Good day, and welcome to the RadNet, Inc. Third Quarter 2017 Financial Results Conference Call. Today's conference is being recorded. At this time, I would now like to turn the conference over to Mr. Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet, Inc. Please go ahead, sir.

Good morning, ladies and gentlemen and thank you for joining Dr. Howard Berger and me today to discuss RadNet's third 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 includes 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. Howard 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 third 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 revenues increased 1.9%, and our adjusted EBITDA increased 1.3% over last year's third quarter, adjusting for the sale of our Rhode Island centers completed in April. Also adjusting for the sale of Rhode Island, procedural volumes increased 2.4% on an aggregate basis and 1.5% on a same center basis relative to the third quarter of last year. Earnings and earnings per share increased quarter over same quarter. Adjusted earnings per share was $0.12 per share in the third quarter of 2017, an increase from $0.11 from the third quarter of 2016, as adjusted for extraordinary events taken place in both quarters. The quarter's performance is especially encouraging since we had one less work day during the third quarter relative to last year's quarter. Based upon our annual run rate of over $900 million of revenue, each work day is worth over $3 million of revenue to us of which our experience is that almost 40% of this incremental revenue would fall to the EBITDA line. Additionally, we made significant investments in our reimbursement operations in the last two quarters, including ramping up staffing in self-pay collections, accounts receivable follow up, pre-authorization, cash posting and senior management.…

Thank you, Howard. I am now going to briefly review our third quarter 2017 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 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 operations, and excludes losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishments, bargain purchase gain 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 third quarter 2017 results. For the three months ended September 30, 2017, RadNet reported revenue and adjusted EBITDA of $227.6 million and $36.1 million, respectively. Revenue increased $3 million or 1.3% over the prior year same quarter and adjusted EBITDA increased $188,000 or 0.5% over the prior year's same quarter. Adjusting for the sale of Rhode Island facilities completed on April 28, 2017, revenue increased 1.9% and adjusted EBITDA increase 1.3% from the third quarter of 2016. Adjusting for the sale of all the discontinued or closed operations which includes Breastlink, Rhode Island and the oncology operations, revenue in the third quarter of 2017 increases $9.9 million over the same…

Thank you, Mark. The traditional lines defining healthcare are rapidly changing. We have seen major strategic moves by some of the biggest names in healthcare over the last 12 to 18 months that indicate where healthcare is headed in the coming years. UnitedHealth through its Optum subsidiary has purchased physician groups, urgent care centers and surgery centers. Other insurers like Humana and several of the Blue Cross Blue Shield providers have also begun to vertically integrate or establish an ambulatory provider strategy. There are even rumors that Aetna and CVS are in discussions to combine. Some healthcare systems are creating their own insurance products. Amidst the consolidation and change, one this is becoming abundantly clear. Healthcare services are moving away from hospitals into lower cost ambulatory settings. There are two principle reasons for those. First, patients are absorbing more of the financial burden of their healthcare than ever before because of the growing popularity of high deductible health plans. This popularity is being driven by the rising cost of premiums and is often the only way patients can obtain coverage at any level. As a result, patients are becoming more knowledgeable about the relative cost of services performed in hospitals versus outpatient facilities. The result is that patients are directing themselves into free standing, non-hospital operations which offer the same or better services as hospitals do, but at a fraction of the cost. Second, insurance companies are also more frequently directing their patients into lower cost settings through the creation of preferred provider networks and incentives such as lower co-payment and office visit fees. In fact, Anthem, one of the nation's largest insurers, recently announced it would only reimburse outpatient imaging exams within hospitals under extraordinary medical necessity circumstances. Otherwise, it would direct all patients to free sanding centers like those operated by RadNet for their outpatient diagnostic and imaging needs. These trends are very positive for RadNet. I continue to believe that we are well positioned to capitalize on the future direction of healthcare. We have proven that scale mattes. We have demonstrated our ability to be a value-based operator. We have shown that we can assume and manage utilization risk effectively and we have created a scalable infrastructure on the cutting edge of technology with our eRAD IT platform and the equipment that we deploy and utilize at our facilities. We look forward to more dynamic change in the healthcare landscape and are determined to play a bigger role in the evolution that takes place in the coming years. Operator, we are now ready for the question-and-answer portion of the call.

[Operator Instructions] Your first question comes from Brian Tanquilut with Jefferies. Please go ahead.

