RadNet Inc (RDNT) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to RadNet Inc. fourth quarter and full year 2007 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that today's conference is being recorded.

I will now turn the conference over to Mr. John Mills of [ICR]. Please go ahead, Sir.

Thank you. Good morning, ladies and gentlemen, and thank you for joining us today to discuss RadNet's fourth quarter 2007 earnings results. On the call today from the Company are Dr. Howard Berger, Chairman and Chief Executive Officer of RadNet, and Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet.

Before we begin today, we would like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. The following prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and, therefore, undue reliance should not be placed upon them.

For a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements, we refer you to RadNet's reason 10-K for the 12-month period ended October 31st, 2006, Form 10-K-T for the two-month transition period ended December 31st, 2006, Form 10-K for the 12-month period ended December 31st, 2007, to be filed and the 10-Qs for the three-month period ended March 31st, June 30th, and September 30th, 2007, filed with the SEC.

With that, I would like to turn the call over to Dr. Howard Berger.

Thank you, John, and good morning, everyone, and thank you for joining us today. On today's call Mark Stolper and I plan to provide a brief review of our first full year since the acquisition of Radiologix, which occurred in November of 2006.

We will also provide you highlights from our annual and fourth quarter 2007 results; issue financial guidance for 2008; discuss in more detail some of our recently announced initiatives, and talk about why we think we are positioned for further growth and success.

I would like to thank all of you for your interest in our Company and for dedicating a portion of your day to participate in our conference call this morning.

I would like to start off today's call by saying that we are extremely proud of what we have accomplished since acquiring Radiologix almost 15 months ago. As Mark and I were preparing our remarks for this call, we began to reflect on all that our Company has achieved in this short time. Much of what we have achieved has contributed to our better than projected performance in 2007, while some of our more recent accomplishments have yet to be realized in our financial statements.

Though some of you on this call have tracked our progress throughout the last 15 months, I believe it is worthwhile to reflect on many of our accomplishments, some of which were probably announced subsequent to our last conference call.

After I discuss these accomplishments, I will turn the call over to Mark who will review our 2007 annual and fourth quarter performance. I will conclude the prepared portion of the call this morning by discussing the future opportunities for RadNet, and why I believe we are well-positioned to remain a leader in the outpatient diagnostic imaging industry.

The principal reason for discussing our accomplishments is that I believe that these accomplishments, when viewed as a whole, contain several themes regarding our strategy that I believe cannot be emphasized enough. As I list these accomplishments and describe them in more detail, they illustrate the following elements of what we believe is essential to our success, including, 1, our focus on operating dense geographic network of centers; 2, our emphasis on a multimodality approach which includes the digitization of routine imaging exams, such as x-ray and mammography; our enthusiasm regarding opportunities within women's imaging such as digital mammography and related procedures; 4, our willingness to more broadly define what investors had traditionally thought regarding what imaging can include as illustrated by our recent entry into interventional radiology and more recently, breast disease management; and number 5, our requirement for partnering with a limited number of large, entrenched, and highly regarded regional radiology groups with whom we share a united vision for building our business.

To the extent that I can, I will list our accomplishments in chronological order, starting with the beginning of 2007 and ending with some of our most recent announcements subsequent to year-end. The accomplishments are as follows.

Throughout 2007, we fully integrated the Radiologix business into that of RadNet's. We recognized early in this process that there were elements of each company that were superior to those elements of the other. We attempted to take a best-of-breed approach.

Furthermore, we had benefited from the many talented people within Radiologix, several of them have become key members of our senior management team. During the integration of Radiologix, we were able to achieve the $11 million of targeted cost savings which we committed to achieving upon the announcement of the transaction back in July of 2006.

Throughout 2007, we successfully absorbed reimbursement cuts of approximately $16 million caused by the Deficit Reduction Act. In contrast, the vast majority of participants in our industry have recorded lower revenues in EBITDA in 2007 when compared with the 2006 year, the year prior to the DRA cuts.

Throughout 2007 and subsequent to year-end, we invested significantly in our centers, because equipment sales through outpatient centers for the large equipment manufacturers have been weak. We have been able to drive equipment purchases at very favorable prices.

