Good day, everyone and welcome to the RadNet, Inc. Second Quarter 2017 Financial Results Conference Call. Today's conference is being recorded. At this time, I would 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 second 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 included 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.

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 second 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. Overall, I am very pleased by the continuing consistent improvement in our metrics and financial performance. Our revenue increased 5.2% and our adjusted EBITDA increased 5.5% over last year's second quarter. Procedural volumes increased 1.9% on an aggregate basis adjusting for our sale of our Rhode Island centers at the end of April and 2.4% on a same-center basis relative to the second quarter of last year. The same-center procedural growth, a major factor in driving our improvement in profitability, has the potential ultimately to margin enhancement, assuming we continue to have stability in our reimbursement rates. Earnings and earnings per share also increased quarter over same quarter. Earnings per share was $0.11 per share in the second quarter of 2017, an increase from $0.08 from the second quarter of 2016. Sequentially, the quarter was also a significant improvement over the first quarter of this year as our adjusted EBITDA increased 29% as compared with the first quarter of 2017. We turned the net loss of $1.2 million in the first quarter of 2016 into a net profit of $5.3 million in the second quarter. I believe the improvement in our results is reflective of our focus on internal operation. Until this morning's announcement of our acquisition of Diagnostic Imaging Associates of Delaware…

Thank you, Howard. I'm now going to briefly review our second quarter 2017 performance and attempt to highlight what I believe to be some material item. 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 second 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 and excludes losses or gains on the sale of equipment, other income or loss, loss on debt extinguishments, bargain purchase gains and noncash equity compensation. Adjusted EBITDA includes equity earnings in unconsolidated operations and subtracts allocations of earnings to noncontrolling interest and subsidiaries and is adjusted for noncash 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 second quarter 2017 results. For the 3 months ended June 30, 2017, RadNet reported revenue and adjusted EBITDA of $230 million and $37 million, respectively. Revenue increased $11.4 million or 5.2% over the prior year same quarter and adjusted EBITDA increased $1.9 million or 5.5% over the prior year same quarter. For the second quarter of 2017 and adjusting for the sale of Rhode Island as compared to the prior year's second quarter, MRI volume increased 4.3%, CT volume increased 5.9% and PET/CT volume increased 7.2%. Overall volume taking into account routine imaging exams, inclusive of x-ray, ultrasound, mammography and other exams, increased 1.9% over the prior year's second quarter. I now will discuss procedural…

Thank you, Mark. For the remainder of the year, we will work to expand virtually every aspect of our business across our 5 core markets. Our initiatives including - include driving same-center performance, expanding existing joint ventures and creating new joint ventures, building Breastlink New York, pursuing capitation opportunities in California and establishing capitation on the East Coast and expanding our eRAD and information technology platforms. The key to our current and future success is and will continue to be using our scale intelligently and effectively. Our size allows us to leverage core competencies and management skills to operate efficiently while affording us a voice in establishing long term fair and stable reimbursement rates with commercial payers. Our size allows us to be a supportable platform for growth and also attracts unique business opportunities. Capitation is one of them. Size, infrastructure, knowledge and breadth of services necessary to successfully manage risk-based contracts separate RadNet from most of the rest of the imaging industry. Scale attracts operating and financial partners like large health systems who seek joint venture opportunities to participate in the continuing migration of imaging services from hospitals to freestanding centers. Scale brings ancillary business opportunities such as our Breastlink Breast Disease Management offering and IT opportunities which we pursue through eRAD. As we have demonstrated, we need to get out or get big to be relevant in our core markets. I believe we have the platform and the team to continue to grow RadNet into a valuable and indispensable part of the health care delivery system. Operator, we're now ready for the question-and-answer portion of the call.

[Operator Instructions]. And our first question will come from Brian Tanquilut with Jefferies.

This is Jason Plagman on for Brian. I just wondered if you could give some color on your outlook for capitated revenue. I know it declined a little bit sequentially, but how we should expect that to trend in the second half.