Howard, thanks for all the color, especially the ones at the end of your prepared remarks. So I wanted to hit on that topic on Anthem. How do you think that will play out and how fast does that initiative ramp across the industry or across the country and what do you need to do to prepare RadNet for that in terms of capturing that opportunity from Anthem as volume shifts out of the hospital mostly to independents like you guys.

Good morning, Brian. Well, the first part of your question about the length of time that this will take. If you had asked me that question maybe six months ago, I probably would have had a much longer horizon but I think as the market plays itself, it is now recognizing the need for shifting of that business. It's not only Anthem but I think other major health insurance companies that are recognizing the need to do this sooner rather than later. So my expectation is something that might have taken three to five years is probably only going to take maybe two to three years at most to have a major impact. Now not all of that business is going to transfer out. We always have to be mindful that the referring physician is the one most often who determines where a patient goes for any kind of ambulatory services. And part of what I think we need to do as well as the insurance companies, is really both educate the consumer, which means the patients or the enrollees, but also the referring physicians. I think by taking a much more aggressive policy regarding not paying for those procedures will help force the referring physicians to break patterns of behavior which are simply something you ingrained in their psyche, not necessarily because there is a real differential for the patient. In fact our position is that anybody given the choice would probably prefer to go to outpatient facility rather than be directed into a hospital whose primary responsibility is delivering inpatient care not outpatient care. So I expect the transition to happen faster. And it might happen before this latest announcement by Anthem, we are in fact fielding calls from other insurance companies that want to talk with us…

I appreciate all that color. Mark, turning over to you, if you don’t mind. So first on the same store performance for the quarter. You guys mentioned divestitures obviously, the one fewer day. If we back out all those things, what would same store revenue would have looked like for the quarter?

Yes. Sure. So same store revenue was up 2.5%.

That’s excluding the impact of the one fewer day and the divestitures?

That’s excluding the impact of the one fewer day which would add another, about $3 million by our estimation based upon our $900 million plus run rate of which we are estimating somewhere between an impact of $1.2 million and $1.4 million of additional EBITDA, would have been in the quarter had we had that one extra workday. So this year we had 63 workdays in the third quarter versus 64 last year, which is a huge impact for us on any given quarter. Just to note, in total we will have one less workday in 2017 versus last year as well because 2016 was a leap year. We had 265 work days this year, last year was 266.

Okay. And then, Mark, as we think about, go forward with the divestitures, just puts and takes in terms of revenue and EBITDA. I know you called out $3 million EBITDA contribution from the divestitures. Can you mind just walking us through how you are thinking about, without giving guidance for 2018, how should we be thinking about the different moving parts including reimbursement? And I know you have already talked about Medicare but just how should we think about building the model up?

Sure. Well, just to give you a little bit more color on the discontinued ops here. On a run rate basis, if you add the revenue of Breastlink, Rhode Island and the oncology operations that we sold to Cedars, that’s on a run rate of about $36 million of revenue on an annualized basis that we have lost through selling those businesses. They were running themselves at a deficit, we said in our prepared remarks that that would increase our EBITDA in 2018 by approximately $3 million. Now the reason why we got into these businesses originally is that they [threw] [ph] a lot of imaging and we were able to exit these businesses in a manner in which we can still recapture the imaging because we sold them to strategic partners of ours where we have joint venture relationships where they are incentivized to continue to send the business to RadNet or to imaging centers that we and they own jointly. So going into your question I think is about 2018, going into 2018 you could assume that although we will have $36 million of less revenue, we will have $3 million more of an EBITDA run rate going into 2018 due to our divesting of these operations.

Got it. Okay. And then last question from me, as I think about -- you mentioned that your goal is to get under four times leverage in 2018. What are your assumptions there in terms of acquisition spend? Obviously that’s a big part of the leverage computation or is it the outlook for you guys?

Sure. I mean from a guidance standpoint, because acquisitions are so binary in nature and we are making them on an opportunistic basis, we don’t budget acquisitions. When we sit in our budget meetings and we go out to the field and we build our budget from the center level up, none of us really have much visibility in terms of the acquisitions that might take place during that year, particularly the small mom and pops. Which come to us from time to time on a very unpredictable basis. But as you can tell from our track record, we are acquisitive. We haven't don’t anything of real major significance since the fourth quarter of 2015 where we acquired the DIG operations. Everything really in the last year and three quarters to two years has been more on a tuck-in basis. So when we think about our budget for 2018, we take our operations and what we have done in 2017 and kind of bridge them based upon opportunities for growth, challenges, risks and then we build it up from a volumes basis, on a center level basis.