As an example of our investment in 2007, we installed 10 PET/CT scanners and completed the full digitization of all centers in the New York and Maryland markets, including the conversion to digital mammography.

During 2007, we successfully exited our core, noncore markets of Minnesota and Colorado through the sell of our imaging centers in those areas. We have been consistent in our strategy of operating only in markets where we have regional clusters and a strong competitive position.

In February 2007 we successfully listed RadNet for trading on the NASDAQ global market under "RDNT". This event was a catalyst for our effort to make the Company more visible within our industry and the capital markets. Today, we have several astute and well-respected analysts who have written equity research about RadNet and we are called upon by many of the large investment banks to participate as speakers at healthcare and investor conferences.

In June 2007, we engaged Ernst & Young as [the] RadNet's new auditing firm. In July of 2007 we acquired the Board Imaging Group, our largest outpatient competitor, in Rochester, New York. We successfully merged the two largest outpatient operators and radiology groups, making our subsidiary in Rochester the largest nonhospital outpatient provider in that market.

In August 2007, we contracted to [write] certain management service through a group of 20 imaging centers, formerly known as [Nydeck] Open MRI. Nydeck's lender had recently foreclosed on the assets of Nydeck. We entered into a contract whereby we provide various management services and other operating metrics. In return, we receive monthly management fees.

In August 2007 and, again, in February of 2008, we increased our GE credit facilities by an aggregate of $60 million of term debt and up to $50 million of additional revolver capacity. We were able to raise additional debt during a time when the credit markets were and still are in turmoil. In a very uncertain economic environment, we are grateful that GE, and the other members of our credit facilities, has continued to support our growth and success.

In September of 2007, we acquired three facilities in Victorville, California, making us the largest operator in the fast-growing market of San Bernardino County. Victorville's population has doubled since the year 2000 and, when combined with our pre-existing center in that market, we are now the clear leader in outpatient imaging in that region.

In October 2007, we acquired Liberty Pacific Imaging in Encino, California, providing RadNet with unique consolidation opportunities in one of its strongest markets of the San Fernando Valley of Los Angeles. During the third and fourth quarters of 2007, we expanded four women's imaging centers to accommodate greater demand in New City, New York and in the California markets of Beverly Hills, Orange County and San Jose County.

As I will discuss shortly in more detail, we continue to believe that women's imaging is vastly underserved.

During the fourth quarter of 2007, we've yanked construction to substantially replace three older Radiologix centers in Pleasanton and San Jose, California and Tuckahoe, New York. These facilities required expansion and/or rebuilding in order to remain competitive in their respective markets. These replacement facilities will commence operations in the second quarter of 2008 and should contribute meaningful to our performance this year.

During 2007, we migrated onto one Companywide back-end billing system and general ledger accounting system. Although we experienced some short-term issues with the conversion process, we have substantially complete with the process at this time and believe that the upgrade systems are necessary to scale our business in the future.

During the fourth quarter of 2007, we successfully restructured and expanded two of our largest and most successful hospital joint ventures in Maryland. In one case we increased our ownership percentage, in the other we allowed our joint venture partner to purchase a greater share. Both restructurings will result in higher management fees for RadNet and significant operational expansions.

During the fourth quarter of 2007, we constructed our second California interventional radiology center -- the center in Rancho Mirage, California. [and] the Palm Springs area will commence operations during the second quarter of 2008.

In February 2008, we acquired Rolling Oaks Radiology imaging centers in Westlake/Thousand Oaks market of Los Angeles. Rolling Oaks was our largest outpatient competitor in that market and with the acquisition of certain centers from InSight Health Systems which we announced earlier this month, we will be the only nonhospital, outpatient imaging provider in this market.

Westlake/Thousand Oaks is an affluent suburb of Los Angeles that has attractive payer dynamics and growth opportunities. In February 2008 we announced the acquisition of six Southern California imaging centers from InSight Health Systems which will provide further consolidation opportunities with existing RadNet centers in Westlake/Thousand Oaks and the San Fernando Valley. We anticipate closing this transaction some time in April. The transaction will result in cost savings and will provide us with what we call in-market consolidation opportunities. Two of the insight centers will close and their business will be moved to existing RadNet facilities. We will also move certain equipment acquired in this transaction and redistribute them or relocate them to existing RadNet centers, allowing us to optimize our capabilities and better service our patients.