Sure. Yes. I mean, we've had tremendous growth in capitation over the last few years, as you've seen and the big year was in 2015 with the sort of the advent of the Affordable Care Act. We saw a tremendous growth within even existing contracts in terms of enrollment. And as you're aware, Jason, our cap checks each month is based upon enrollment. In other words, we're not billing and collecting for each procedure. We get a check from the various medical groups with whom we contract that is based on a number of enrollees. We have not added any new contracts this year in terms of that types of growth. So our capitation really this year versus last year is fairly flat. And it may go up or down slightly in any given month or any given quarter just by number of enrollees who enter these health plans or leave these health plans or who choose our contracted medical group as their primary care providers or who leave those primary care provider groups. So it's been fairly constant. But if you look at the trend over the last 3 years, we've had significant growth in capitation. We're in discussions with several new groups here in California as well as talking to some of the existing groups who have positive lives in geographies that we're currently not capitated with. So I do expect continued growth here in California. And as Dr. Berger mentioned in his remarks, we do have some fairly significant opportunities on the East Coast that we've been working on now for some time. And we're hoping that we'll be in a position to talk a little bit more about that as the year progresses because that would be a major step for our company to bring capitation outside of California to other core markets where we operate.

Great. That was helpful. And then on the debt refinancing, any initial thoughts on where the interest rate may come in on that? Do you expect it to be similar to your current first lien or will it be tack-on?

Sure. Sure. So obviously, there's not a whole lot I can say at this point because we're just launching the deal right now. But I can talk to you about our intentions and our expectations. Our intention and expectation is that the blended cost of our debt capital when you now compare our current first and second lien rate and the interest expense that falls out of that rate - those rates to what would be now the new pricing under a unitranche deal or a first lien-only deal, we're anticipating that there would be an interest savings to the company that would be material to us. And we're also seeking a structure that incentivizes the company to reduce its leverage in the future, so that we're seeking a structure that would have step-downs in our leverage. So that as we continue to deleverage the balance sheet, the cost of our debt would be reduced. And what it would also do, it would prevent us from having to go out and do another refinancing in a year or 2 when we anticipate having lower leverage and may anticipate a ratings upgrade from the agencies, meaning Moody's and S&P, that would allow us to achieve a lower cost of capital. So we're looking to achieve a structure today that would not only build in some interest savings for us today, but would also allow us to have step-downs in the future.

Great. That makes sense. And the last one for me. On the M&A environment, are you seeing maybe tuck-in opportunities in your existing markets? And then secondly, any thoughts on potentially expanding into additional adjacent states or entirely new states?

Yes, we're seeing interest in current markets from smaller operators. It's something that we get queries often from. As I've mentioned before on prior close calls, we don't go looking for acquisitions by and large. We want inbound interest from motivated sellers. So I think that will continue to be part of our strategy in our core markets. As far as getting outside of those core markets, unless there was an extremely unusual opportunity for the company at this point in time, we think it's best to deploy our capital in the existing markets that we're in rather than enter a new market.

And next, we will hear from Mitra Ramgopal with Sidoti & Company.

Just following up a little on the acquisition front. Regarding the DIA transaction, I know it's relatively small, but guidance remained unchanged. Does the guidance already assume some acquisition activity?

No. Our guidance, when we set it at the beginning of the year, assumes just a - unless there's an acquisition that's already been announced, it assumes no acquisition.

Okay. So again, but DIA, that's - you're looking to a more - the contribution for 2018 in terms of guidance being unchanged for this year?

Yes.

Okay. And Dr. Berger, as it relates to expanding the network, how do you view pursuing JVs versus acquisitions? Any preference?

Well, I would say that the pursuit of joint ventures is probably a greater priority for the company at this point in time. I should say that pursuing joint ventures is not mutually exclusive also with doing acquisitions because all of our joint venture partners are interested in continuing to grow the relationships. But the joint ventures that we've already announced and those that we're continuing to pursue have a lot of additional benefit long term for the company in terms of stability and relevance in the marketplace as, I think, alternative reimbursement models evolve. So we have found that all of our joint ventures ultimately, we believe, will enhance the company's overall performance either by growth inside those joint ventures or enhancing our opportunity for reimbursement or new reimbursement models that will only come to us, I believe, as a result of having partners that have even a bigger seat at the table or a voice with the payers. So I think at the present time, our primary focus is doing more joint ventures with the large health systems.