Just to follow up with that. So as I think about your acquisition strategy, basically we should be thinking more tuck-ins and the deal should all be accretive. Right?

Yes.

Meaning like leverage accretive. In other words you don’t do deals that make your leverage worse?

Correct. I mean the smaller tuck-in transactions we are completing generally between three and four times EBITDA. In the cases of some of the mid-sized to larger acquisitions, we may stretch up to five times EBITDA if it's very strategic to us. And ultimately we feel like we can lower that even those stretch deals through consolidation opportunities, cost savings opportunities over time.

Let me add one other point to that. I believe that the small tuck-in acquisitions that we discussed in our remarks prior to the question-and-answer session here, will go a substantial way in replacing the revenue which has been lost through the divestitures. The importance of my making this comment is that our budget and the prospects for 2018, probably will be not that terribly different from a revenue standpoint but our performance and margins should improve as a result of divesting of operations that were very low margin and replacing that with better margin acquisitions that we have accomplished throughout 2017.

Thank you. Your next question comes from Mitra Ramgopal with Sidoti. Please go ahead.

Just a few questions. First, Howard, as you look at the business today post the sale of centers in Rhode Island, Breastlink and your oncology assets, do you still see having to divest more either non-core or low margins operations, or are you pretty much where you are or where you want to be right now.

I think we are pretty much where we are, where we want to be. Those other non-core operations at this point are very small and while there may be opportunities for us, I don’t believe that they move the dial very much one way or the other. So I think 2017 will have been a watershed year for us that has allowed us to exit lower margin operations and fortunately place those with now strategic partners so that we can still be the beneficiary of their imaging needs.

Okay. Thanks. I know you had mentioned earlier that you are seeing insurance companies looking to purchase free-standing ambulatory providers etcetera, and also surgery centers. Do you see yourself as a potential candidate for insurance companies or more really as a partnership opportunity going forward?

Well, I don’t have a crystal ball. Certainly I think that anything is possible when just a couple of weeks ago we saw the announcement that CVS and Aetna were in talks to merge their businesses. I think as I said in my closing remarks, the lines are blurring here and what I particularly like about our position in the healthcare industry is that number one, we are outpatient based and that clearly is the direction that all of healthcare is moving. And I don’t think there is a part of what we see being fundamentally by design that doesn’t emphasize that strategy. The other thing, and I say this perhaps somewhat selfishly but nonetheless I think was very good experience in healthcare. Imaging is a gateway to population health and I think conversations that we are having and will have, whether it is with health systems, insurers or others, are further recognition that better outcomes and better population health management is utilizing the tools of diagnostic imaging in a preventative and early diagnostic way. So I think, I wouldn’t rule anything out, we are always interested in talking and I think conversations in and of themselves, will lead to opportunities for strategic relationships regardless of what any kind of financial alignment or stock alignment might look like. So I think all these, this evolvement, if you will, of the healthcare industry, affects in a way that almost leaves the opportunities unlimited.

Definitely appreciate the additional color. Just to follow up a little more on the acquisition front. Given that insurers like Anthem etcetera are going to be focusing more on the outpatient imaging. Do you see that potentially driving up valuations as you look at the opportunities for acquisitions?

I don’t think it drives up the cost of acquisitions, if that’s what you are referring to, for us. I think we are very disciplined in what I believe we will consider in the way of an acquisition, as Mark mentioned, that’s what our plan and philosophy has been now for many years. And when you look at what the impact of this might be to a smaller operator, I don’t think it necessarily makes them more costly for us as an acquisition candidate. What they become of increased benefit for us, is additional capacity to the extent that the capacity constraints add our existing facilities are further taxed. So for us, I think looking at any acquisition, we will take into account adding capacity as much as it does, look at it from a pure financial and accretive standpoint. But I would not expect the acquisitions would become more costly for us.

What I think it does, Mitra, is it is a catalyst for more health systems who are using volume to the outpatient players to have conversations with outpatient players who are already established in the marketplace to have more joint venture opportunities be evaluated. And we are seeing more and more interest from hospitals, health systems to talk with us to try to essentially recapture business that they see migrating out of there hospital campuses in to the outpatient facilities. We did that with Cedars earlier in the year by establishing two joint ventures with them in Los Angeles. One in the Santa Monica market place, the other in the San Fernando Valley of Los Angeles. And Cedars as an example which is no dissimilar to what we are seeing with some other health systems, are trying to go beyond their four walls and have satellite offices, buying physician practices, other specialty provides so that they can be more of an integrated health system solution as opposed to just be a inpatient processor of patient within their hospital campuses.