In March 2008, we completed the acquisition of Papastavros Imaging, a 12-center operator in Delaware expanding our mid-Atlantic presence beyond the Maryland border. Papastavros will become a platform for growth in that new market. We are excited about the potential expansion opportunities that may exist for us in Delaware. And most recently in March 2008, we announced our entry into breast disease management through the acquisition of breast oncology and breast surgery practices in Southern California.

Initially we are operating at four locations in concert with our largest women's imaging center in Orange County, California. The opportunity for us to provide a continuum of care to women with breast cancer all the way from diagnostics or treatment allows us to capture larger revenue stream and increase our service capabilities.

As the list of accomplishments illustrates we had a very busy 15 months. We continue to believe that 2008 will present us with opportunities which we hope and anticipate will provide shareholder value. The DRA continues to have a dramatic impact on the health and landscape of our industry and believe that we are well-positioned to continue on the path we paved in 2007.

At this time, I would like to turn the call over to Mark Stolper, our Executive Vice President and Chief Financial Officer, to discuss some of the highlights of our full and fourth quarter performances. When he is finished, I will conclude our prepared remarks and some of my thoughts about what 2008 may have in store for RadNet.

Thank you, Howard, and thank you all for participating in our third -- in our fourth quarter and full year 2007 conference call.

I am now going to briefly review our full year 2007 and fourth quarter performance and attempt to highlight what I believe to be some material items. I will also attempt to 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 2007 performance.

In my discussion, I will use the term EBITDA which is a non-GAAP financial measure. The Company defines EBITDA as Earnings Before Interest, Taxes, Depreciation and Amortization, each from continuing operations and adjusted for losses or gains on the disposable equipment, debt extinguishments, and non-cash equity compensation. EBITDA includes equity earnings in unconsolidated operations, and subtracts minority interest in subsidiaries and is adjusted for non-cash, extraordinary and onetime events taking place during the period.

As many of you may be aware, we delayed our 10-Ks filing by approximately two weeks from our intended filing date of March 17th to give us and our auditing firm, Ernst & Young, additional time to complete the audit of our financial statements. As some of you have read in our press release this morning, the additional time was necessary to identify, analyze and adjust for two accounting issues, one pertaining to our medical malpractice insurance and the other relating to the collectibility of old accounts receivable.

Before I begin reviewing the 2007 full year and fourth quarter performance, I'd like to take a few moments to explain the two issues in greater detail which required us to take certain non-cash accrual adjustments to our 2007 financial statements.

The first issue regarding our malpractice policy resulted in our addition of a $1.7 million liability at December 31, 2007, relating to incurred but not reported otherwise known as IBNR malpractice claims. We have what is called a claims made policy and we determined we were not adequately reserved for IBNR exposure. We engaged a third party actuarial firm to calculate our accurate IBNR exposure, which approximates the cost of [tail] coverage should our malpractice insurer go out of business or should we stop paying premiums as of December 31st, 2007.

Also related to this issue, we recorded a non-cash expense of $170,000 for the year ended December 31st, 2007 for medical malpractice. The portion of the liability we booked associated with 2007. In order to avoid this issue in the future, we will get an actuary update every quarter and true up our liability to the updated IBNR calculation.

The second issue involved a revision to our estimated collectibility of accounts receivable on our balance sheet, related to dates of service prior to December 31st, 2006. Following an in-depth analysis performed by us and audited by Ernst & Young, including the analysis of historical collection statistics by payer and by [aging], we determined to record an $8.5 million non-cash allowance related to these 2006 and prior accounts.

In May of 2007, we converted certain accounts receivable balances including those for which the additional reserve is being recorded to the Radiologix billing system and changed the personnel responsible for collecting these accounts.

We believe this conversion materially contributed to slower-than-anticipated collections on these accounts in question, resulting in our decision to revise our estimate of their future collectibility. Although it is possible that we may still collect a portion of that which we are reserving, we believe at this time that the adjustment is prudent and appropriate.

