Good day, and welcome to the RadNet Incorporated First Quarter 2018 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 Incorporated. 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 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 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, 2017, 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 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 2018 results, give you more insight into the 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. The first quarter was a challenging one for RadNet. While the first quarter is normally impacted by seasonality related to weather and lower utilization as a result of the resetting of patient deductibles on January 1st of each year, this year’s first quarter was exceptional. We experienced the most severe winter weather conditions in recent history in the Northeast and Mid-Atlantic regions. During the first quarter, we had excessive closures as a result of winter storms and related issues such as power outages. These weather conditions even accelerated in March, where we experienced four nor’easter storms that lasted into the beginning of April. The result was materially impactful to our East Coast revenue, which represents slightly over 50% of RadNet’s entire revenue base. We estimate that we’ve lost almost $6 million of revenue from this scanning slots, representing a shortfall of over 45,000 exams that we would have otherwise performed. This was primarily a result as 24% of the scanning days on the East Coast were affected by some form of weather impact that led to higher complete closure or substantial reduction of our delayed to scan exams. Because much of our costs are fixed in nature, such as the vast majority of our staffing expenses, facility leases, repairs and maintenance, insurance,…

Thank you, Howard. I'm now going to briefly review our first quarter 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 first quarter performance. Lastly I will discuss our 2018 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 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 a non-cash or extraordinary and onetime events taking place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or loss attributed to RadNet Inc. common shareholders is included in our earnings release. With that said, I’d now like to review our first quarter 2018 financial results. For the three months ended March 31, 2018, RadNet reported revenue of $231.4 million and adjusted EBITDA of $21 million, with revenue increased $2.4 million or 1% over the prior year same quarter and adjusted EBITDA decreased $7.6 million or 26.6% over the prior year same quarter. For Dr. Berger’s remarks, our quarterly results were impacted significantly by the unusually severe weather conditions in our Northeast and Mid-Atlantic markets, which we estimate to have approximately a $6 million negative revenue in it and EBITDA impact on our operations. Furthermore, we received decreased management fees from our JV partners and lower flow-through of our EBITDA from these JVs as…

Thank you, Mark. In the coming quarters, we expect that much of our focus will be on the continuing improvement of operations, pursuing health system partnerships and completing tuck-in acquisitions. We will continue to work on de-leveraging our balance sheet through both debt paydown and driving future EBITDA performance. I continue to believe that RadNet is now characterized by geographic concentration, multi-modality approach, health system partnerships and capitation, ideally position us for the changing landscape of healthcare. The practical economics of the rising cost of healthcare will require change with respect to where patients receive their services and how these services will be compensated. New models that address population health and risk taking are becoming more prevalent replacing the traditional fee-for-service approach. We believe that some of recently announced partnerships between payors and providers and between payors and retailers will require a strong imaging partner, as imaging is the front end of the practically all medical specialties with respect to diagnosing and detecting disease and injury. We believe the RadNet size and scale make us a national partner to virtually any party looking to make a major move into population health. I look forward to updating all of you with our progress as the year progresses. Operator, we are now ready for the question-and-answer portion of the call.

Thank you, sir. [Operator Instructions]. Our first question comes from Brian Tanquilut with Jefferies.

Hey. Good morning, guys. Mark, just to start, as we think about the weather map in terms of the impact that you had, how do you get there? I mean, is that merely looking at the cancellations? Or is that conversely to your budget? If you mind just walking through how to think about that?

Brian, this is Howard. Actually I'll take that one from Mark. What we did was we took a look at our entire first quarter on a day-by-day basis, and where we noticed substantial dips in our procedural volume, we correlated that with known weather impacts such as snow and other power outages. And it became relatively easy for us to see that as the quarter unfolded, there were substantial full days as well as partial days that we’re impacted by that just imply based on what has been the run rate of the procedural volumes prior to those days and then in ramp up again to the succeeding 2 or 3 days, after a weather event. It's important to recognize that in our business not only is the date of weather impact felt by us but it's also subsequent days because our referring positions and their patients don't make it to their doctors’ offices, which then help populate our schedule with our backlogs.

No, I appreciate that color, Howard. So I guess a follow-up to that as you called out how the West Coast had north of 2% comps. So do you think that, excluding the weather, you would have been able to put up somewhere along those lines or system wide, should we be thinking about at least a 2% same-store outlook for the rest of the year or just going forward?