Okay. And on the same-store numbers, clearly, you saw nice improvements, especially in CT and PET/CT. I was wondering if anything in particular was driving that. And also the strong improvements you saw on the operating margin, anything that might have been different that led to that?

Well, in regards particularly to PET/CT, we have become the largest source of clinical trial in the country where 2 new agents used - were looking at prostate cancer and Alzheimer's disease. This has been a major growth opportunity for the company uniquely because of our large network of over 40 PET/CT systems which is by far the largest provider of those services as well as the clinical skills that we have in managing these clinical trials. I'm pleased to say that both clinical trials are producing very favorable and important results and expect that, in both of these cases, the methods will be adopted and reimbursed in a more routine basis in the very near future. As far as CT is concerned, some of our CT growth is both a combination of upgrading some of our systems to better technology as well as, I think, some renewed value that people see in CT scanning since it's a little less expensive than MRI scanning and has more in the way of opportunities for preventative screening such as CT of the lung which has now been approved by CMS and which is beginning to generate more activity and interest in our core market.

And on the operating margin, I guess, as a function of some deleverage you're getting off of the top line and the mix?

Yes. Mitra, I think as we continue to own our skills internally on a number of different levels, whether it be IT implementation, better negotiating with our vendors for supplies and our latest focus of turning attention to reimbursement operations to enhance our collection rates, all of these are working nicely with the company now. That's been our primary focus here over the last couple of years.

[Operator Instructions]. And we'll take a follow-up question from Brian Tanquilut with Jefferies.

Guys, just one follow-up. The Breastlink rollout in New York, just wondering how that's been received so far relative to when you rolled that out in California. Just any initial reception and thoughts on how that's been going would be helpful.

Well, it's a little bit early. We only launched it at the beginning of the second quarter, so we're barely 90 days into that process in. It has been - a primary objective of ours is to integrate the surgical practices into our facilities. The early results is very enthusiastic on the part of the patients who very much appreciate coming to our Columbus Circle centers in Manhattan and are able - and more efficiently they get all of their consultation as well as imaging done in a very expeditious manner. So we're still doing some build-out and expansion of our facilities. And I think it'll probably be the first quarter of next year until we're fully settled in and have the ability to go out and more widely market the multidisciplinary approach. But if we use as a gauge of this the enthusiasm of our patients and, most importantly, our surgical physicians who we brought into the practice, so far, I think it's a resounding success.

And next, we will hear from Dan Mena with Prudential.

First, the 4x leverage target that you referenced, is that a gross or net level?

It's a net debt level. Currently, our covenant in our credit agreement allows us to net cash against debt. So we look at it as on a net debt basis because we could always take that cash balance at any time and prepay the first lien at this point without any call period - without any prepayment penalty.

All right. Great. And then last one for me, working capital looks like it was a bit of use in the quarter for the first half. I was hoping you could talk a little bit about what's driving that and maybe how would you think about working capital for the back half.

Sure. Sure. There tends to be a drain in the first 2 quarters of working capital and it generally relates to our revenue cycle throughout the year, particularly now as more and more patients have migrated to the higher deductible health plans that there's a delay in cash that we see mostly in the first quarter but it bleeds into the second quarter. And we often see that, that turns around here in quarters 3 and 4 which tend to be much stronger cash collection quarters. So that's typical of the seasonality now that's been growing every year as more and more patients are going to these higher deductible plans. Going forward, I do expect to be - to see working capital via a use of cash but a small use of cash as we continue to grow the business. As you grow a business, generally, AR and working capital grows along with it and that's not been dissimilar to our business as we've grown so great over the number of years. So - but if we stopped growing and just kept a constant business, we'd expect working capital to be neutral.

[Operator Instructions]. And no further callers in queue at this time.

All right. Again, I would like to take this 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 to 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.

Thank you. That does conclude today's call. We do thank you all for your participation. You may now disconnect.