I cannot emphasize the following point enough. This issue regarding collectibility of 2006 and earlier accounts receivable had no impact on our accounts receivable or our revenue recognition related to fiscal 2007. As part of the exhaustive study that we performed with Ernst & Young, we analyzed the revenue that we recorded in 2007 and its future collectibility. Both we and Ernst & Young deemed our collectibility estimate as of December 31, 2007, for 2007 dates of service to be appropriate.

As a practical matter, cash collections have been strong. Through March of 2008 we have already collected approximately 90% of the revenue that we accrued for in 2007. From an accounting perspective, the $8.5 million non-cash adjustment is what is termed a change in accounting estimate related to a prior period. As such, the proper accounting procedure is to book the non-cash adjustment in the current accounting period, i.e., the fourth quarter into the adjustment is to correct a prior period estimate. Thus, the result of this accounting adjustment in the fourth quarter distorts the quarter's and the full year's performance by decreasing our net accounts receivable at year-end by $8.5 million to and more notably lowering our revenue by $8.5 million.

Thus, for the purpose of this call, I will talk about adjusted revenue defined as revenue adjusted by backing out this $8.5 million accounting interest entry.

With all that said, I would like to now review our full year 2007 and fourth quarter results. For the year ended December 31st, 2007, RadNet reported adjusted revenue of $434 million. Adjusted revenue increased 4.3% from $416.3 million which would have been the revenue in 2006 if the RadNet Radiologix combination had occurred prior to January 1, 2006.

For 2007, we reported EBITDA of $85.3 million. EBITDA increased 9.5% from $77.9 million over the prior pro forma 2006. It is important to note that adjusted revenue in EBITDA for 2007 is reflective of the full impact of the Deficit Reduction Act Medicare reimbursement cuts whereas 2006 pro forma results, to which I am comparing them, do not include these reimbursement cuts.

The native impact from the DRA was approximately $16 million of both adjusted revenue and EBITDA for RadNet in 2007. I mention the DRA to highlight the following point. When compared with 2006, a period not subject to the DRA, our 2007 results of increased adjusted revenue and EBITDA illustrate that we have substantially improved operational performance. This has been achieved through increasing scan volumes at our centers and lowering our operating costs.

Overall, we performed 2,079,502 procedures in 2007 as compared to 2,540,945 total procedures in pro forma 2006. This is an overall increase of 6.6%.

MRI procedures increased 5.6%. CT procedures increased 3.5%. PET/CT procedures increased 22.2% and routine imaging procedures -- this includes x-ray, ultrasound, mammography and all other exams -- increased 7.1% in fiscal 2007.

Net loss for the year, not backing out the $8.5 million accounts receivable allowance accrual was a negative $18.1 million or $0.52 per share, compared to a net loss of $6.9 million or $0.33 per share reported for the fiscal year ended October 31st, 2006.

Affecting 2007 net income were certain non-cash expenses and one-time nonrecurring items including the following. The $8.5 million reduction of 2007 revenue related to the increase in the allowance for accounts receivable from dates of service prior to 2006 which we have discussed in detail earlier; $3.3 million of non-cash employee stock compensation expense resulting from the vesting of certain options and warrants; a $1.9 million gain on the sale of a joint venture interest; $1.6 million of non-cash deferred financing expense related to amortization of financing fees paid as part of the $405 million credit facilities drawn down in November of 2006, in connection with the Radiologix acquisition and the incremental $25 million term loan and revolving credit facility arranged for us by GE in August, 2007; $1 million of severance paid associated with the termination of certain employees related to achieving the previously announced cost savings during the Radiologix integration, and a payment to an employee to settle an employment-related dispute; $934,000 of retention payments to key Radiologix employees per certain agreements entered into at the closing of the Radiologix acquisition; $820,000 of non-cash loss on the fair value of interest rate hedges related to the Company's credit facilities and a $600,000 non-cash accrual for a stock compensation-related bonus.