Yeah, that's pretty much built into our budget and our model. And given that we did see that on the West Coast, there is no reason for us to think that we shouldn't anticipate that on the East Coast, which is even a more robust market in many respects because fee-for-service business is far more problem in that marketplace. So I would think that other than the weather impact, have we would have been pretty much right on target with our internal budget projections.

All right. Got you. And then, Howard, as we think about the joint ventures, I mean, obviously you’ve signed a few of those, how are you thinking about the ramp? I know, Mark called out some losses there and declined management fees, but the core business that these JVs are seeing, if you don’t mind just walking us through what you’re experiencing and what your outlook is for that? And also if you can discuss or highlights incremental JV discussions that you’re having?

Well, there’s two parts of your question. The first one is that -- and I want to emphasize this because we’ve talked about it on prior close calls, we don’t just look for a hospital partner. We’re looking for the health system that is a partner and that can help do two primarily for us. Number one, as they acquire medical groups and execute on their own internal regional strategy, they then can drive additional business into the partnership that we might not otherwise have seen. More interesting in the case of the MemorialCare joint venture. They had actually 10 imaging centers that they contributed into the joint venture, which puts into that joint venture over 30 centers between the ones we owned and the ones they own. And those particular markets where we have big backlogs, we believe that capacity that they had in their 10 imaging centers will allow us to better operate their 10 centers that are now in the joint venture and contribute substantially more profitability than what those centers were doing when they were brought in. So that’s an impact element here for everybody to realize that none of the joint ventures that we have on the East Coast or West Coast are really with a single hospital. It’s with a system that’s a dominant player in their marketplace. Second part which you asked Brian is about future opportunities. We are looking at both coasts, other opportunities…

What type of break into other opportunities, just to mention with MemorialCare as the capitation contracts that will be carried on? So we will be starting the first of two capitation arrangements on June 1. The second will be started later this summer. In total, that represents about a little over 150,000 lives. And so we should see a ramp in MemorialCare as we go on throughout the year from those managed care lives.

And that at least on the West Coast is a bigger feature of our joint venture strategy given that these health systems do have large medical groups that they have purchased for manage and which they take for outpatient risk for that includes imaging. In the 150,000 lives with MemorialCare that we’re talking about, none of the patients that need imaging were being seen any of the RadNet centers prior to the joint venture. So that just kind of amplifies, I think, the value proposition of the hospitals. And the other thing that the hospitals provide for us and while we look for them is that they give us a greater leverage with the payors in those markets. We’ve seen that very substantially – seen substantial benefit in New Jersey with our partnership with the Barnabas Health System, where between the health system and RadNet we’ve been able to go in and get better pricing than what the physician fee schedule by itself would be. And that partnership is doing extraordinarily well. And more of the joint ventures that we will look for as we become more and more indispensable in the marketplace and with our hospital partners, I believe those conversations will be considerably more substantive. So that will be a key feature for us to continue to try to find appropriate hospital, new hospital partners, as well as expand existing hospital relationships which we hope to have more to talk about through the remainder of this year.

Howard, just a follow-up to that last point you made. Or I guess part of this is for Mark as well. So as I look at your revenue per procedure, it was down 5.8% year-over-year. I know last quarter you called out that you are getting better managed care pricing. And I know there is also the lot of the medical oncology business that you’ve invested. So if you don’t mind just walking us through the rate outlook in terms of apples-to-apples rate growth that you are seeing right now?

Sure. With respect to your 5% number, I am not sure you’re using the correct total volume for last year, which -- because I restated the volumes for last year using total consolidated volume. So just make sure you are looking at as an apples-to-apples.

Mark, if you don’t mind giving us a number? If we made it out apples-to-apples, what would revenue per procedure has been year-over-year?

I don’t -- we look at revenue procedure on a modality basis because the change in modality is a change from year-to-year. So we don’t look at it as a total one numerator, one denominator. We are looking at it on a -- not only a per-modality basis but we are looking at it per payor. And so I think the premise of your question is wrong. We are actually not down on a revenue procedure when you look at on a modality basis and per payor. We are actually slightly up.

Got it. Okay. That’s what I’m trying to get to. You are actually seeing rate growth from your payors?

Yes.

