Good day, and welcome to the RadNet, Inc. Fourth Quarter 2018 Earnings 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 fourth quarter and full year 2018 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, including 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, 2018, 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.

Thank you, Mark. And 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 fourth quarter and full year 2018 results, give you more insight into the factors that 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. 2018 was a very progressive year, which sets the stage for what we are anticipating to be an even stronger 2019, as indicated by our guidance level we announced this morning and which Mark will review in his prepared remarks. During 2018, we made progress on all strategic fronts. And I believe our performance, particularly in the fourth quarter, demonstrated the power of the RadNet model and the multifaceted aspects to our business that make it unique in health care. I would like to begin by highlighting some of the accomplishments of 2018. First, our operations teams were successful on driving same-center growth. After a first quarter during which EBITDA was impacted by a $5 million with unusually adverse winter weather condition in the Northeast, our business recovered nicely. We posted positive same-center procedure and revenue growth for each of the remainder of three quarters of the year. For the last three quarters of 2019 -- our EBITDA for the nine months of 2018 exceeded that of the same period in 2017 in by 7.6%. In particular, our EBITDA increase was most pronounced in this fourth quarter, where we increased EBITDA by 13.5% over last year's fourth quarter. When we were are able to drive more patient volume…

Thank you, Howard. I'm now going to briefly review our fourth quarter and full year 2018 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 and full year 2018 performance. I will also provide 2019 financial guidance levels, which were released in this morning's financial results press release. 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 and excludes losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishment and noncash equity compensation. Adjusted EBITDA includes equity and earnings in unconsolidated operations and subtracts the allocations of earnings to noncontrolling interest in subsidiaries and is adjusted for noncash for extraordinary or one-time events taking place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or loss attributable to the 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 2018 results. For the three months ended December 31, 2018, RadNet reported revenue of $257.2 million and adjusted EBITDA of $46.2 million. Both were the highest quarterly levels we've ever produced in our history. Revenue increased $21.7 million or 9.2% over the prior year same quarter and adjusted EBITDA increased $5.5 million or 13.5% over the prior year same quarter. The increase in revenue and adjusted EBITDA was the result of the combination of same-center growth performance as well as the contributions of the EmblemHealth capitation contract, the Medical Arts facilities and the…

Thank you, Mark. We are very enthusiastic about the future of our business and -- as well a freestanding outpatient imaging business as a whole. Our company and our industry expect to benefit from the continuing migration of outpatient services from hospitals into lower-cost and in many cases, higher-quality ambulatory setting. Diagnostic imaging is necessary and irreplaceable in its ability to diagnose disease more quickly and accurately and with relatively low cost that are more than recouped through earlier and more effective treatment. In our core markets, RadNet has positioned itself the indispensable for the insurance companies, physician practices, major health systems and virtually all the medical disciplines that rely on imaging as a diagnostic tool. Through our capitation model, we are participating in and furthering alternative payment models and risk taking. With our eRAD solutions, we are participating in the transition to the digital medical record and to the electronic healthcare information system. Through our joint venture model, we are affording health systems the opportunity to have more distributed reach and to the communities, which they serve and affect strategies, such as population health. Our results in 2018 demonstrate the power of our core operating model. As we move into 2019, our focus will continue to be executing on our multifaceted operating strategy to include driving same-center growth and efficiencies making tuck-in acquisitions, expanding our health system joint venture model, designing innovative IT capability, such as artificial intelligence and computer-aided diagnostics and furthering alternative payment model. I look forward to updating you on the many initiatives we've discussed on our call today and during our first quarter's financial results call in May. Operator, we are now ready for the question-and-answer portion of the call.

[Operator Instructions]. We will take our first question today from Brian Tanquilut from Jefferies.

Congrats on a great year. My first question, Mark. Just to clarify. The JV in New Jersey, the changes there, did those occur October 1, 2018? Or is that a 2019 transaction?

2018.

2018? Okay, got it. And then, what is your ownership percentage of the JV after the reconsolidation?

