospitals have approached us or we have approached them in our market, and are looking at ways that they can now participate in that growth of the ambulatory practices. And they also recognize that a lot -- that they have -- that a lot of these patients who are very sick, will ultimately find their way into the hospital through surgeries and other services that they provide on an in-patient basis. So they look at that -- these outpatient ambulatory operations as kind of feeder systems, ultimately for their hospitals. And from our standpoint, we like it a lot, because it takes the -- one of our competitors, which tends to be the local hospitals, out of commission or we join forces with one of our competitors for the outpatient business. And many of these hospitals are health systems with whom we are partnering, have acquired and been more aggressive over the last few years in acquiring physician practices and other operations outside of their four walls that can be tremendously valuable referral sources into our outpatient imaging. And we hope that once we join forces with a local hospital, then the outreach that they have in the community will help to drive our volumes.

That makes a lot of sense. Dr. Berger, one thing that we are hearing reading trade industry Rad [ph] and just talking to your physicians; is artificial intelligence getting into the radiology space. So what are your views in terms of the future of radiology and how technology plays into it, whether it's the risk or an opportunity?

I think it's both actually, risk and opportunity. Not so much risk for RadNet but risks for radiologists that are resistant or could not adapt to these changes. What I like to stress when I meet with people regarding this subject, is that artificial intelligence or cognitive learning or machine learning, whatever term you want to use, I think is perhaps more important in radiology than it maybe in any other specialty. And the reason I say that, is that you have to look deeper into what's happening inside radiology, from a technology standpoint. As more and more of the equipment becomes increasingly sophisticated and capable of generated, in shorter periods of time, numerous more images, it is becoming increasingly difficult for radiologists to keep up the productivity and the quality of imaging that the enormous amounts of data, produced by this piece of equipment -- let me give you an example; in the transition from 2D to 3D mammography, the amount of data that the 3D breast tomography systems are capable of generating, are somewhere between 17 and 20 times the amount of conventional 2D mammography. What's really driving that, are the enormous numbers of additional images produced. I could make that same comment with MR and with CT, as the number of slice scanners goes up or the CT scanners which used to be single slice and now you are talking about 256, 512 slices, the amount of data and the ability of the human eye to go ahead and look at each one of these images and detect the slight abnormalities that might be seen, become increasingly difficult, not only for the average radiologist, but also, tend to slow them down and become quite fatiguing over the period of time. So I look at artificial intelligence being able to sift through these enormous amounts of data and identify the pertinent images that might require further evaluation by the radiologists, allowing them to be more selective, and at the same time, letting the artificial intelligence give its own interpretation of what the potential differential diagnosis might be, that a radiologist can then use, when he does his consulting work with the referring position. So I don't believe artificial intelligence will replace radiologists. I think it will enhance all of our ability to make everybody in the system more efficient, more accurate and in the case of RadNet, more productive in terms of how it is able to manage the large numbers of patients that we expect to continue to see coming through our centers.

I appreciate that comment. Mark, last question for you; so as we think about EBITDA progression for the year, how should we think about the cadence of EBITDA, as we think about Q2, Q3, Q4? And then also I noticed that, the capitated revenue has been pretty stable at that 0.7, $28 million range. I mean, is there anything that you would call out there, and then how do you foresee that growing in the future?

Sure. So there is a natural seasonality to our business, where first quarter is usually the weakest in terms of volume and profitability, given that most of our costs are fixed costs. We see the second and third quarter, the summer months, tend to be stronger. Fourth quarter, depending on where the holidays fall, whether they fall in the middle of the week or towards the end or the beginning of the week, and depending upon what the weather situation is, if there is say, early and bad winters. If you have winter on the East Coast, can affect our results. But we usually see, second and third quarter being our strongest quarter of the year, although we have seen very strong fourth quarters in the past. This seasonality has changed over the last 10 to 15 years since I have been in the business. It used to be that the first quarter was strong and the fourth quarter, because of the holidays and the winter was weak. But with confidence [ph], we have seen is that there has been a pretty steady migration of patients going into these higher deductible health plans, which has caused them to -- at the end of the year, trying to scramble and get any types of services done, that are elective or that could otherwise be delayed, they want to get that done before they are deductible resets at the beginning of the year. And then once the beginning of the year comes on, maybe they've had some of those services, so they don't need them. Or there is a kind of a psychological effect where people don't want to start blowing through their deductibles, unless they really have to. So they did delay, and delay, and delay, until they suddenly start using their deductibles. So we have seen a lighter first quarter, typically, than in the past, and that continues to be the case. The second part of your question Brian, was?