Yes, let me amplify a little bit more on that, too. One of the reasons we don’t give an average price per procedure, Brian, is that, I think as Mark referred to, modality mix can change from period to period, but we are also heavily investing in mammography 3D equipment, which is replacing our 2D. And with that, while we are making capital investment, we are getting a substantial increase in our reimbursement for mammography services. So if you would look simply, for example, at mammography, you would actually see a considerable increase in our reimbursement per procedure in mammography. And we are moving a substantial amount of our mammography fleet into 3D aggressively this year to follow up on that which we did last year.

We will go next to Mitra Ramgopal with Sidoti.

I just wanted to first touch on the guidance in regarding expansion opportunities. I know Howard you talked about some tuck-ins and obviously pursuing additional JVs. Are any of those already baked into the guidance?

Maybe on the one of them is based into the guidance, which is the one that we announced about a month and half ago, our Fresno Imaging acquisition had made us the largest player in Fresno. That's really the only acquisition that's built into our current guidance. And that became effective April 1.

Okay, thanks. And as you look the expansion, any preferences relates to doing a JV as opposed to tuck-in? Or do you on the need to necessarily start to the acquisitions that help drive additional JVs?

No, I don't think we need to do additional acquisitions to drive JVs. I actually think it’s the other way to round. Our tuck-in acquisitions, which in core markets that we're in, are ample. We will be pursuing those on a case-by-case basis to both I think expand our network presence as well as have a better -- to take out competitors, if you will. On the JV side of that what we're seeing is that our JV partners actually have relationships that they wind up then bringing to us to evaluate for expansion and which are centers that we might not have otherwise looked at but which they feel are important in their geographic market for their health system itself. So the JVs wind up presenting us considerable opportunities both on the revenue side of it as well as the expansion of it. And none of our JV partners, and I can say that categorically for all of them want to just start doing acquisitions. So RadNet strategy that has allowed us to build our scale to this point is one indeed that our JV partners want to continue to pursue both with us independently, but also in the various markets with their assistance.

Okay thanks. That's great. And again, I know it’s obviously was an unusual winter and clearly you had a significant impact on East Coast operations. I was wondering if you can giving me any thoughts in terms of geographic diversification beyond East and West Coast as a result.

Probably not. It's a good question. But it really goes to the heart of why we are pretty much at this point staying within our core markets, and it's where the population is where you have to take the opportunity with all of its shortcomings as well as outside benefits. And whether it is something that is one of the few things that we can't control, a lot of things that we do feel we can have a substantial impact on, but Mother Nature and other forces are just something that even RadNet can't control. And so the East Coast is a major hub for us. We’ve completely the expansion in the Delaware marketplace. As you well know, we've been a major fisher in Maryland now Northern New Jersey and in the metropolitan New York area, where we see very big opportunities at only in network of the scope and size that we have can really pursue. So we think that the deployment of our capital, if we look at it that way, is probably best in the markets that we’re currently in and where we get enormous leverage with all of the various facets that we’ve talked on in this call as well on prior calls.

Okay, no that’s fair. And then, finally, I am just wondering if you’re seeing any benefits from the Anthem announced last August noted plan to roll out a number of states in 1Q and I am just curious if you’re seeing any impact at all or is it just too early?

Well, I think the only market that we’re in, where Anthem plays, has a big role here in California, and they had their challenges with the California Medical Association and I believe that they’ve just kind of finalized a policy of how they’re going to implement that I thought was supposed to go into effect either April 1st or May 1st. So I think there will be opportunities that we will see from the Anthem announcement. But the focus really shouldn’t beyond the Anthem because every one of the other major payors and for that matter, smaller regional payers, are looking aggressively at trying to the be as influential as they can in directing their outpatient imaging away from hospital-based rates. I could mentioned names that I am sure would be household names to all of you, but suffice to say that on some level we’re having conversations with all of them and almost not a week goes by where you don’t read about them in other case or situation where an outpatient imaging done in a hospital environment is charged at four or five times what would otherwise be reimbursed in a freestanding facility. So some of that work, I think, will not necessarily come to us in roles unless we get more creative with some of the payers and helping them with planned design as well as being more educational not just to the patients but also to the physicians as to the merits of directing those patients away from hospital so that’s perhaps a little of the signal about things that we might be working on here but I think we will have additional information to report on that as the year unfolds.

[Operator Instructions] We’ll take our next question from John Ransom with Raymond James.

Hi, good morning. You guys gave your guidance in early March, so are we to takeaway from this sort of it was really March that was most of the mix?