We still own 49% of the equity interest. What occurred with the change of control is there were changes in the operating agreement and a voting proxy that gave RadNet more control, which required us to consolidate it from a financial statement perspective.

All right. Got it. That makes sense. One of the things -- as I read the press release, one of the things that you said in the press release, Howard, was that there's potential upside to rates for 2019. Do you mind elaborating on that as it relates to the capitation and commercial contract?

Yes. Hi, Brian. Thank you. As part of our strategy for years, we believe that the presence in each of our markets allows us to at least have a dialogue with payers, whether they'd be capitation models and the medical groups or with the health plan. Given the growth that we've achieved, both in terms of expanding our presence and our network of centers as well as joint ventures with major health system. We've begun conversations, which in the past, while it may have been somewhat muted, have now gained, I think, additional opportunities for us given the expansion of our presence as well as, I believe a more aggressive approach that virtually every major health plan is undertaking to help move business out of the more costly hospital stays into ambulatory centers. And for the first time, I believe we are starting to have conversations that not only talk about rates to talk about actual strategies, whether it's health plan design or going out into the marketplace to various physician groups and consumers to educate them the benefits of going into the ambulatory side of healthcare delivery and in particular, imaging. So in both cases, with our capitation groups where we feel the maturity of these contracts now causes us the opportunity and the need for both parties to reevaluate the economics as well as our overall strategy with the health plans coming from a number of different sources should provide us with some nice opportunities for revenue and reimbursement enhancement in 2019 and [indiscernible].

I appreciate that, Howard. I guess, a follow-up to that. So it looks like the growth story is now shifting to the joint ventures, right? I mean, been that way for the last few years instead of traditional M&A. So as we think about the profile of the joint venture facilities that you have, I mean, how do they compare to the legacy or traditional centers that you run in terms of same-store performance and margins and just any metrics that you can throw at us as it relates to the JV assets?

Well, I don't think that the metrics change dramatically when our centers go into joint ventures. I think it's more of an opportunity to protect our volumes as well as leverage the growth of the health systems that are very acquisitive in medical groups that they are purchasing and their desire, much like the health plan, to direct those patients, either for those medical groups that they acquire into lower-cost settings or be a beneficiary of that migration that is occurring irrespective of any other actions that they had on their own take. So our opportunity with these large healthcare systems that I need to emphasize is their health care systems, not individual hospitals are really to dovetail with their own strategic growth initiatives, which include population health and bundled health services as well as essentially, writing the opportunity both for them and us as the way of those business moves out of the hospital or centers into the freestanding facilities. So while I don't think that the growth is that materially different, I think it does ensures us of continuing their growth by not looking at the hospital as a competitor any longer but really as a strategic partner in virtually every region that we operate in. And we're looking for more of those. So I think, if you thing on a broader scale of what's happening in healthcare with mergers and consolidation of vertical integration of providers is I think a hallmark of what RadNet is attempting to do with the large health system.

I appreciate that. Just to piggyback on that comment, Howard. I thought Peter's and St. Joseph's with a deal that turns on every other day, so is that an example of that where you will get brought in as part of the deal down the road? And should we think about that as part of your JV pipeline for 2019?

Yes, I think so, Brian. Thank you for observing that. What I think that that represent is again consolidation that's going on inside the industry. Here, you're talking about two of the major healthcare systems, certainly in California, but particularly now here in Southern California, that has now found it advantageous for them to go ahead and merge their operations at least in one geographic area. My guess is that, that will happen to others. And because we have a joint venture already in place with the Cedars system, that relationship will not only be grandfathered into the new relationship with the Providence system that I believe will open above during this -- for us to work more directly with Providence as another potential joint venture partner, either in conjunction with Cedars or perhaps other areas of California where Providence is quite dominant.

We'll take our next question today from Mitra Ramgopal from Sidoti.

Just wanted to follow-up on the joint venture questions. I believe, Howard, you've mentioned you have about 25% of the facilities now with joint ventures with the leading health systems. I was just curious if you had to sort of take a longer view, 3, 5 years out, where do you see that number sort of approaching?