Okay. No, thanks a lot for that. And, Mark, you had mentioned earlier I think, there are a few opportunities for you in terms of going through your customers and negotiate pricing. Do you see the story in terms of the top line essentially being volume driven or you feel more comfortable now that pricing can actually become a little more of a catalyst pulling Medicare rates neutral.

I think both. I think we have had -- we did get some pricing increases this year in a couple of our East Coast markets, most notably our New Jersey marketplace as we have demonstrated our importance and our strength in that market. And as insurance companies are interested in directing business to the lower cost providers, it's more of a volume play for them as opposed to a pricing play meaning that when hospitals are charging multiples of the price of what outpatient provides are charging, the insurance companies are okay with providing long-term stable pricing and pricing increases to the outpatient players, if they can drive more of that volume into the outpatient. So we are working with some of the major insurance companies in ways to design plans, whether it be with different co-pays or lower office visits, fees, in order to drive and direct more of the business to us. And with these discussions, in many cases, they are willing to give us increases to help them do that. So I see next year, I mean we haven't set our guidance yet but there is no doubt in my mind that our revenue will be higher next year and that’s going to be a function, certainly of volume, but I do believe there is some opportunity on the pricing side as well.

Thank you. Your next question comes from Ed Kressler with Angelo, Gordon. Please go ahead.

One of the themes coming out of the hospital reporting in Q3 was payer mix shift. I was wondering if you guys are seeing any of that?

Mix shift between government and non-government payers or...

Away from commercial towards government.

Yes, we haven't seen that. In the back of our press release, we release our quarterly payer mix and if you look at the government payer, meaning Medicare, it's right at 20% relative to our total net revenue and it's been, I would say between 19% and 21% now for several years. So we haven't seen anything like that. I am curious to know why hospitals would be seeing that. Perhaps it's related to the shift that we have been talking about in more and more services going to the ambulatory non-hospital based providers and so that the sicker patients are being seen within the hospitals and obviously the Medicare, the older patients are sicker in general. And so perhaps we are seeing a mix shift there because the ambulatory patients are going into the free-standing locations.

Right. You are seeing it on the ambulatory surgery center side too. So I think it's either all scratching their head, I am and that’s why I was asking the question, but I appreciate the feedback. CapEx, do you kind of think we are at run rate here or are there any kind of onetime issues in 2017 that affected it?

Yes. I think there were some items in 2017. We have the challenge of transitioning most of our x-ray systems that we are using, what, for last decade or so, were called computed radiography tools, to digital radiology tools. That CMS mandated that unless you made that conversion there was going to be a reduction in your reimbursement for x-rays if you did not make that transition. That was a very aggressive and substantial part of our 2017 CapEx and I am happy to say we have completed that now so that the company has no exposure to any reimbursement reductions from CMS as a result of that new policy. And that could easily have accounted for in the neighborhood of $7 million or $8 million or maybe even more, of our CapEx this year that will not be necessary in 2018.

Got you. Thank you for that. And finally, on the cost side. You are seeing any labor cost pressure overall? Are you staying essentially flat?

I think there is some labor cost pressure. The marketplace is much more of a buyers than a sellers, in other words the work pool I think has tightened up in the marketplace and hospitals out of desperation are continuing to pay substantially more because they were getting differentially, substantially greater reimbursement than the outpatient providers, particularly in imaging. And so that has been some of the competitive factors. My guess is, is that I think that that’s going to loosen up here because several systems that we are aware of or starting to have workforce reductions in the number of people that are staffing their radiology facilities, primarily as a result of what they anticipate are lower volumes as the outpatient business transitions to the free-standing facility. So the answer is, yes, I think there has been some upwards pressure on our salary structure but I think it will be somewhat transitory and will be a different playing field probably in the next 12 to 24 months.

We have also, Ed, beefed up some areas within our company and so we have added some salaries, most notably in our reimbursement operations, where we have added people in the areas of self-pay, payment posting and general management oversight. So we have made some investments. Given that it's becoming more and more difficult to bill and collect the money these days particularly because of the proliferation of these high deductible health plans that the patients are choosing more frequently that we have had to make some investments on the salary front to deal with some of these issues.

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

Thank you, operator. Again, I would like to take this opportunity to thank all of our shareholders for their continued support and employees of 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.

And once again that does conclude today's conference call. We thank you for your participation. You may now disconnect.