We expected -- March is usually a fairly strong month for us, and we expected or hoped that towards the middle to March that we were going to make up some of the lost volume that we saw in January and February and that didn't happen. In fact, we had a couple of storms towards the end of March that really impacted March and compounded the problem. The other thing that we were dealing with is we changed accounting systems. Ss of January 1, 2018, we migrated from a system called the Lawson system that we were using for the last 11 years since our acquisition of Radiologix, which was really an outdated system to a Microsoft Great Plains system. And so by the time when we released guidance in early March, we had not yet even closed February because we were dealing with the accounting system change and closing out our financial statements for the 10-K. So I don’t think we appreciate it some of the flow-through on the EBITDA side that even occurred in January at the time. So I think it’s the combination of those two things that hit us pretty hard with respect to our guidance and our actual results in the first quarter.

Okay. Second question would be does this maybe point to the need to be -- I know your strategy has been justification, but you are really just in a handful of geographies. Does this point to the need, perhaps, to be a little more diversified from a geographical standpoint?

Yes. I mean, I don’t think so. I think Howard addressed that a little bit in his response to make sure a related question. I think -- where the population is in the markets in which we are in represents about 25% of the United States population, they’re densely populated. They are growing populations. There is attractive payor mix. There’s attractive demographics. In those markets, I mean we are subject obviously to more seasonality as we’ve grown in the Mid-Atlantic in the Northeast region, which of just part of the program. Hand we got hit hard in 2012 with the Hurricane Sandy. 2015 was another terrible winter. So it does happen from time to time these generally are kind of one-time issues for us, which we move past and I don’t change the fact that we like the markets that we are in. Now having said, that we are in only five markets, the imaging industry on the outpatient side if you even exclude the hospital-based imaging, it’s probably a $30 billion or $40 billion industry of which RadNet, even if you gross up our sales for our joint ventures and the revenue that our physician groups report, we’re just over $1 billion of that $30 billion, $40 billion industry. And the imaging business doesn’t operate any differently in any other part of the country than it does in the markets that we are in. So there’s no -- nothing stopping us from moving into a market, but we’ve always -- as a tenant of our strategy, we’ve always believe that we had to be the largest player and the largest provider of imaging services, where we could have some control over our reimbursement and leverage in those discussions with the private payor. So the only way we would diversify our geography is by going into a new region with scale and with the strength and with the thought and the ability to increase that scale and breadth of services in the future. So it would take an acquisition us scale in the new geography that had a similar strategy of both the modality, geographic concentration that we then felt that we could grow. And we will be opportunistic at looking at those acquisitions, but we've also believe that we allocated our capital well in past by and continuing to invest in the markets in which we're in where we get synergies and other operational efficiencies the larger we get, as well as greater leverage and the discussions with the prior health brand.

So is there -- I know you guys are famous for paying very rich multiples. Is there stuff you can buy that you would like at the multiple you're willing to pay? Or is that kind of a long chat?

In our markets or outside of our market?

So outside. I mean if you were to go into the new market, is there, are there -- there are enough assets out there that you could buy at the multiple you’d like to pay? Or had the market moved pass your multiple comfort zone?

It’s a good question, John. I think that there are targets out there that might fit in with our 3 to 5 multiple range. But I think in purpose to partly with Mark said, buying a single center or a small group of centers in a market would probably be more challenging for us and would be a dilution of our management. So if somebody were to present I mean a group of 3 or 4 centers in Chicago versus 3 or 4 centers in New Jersey for New York for Maryland for that matter or California that we’re of similar size and similar value from a pricing standpoint, it's pretty much slam jumping we would say within – with our current market, given the other benefits here. Stake in RadNet, a long time to build the scale in each of the markets that we're in. For example, in the New York metropolitan area, which we were not in at all five years ago, it took us five years and considerable amount of capital. And we now are positioned ourselves to be the beneficiary of some major contract opportunities that only the breadth and scale that we have in that market that afford us. So they held, and in addition to that, many of our joint venture partners when we begin and engage in a conversation with them are attractive because we have multiple centers in that markets and opportunities for future expansion. So we perhaps a better way to look at this is this it’s a big health system in a non-core market where it come to us and wanted us to be a partner with them in centers that they currently own and opportunities that they're pursuing, that might be the preferable way for us to go rather than just go into the market and be another small player and have to allocate a lot of capital to get to the size that we think we need to be have a major impact.