With regards to some specific income statement accounts, interest expense for 2007 was approximately $44.3 million. This was negatively impacted by $1.6 million of non-cash amortization of financing fees and $820,000 from a non-cash loss, related to a mark-to-market of an interest rate hedge, both of which I touched on earlier.

For 2007, bad debt expense of 6.3% of adjusted revenue. This was in line with our expectations as we had a structural increase in bad debt as a percentage of our adjusted revenue, because of the addition of the Radiologix subsidiary. As we discussed on our last quarter's call, the bad debt percentage of our Radiologix subsidiary is higher than the rest of RadNet because it performs on behalf of its physician partners, substantial billings from hospital operations for which it receives a management fee. Hospital settings regularly have bad debt expense that far exceeds that of freestanding imaging centers. It is important to note that the bad debt percentage of Radiologix in RadNet excluding the Radiologix subsidiary did not change materially, as compared with itself over the same period last year.

With regards to our balance sheet, as of December 31st, 2007, we had $421.8 million of debt, and we were drawn down $4.2 million on our $55 million revolving line of credit. Since December 31st, 2006, accounts receivable increased approximately $16.5 million, resulting from increased business, acquisitions, and the credentialing of new positions staffing several of our Northern California facilities and recently acquired centers. We had working capital of $23.2 million at December 31st, 2007.

During the year, we entered into capital leases of $19.6 million and repaid $10.4 million of notes and leases payable and net payments of $3.8 million on our line of credit. We had cash capital expenditures, net of asset dispositions, of $22.5 million during 2007.

I will now discuss our 2008 guidance. As some of you saw this morning in our press release, we issued guidance ranges for our 2008 expected performance. The metrics are as follows. For revenue, our guidance range for 2008 is $470 to $500 million; for adjusted EBITDA, our guidance range for 2008 is $100 to $115 million; for capital expenditures, our guidance range is $15 to $20 million of maintenance capital expenditures plus growth expenditures of up to $25 million. For 2008, our cash interest expense guidance is between $46 and $52 million.

Although we have not formerly broken out our guidance by quarter, we expect revenue and adjusted EBITDA will increase as the year progresses. This should be the result of the contributions from acquired operations and initiatives in progress that will come online throughout 2008. I would now like to briefly discuss the performance of the fourth quarter of 2007.

For the fourth quarter of 2007, we reported adjusted revenue of $110.9 million and EBITDA of $20.4 million. Adjusted revenue increased 8.4% and EBITDA increased 18.7%, respectively, over the prior period's pro forma quarter. The results reflect improved volume and margin performance from existing imaging centers as well as cost savings measures, the combination of which helped to offset the negative reimbursement effects of the Federal Deficit Reduction Act.

For the fourth quarter of 2007, as compared to the prior year's pro forma quarter, MRI volume increased 3%, CT volume increased 2.5%, PET/CT volume increased 31%, and routine imaging procedures -- which includes x-ray, ultrasound, mammography and all other exams -- increased 11.2%. On a same center basis, which measures cites only if they were open for the full periods in both 2007 and 2006, MRI procedures increased 2.7%; CT procedures increased 1.1%; PET/CT procedures increased 31%; and routine imaging procedures -- including x-ray, ultrasound, mammography and all other exams -- increased 8.6%.

Net loss for the fourth quarter was $11.7 million or $0.33 per share which is inclusive of the $8.5 million non-cash allowance adjustment, which compares to a net loss of $11 million or $0.35 per share reported for the two-month period ended December 31st, 2006. Effecting net income in the fourth quarter of 2007 were certain non-cash expenses and one-time nonrecurring items including the $8.5 million non-cash allowance adjustment to AR and revenue; $1.9 million gain on the sale of joint venture interests; $500,000 non-cash loss on the fair value of interest rate hedges related to the Company's credit facilities; $400,000 non-cash employee stock compensation expense resulting from the vesting of certain options and warrants; and approximately $400,000 of non-cash deferred financing expense related to the amortization of financing fees paid as part of our $405 million credit facilities drawn down in November 2006, and in conjunction with the incremental $25 million term loan and revolving credit facility arranged by GE in August of 2007.