Currently we expect that, Mitra, but given the fact that I believe that we're getting more and more interest from health systems that I would not be surprised within 3 to 5 years if we would double the number of centers that we have with our joint venture partners. We have to remember also that, when we do these joint ventures with these healthcare system, the joint venture itself has a acquisition profile. So as those centers that are acquired, whether it's through the joint venture or independent centers that we own a 100% of, both of those are ways for us to grow the company. And in each of our joint ventures, by and large, those health systems have, as part of their regional strategy as well as their outpatient imaging strategy, the charge for RadNet, who manages all of these joint ventures and is responsible for various strategic initiatives to grow the number of centers in those joint ventures. So I believe within 3 to 5 years that, that may be 0.5% in joint ventures.

Yes, Mitra, and we've demonstrated that. In our prepared remarks, we talked a little bit about two acquisitions are MemorialCare joint venture we did, one in Santa Ana, did another one with a multicenter operator had four centers in Orange County, called Orange County diagnostics. And then in our Cedars, San Fernando Valley joint venture, we acquired a facility in West Hills near -- very close to actually to the HCA-West Hills Hospital. So we're already looking to expand these joint ventures and RadNet, in all cases is the day-to-day operating partner, so it is our responsibility to go out and figure out how to grow these businesses. And we don't treat these joint venture centers any differently than we treat wholly-owned facilities. They get the same time and attention and the same focus on business development.

Okay, noted. That's great. And then shifting a little in terms of -- I'm just curious regarding Anthem and UnitedHealth, the initiatives they've started in terms of shifting some of this business towards more outpatient to your so kind of facilities. Are you noticing any difference there? Or is this still too early to gauge any effect?

I think it's still a little bit too early as I've said in prior close calls here. It's a big shift and it turns slowly. And just because the health plan itself decides to take that kind of an initiative, it doesn't mean that the patients and the referring physicians embrace it just as quickly. So what we're beginning to have in the way of conversations with virtually all of the major health plans are ways that we can comarket and strategize about how we get to the primary consumers as being the referring physician and as being the patients into play, educate them, both on the benefits of going into a more friendly and perhaps even better quality imaging facility as well as the substantially reduced cost that they're likely to incur based on their higher deductibles and co-pays. So these conversations are bubbling up, and while I expect there to be a continued transition here, I think it will be one that will be slow given the educational process. Should they really get some real steam and initiatives here, perhaps later, here is our typical 1% to 2% growth could improve. But for the next year or two, I don't necessarily see that impact as being much different than what our difficult organic growth has been.

Okay, no, that's great. And I know you'd mentioned you'd be ending integration of the Medical Arts Radiology, and I was wondering how far along are you with that? And if all this already are completed?

Oh, gosh. It's not even started yet. With all the things that we have going on in the New York marketplace and in particular with our operationalizing our first CUP patient. The Medical Arts entity itself and it's 10 centers has been left pretty much unattended. So we expect starting here in the second quarter and extending throughout the rest of the year, we'll begin our process of what we call brand advertising the centers which would mean putting them onto our IT platform beginning to operationalize the staffing and integrating them more into the RadNet network. So while we believe there's significant upside there but it was there for us to leave that unattended. Now our integration teams and implementation teams were focused on the bigger opportunity in that New York marketplace so with our EmblemHealth relationship.

And then finally, I know, Mark, you'd mentioned in the quarter, I think, the California wildfires had an impact. I was wondering if there's a way of quantifying some of that?

Yes. And we were initially thinking it was going to be larger than it was. We were impacted in the -- in what we call our Ventura, Thousand Oaks, Westlake region, and we were also up in Northern California. And we estimated to the tune of about $1 million.

[Operator Instructions]. It seems we have no further questions at this time. I'd like to turn the conference back over to your host for today 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 in particular, the employees of RadNet for their dedication and hard work. Management will continue its endeavor to be a market leader and provide great services with a proper return on investment for all stakeholders. Thank you for your time today, and I look forward to our next call.

Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.