Okay. And last question. Since you're maintaining your outlook for the rest of the year, I assume you've got a lot of site into the April that will support that.

Yeah we're in -- at the very beginning of April which -- with last nor’easter spread over, we have seen a nice ramp-up to more accepted volumes relative to what our budget forecast certainly on the East Coast or continuing the nice trend here that we’ve seen on the West Coast.

Our next question comes from [Dale Borough] with [OFS Management].

I just want to talk a little bit more about your capitation arrangements here. First of all, just wondering if you could kind of bridge the quarter-over-quarter 2.5% decline in revenue from the capitation arrangements?

You’re saying [Indiscernible] capitation?

Yes, as I assume capitation was not impacted by weather, correct?

Correct. It’s all of California-based business for us at this point. Yes, the capitation when you bridge the year-over-year, we had some increases in existing contracts and some enrollment in existing contracts, but we did have a contract here in Southern California that flipped from a capitation arrangement to a fee-for-service arrangement. So those lives and that enrollment and the capitation revenue essentially kind of flipped into fee-for-service business. Now that occurred in Orange County, California.

So, with the…

In another words, if that contract had state capitation, capitation would have had a nice increase year-over-year.

Okay. And with the increase from the Memorial contract, I think you said what a 125,000 lives coming in on June 1?

North of 150,000 lives when both contracts are impact.

So what percentage of your guidance revenue then for the full year do you expect to result from capitation?

We expect capitation to remain between 11% and 12% of our business, which is similar to where it is right now in our guidance.

Okay. As of 3.31 million, how many covered lives did you have under capitation arrangement?

I don’t have that report in front of me, but it’s about 1.5 million lives.

And have you found within those arrangements that the utilization have been within your expected levels? And have you been satisfied with the ability to seek any rate adjustments on these contracts to the extent that it’s deviated?

Yes, we are pretty good at managing the utilization within an expected range and in almost all of our capitation arrangements we have modest annual increases, which primarily reflect the fact that the advanced imaging tends to creep up a little bit every year. But most of our capitation contracts are -- we’ll manage with the programs that we have currently in place.

We have a utilization management group here at corporate that when we sign one of these agreements, the obligation of our medical groups is whenever they have a request for an advanced imaging scan such as an MRI, CT, PET/CT our nuclear medicine study, that request gets sent in with all the clinical data that backs up that request into our utilization review group. And then we review that and ultimately make recommendations back to the medical group and it’s a constant educational process. And we found that that allows us to really have an impact on utilization and manage those contracts with a pretty predictable levels of utilization.

Okay. So for this new Memorial contract and do you normally have a look back in a year?

Well, in this particular case with Memorial, we don’t because they are our joint venture partner and we will be able to do a look back if it’s necessary virtually at any time because they really -- they are very much tied to the financial performance of that medical group itself. So while these are long-term contracts with MemorialCare, the discussion of our utilization and management of that will be something that we will routinely share with them on our quarterly joint operating committee -- joint operational committee meetings.

And we have a follow-up question from Brian Tanquilut with Jefferies.

Hey, Mark, just a quick follow-up. So you are adjusting down the guidance by $5 million. So it looks to me like maybe the Street was mismodeling the quarter a little bit as well. If you don’t mind just helping us think through how we should be thinking about the sequential improvement in EBITDA? Number one. And then in your overall EBITDA guidance for the year, just wanted to clarify are we using $21 million for Q1 as a base to get to that annual guidance number?

Yes.

Okay. And then just the figure around, if you don’t mind. Can you guys help me…?

Yes. I mean, we do think that there will be a ramp through the quarters, the next three quarters. One, there is going to be some improvement in the MemorialCare JV as well as some other kind of acquired operations, such what we acquired. We are seeing improvement in Delaware with our DIA acquisition. We have got some expansion opportunities with a couple of other joint ventures that we are pursuing that we believe that will get done before the end of the year. We are working on a couple of new potential joint venture relationships that we hope to announce either one or more of those by year end. And then we see some seasonality in the summer in favor a better fourth quarters, which we’ve been seeing over the last couple of years as people seem to be utilizing more healthcare services in the fourth quarter because they know the deductibles are resetting from January 1. So we do think that the year will progressively or should progressively get better barring any unforeseen events.

And it appears there are no further questions at this time. I would like to turn the conference back 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 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.

This concludes today’s conference. Thank you for your participation.