Capitation revenue.

Capitation. Yes. I mean, we did see some growth in capitation. Our capitation revenue quarter-over-quarter was up $2 million. About half of which was based upon greater enrollments in these capitation contracts. Remember, we are getting a per member, per month fee for these commercial and Medicare advantage lives. And so as enrollment changes, that per member per month fee goes up or down. So we have seen some growth in enrollment, which is nice, and that's basically the typical growth year that we are seeing in managed care in California. And then half of that was from pricing increases. So we have got $1 million of that $2 million were from price increases that have happened over the last 12 months.

Got it. All right. Thanks guys.

Thanks Brian.

Thank you.

And moving on, we will take our next question from Mitra Ramgopal with Sidoti. Please go ahead.

Good morning. First just a few questions regarding the exit from Rhode Island. I was wondering if you can give us a sense of the revenue from the five locations?

Sure. The revenue from the five locations was about $6.5 million to $7 million on an annual basis. And was a [indiscernible] amount of volume that we were talking about from those five locations was about -- I believe about 75,000 exams per year.

Okay, thanks. And can you talk a little about maybe the competitive environment? You mentioned an operator was looking to expand there, and so you stalled. Are you seeing other operators into the geographies you are in right now, and are expanding?

In all the geographies that we remain, providing our services, there are opportunities to expand. In our five core markets, California, New York, New Jersey, Delaware and Maryland, we are already the largest outpatient imaging provider in each of those markets. And we continue to see smaller operators desirous of becoming part of either the RadNet operation or perhaps finding it too difficult for them to continue themselves and closing shop. So we were not particularly interested in staying in the Rhode Island, since we couldn't elevate our presence in that market to a similar position and rather than invest more capital in a market where we were not going to be the dominant player, we felt that better to exit that market and be able to redeploy that capital into our existing markets, where we have greater size and leverage.

Okay, thanks for the color there. And just on the pricing side, clearly, you are seeing some nice initial success in terms of the 3D mammography and you mentioned you got some pricing, in terms of -- with other payors. I know you talked about upcoming CMS proposals, etcetera. But it seems like, at least from a pricing standpoint, it's pretty favorable for you right now?

Well, yes I think it is. I think it's favorable, more because of the position that we have been able to establish in our markets, where other than let's say Medicare, which is controlled by CMS, we are able to go back to individual payors and negotiate different reimbursement rates. And there has hardly ever been a case where we didn't go back and get some additional benefit moving forward. But I think that's more, again, not necessarily a industry-wide phenomena, it's more of a testimonial to the RadNet strategy, where we have such a important seat at the table that we can have these conversation and try to stress the importance of making certain reimbursement is reasonable and equitable for us, and how much the payors can actually save by putting plan design together or marketing strategies with us, that move patients out of the hospital systems, which typically cost the patient and the payors, three to four times what it would be, in a freestanding outpatient facility. So I think, I'd like to give credit to the entire RadNet team, in terms of its execution of its strategy that has made this possible. I don't think that the average imaging center operator can -- since we walk into a payors offices and expect to get increasing reimbursement.

Thanks. So that's great. And then finally, again I know we are pretty early still in terms of talks about healthcare reform. But I don't know if you could kind of give us a sense as to, how much you think the Affordable Care Act might have helped you, and do you see really it being clearly [ph] neutral for your business, in terms of any changes in terms of Obamacare?

Yes. I think the primary benefit from the ACA was really here in California. I think it has been negligible in the other markets that we are in, and I think that's just a matter of demographics. Here in California, and as we have seen with at least some of the preliminary information regarding the repeal or replace, I am not certain what it's going to be in its final form of the ACA. But in California, so many of the uninsureds have been opting out for either the exchanges here, or other types of plans that the payors here have created. I don't believe that the state is trying to shirk away from its opportunity and the benefit of having these people insured. So whatever changes may shift, may occur, [indiscernible] of shifting responsibility from the federal government to the state, and I believe California, because it's in a much better economic position than it was, let's say five years ago, will be very responsible for making certain that these people who have now entered into the health system, which has probably stabilized somewhere between 1.5 million and 2 million people, don't filter back out into the uninsured marketplace, which cost the system far more money than it does to have them properly insured.

Okay. Thanks again for taking the question.

You're welcome.

Thanks Mitra.

[Operator Instructions]. And we will take our next question from Ed Kressler with Angelo, Gordon. Please go ahead.

Good morning. Thanks for having the call. Real quick on CapEx; just trying to get a sense in terms of the cadence through 2017. Q1 was a pretty heavy number, so I guess about half of your guidance was already spent. Just wanted to get a sense in terms of, where that's going? I know Dr. Berger had made some commentary requiring equipment for 3D mammography. I was wondering, if it's going there, and then what is the -- what's kind of a more normalized run rate number for CapEx, as the business kind of moves past this bolus that we have been at? Thank you.

Well, our guidance for CapEx is $55 million to $60 million for the year. In the first quarter, as you have seen, we spent about $35 million. So we are very comfortable with that range, but in and of itself, we tell you that over the remainder of the year, we don't anticipate spending more than about $25 million over the remaining three quarters here. This is a fairly typical pattern for the company over the last several years, where we begin projects at the end of the year and the bulk of our spending occurs in that first quarter. And so, as Mark alluded to in his remarks, the fact that there will be a significant lower spending, primarily in the third and fourth quarters, should allow us to accumulate more cash and continue delevering our balance sheet. So where that money is being spent is a broad spectrum, some of it is for a couple of new facilities that we are building here. One on the East Coast, and one on the West Coast. Some of it is for expansion in the East Coast for our Breastlink initiative in New York. Some of it will be for continued investment into the 3D mammography. And some of it will be the continued upgrading of equipment, particularly in the x-ray area, where the reimbursement from Medicare will decrease, if you don't make a transition into the more sophisticated digital x-ray technology, which we began last year and will finish off this year to avoid any kind of reimbursement reductions that are going to take place for people who haven't made that transition, starting in 2018. So I don't think there is any one area, where we are going to be more heavily spending than others. Some of the spending will be maintenance CapEx as always. But a good part from this point forward, will also be for growth CapEx, particularly as it relates to treating, tomography and our Breastlink initiatives.

And any sort of guidance in terms of what run rate maintenance CapEx will be?

Generally speaking, we are comfortable that about half of our CapEx is maintenance and half of it is growth CapEx. That distinction is one that require a longer explanation. But much of what we do, when it comes to equipment like CT scanning and MR scanning, is actually growth CapEx, as well as maintenance CapEx, because the newer equipment allows us to do a greater breadth of procedures and also, to increase capacity by producing scan times. So when we have opportunities like that, and particularly, when we have high demand and some backlog issues, you will see a lot of our spending will come along those lines; because overall, that enhances, but not only upgrading our facilities in keeping our competitive advantage in the marketplace, but also enhancing revenue opportunities. But roughly speaking, I think a 50-50 mix is accurate.

Okay. That's great. Thank you so much.

Thank you.

[Operator Instructions]. And it appears there are no further questions at this time. I would like to turn the call back over to management for any additional or 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 at RadNet for their dedication and hard work. 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.

Once again, that does conclude today's conference. Thank you for your participation. You may now disconnect.