With regards to our liquidity and capital sources, in February 2008, GE arranged for us an incremental $75 million as part of our existing credit facilities. The incremental facility consists of an additional $35 million as part of our second lien term loan and $40 million of additional capacity under our existing revolving line of credit. The incremental facility was used to fund the acquisition of Papastavros Imaging and a portion of our digital mammography initiative and will be used to fund future acquisitions such as InSight Health Systems acquisition and to fund working capital.

With the recent increased size of our credit facilities, which we completed in one of the most challenging credit markets in recent history, we believe that our current capital structure provides us sufficient financial flexibility to effectively execute our growth plans. Additionally, the difficult credit market has significantly impacted the access to capital of our competitors, especially small operators. We believe this will result in further opportunities for us in the future.

I would now like to turn the call back to Dr. Berger who will discuss his views with respect to 2008 and make some closing remarks.

Thank you, Mark. I will make my comments brief as the call is running a little bit late here.

In short, the opportunities that we encountered and pursued in 2007 have built a foundation for what I believe is a very exciting opportunity for 2008. From my earlier review of our accomplishments over the last 15 months, it is obvious that we have been aggressive in our approach to expanding the business. In the aftermath of DRA, I believe that the types of opportunities we saw in 2007 will continue. There will be further consolidation in the industry, smaller operators will probably continue to go out of business, and there will be opportunities to buy new and used equipment at favorable prices. We also believe very strongly there will be further pressure on those who abuse imaging through self referral and block leasing arrangements.

Our industry will continue to grow like it has for each of the last 20 years. What we do is essential to how medicine is practiced today. Technological advances will continue to drive further applications.

That being said, 2008 will be a year of digestion. What I mean by this is that we are extremely focused on optimizing the many initiatives to which we have dedicated our time and efforts in 2007. We have worked very hard to pursue these initiatives and we are determined to ensure that they will reap their full benefit.

We have grown rapidly and absorbing that growth in a way which optimizes our operations will be a priority in 2008.

I will close by reiterating what I touched on during the last conference call by saying that I can't remember a time in which I have seen more and been more excited about the future growth prospects and the opportunities that lie ahead for our Company. Particularly included in that are the opportunities that we see in a comprehensive breast disease management initiative that will be kicked off in the second quarter of 2008.

With the momentum we take into 2008, we see a bright future for the company, a future that will transform not only our Company but perhaps will have a hand in bringing change to the outpatient imaging industry itself.

Operator, we are now ready for the question-and-answer portion of the call.

(OPERATOR INSTRUCTIONS) Art Henderson. Jefferies & Company.

Thanks for all the detail. Couple of questions for you. First, in terms of your guidance, could you sort of describe what sort of assumptions that you are getting to get to the low-end versus the high-end of the EBITDA guidance for '08?

Sure. The lower end of the guidance would anticipate the current operations, along with the addition of the already announced initiatives that we have publicly disclosed, for example, the Rolling Oaks transaction, the Insight transaction that we are about to close. And incorporating with that, the acquisitions that occurred in the fourth quarter of last year that will become fully implemented in 2008.

The higher end of the range would really include some contribution from the expansion that I talked about of some existing centers, replacement of the three centers that we talked about in the Radiologix markets that needed replacement as well as contribution from breast disease management and the other new center that we built in Rancho Mirage.

We are at this point not able to as accurately quantitate the amount of that impact, but the successful operation of those would get us to the higher end of those ranges. The range does not talk about any further acquisitions or other activities other than what we've already talked about in the prior remarks.

That's helpful. I know, just to sort of touch on something you just that said then, should we expect that '08 is going to have, that you are going to be doing fewer acquisitions this year, that you are going to be spend more time integrating? Or are you going to try and keep a balance of looking for certain things?

I think the last comment, the balance is probably the way we will approach this. The main focus, as I mentioned, is to make sure that all of the initiatives in 2007 as well as the first quarter get the full opportunity for contribution to the Company's performance. We will look at acquisitions which we find attractive in terms of consolidation opportunities, but that will be something that we'll probably be less aggressive about in the first two or three quarters of this year.

One of the other things that we again will be putting a lot of emphasis on is the breast disease management, which will essentially get us into oncology and other exciting opportunities.

I'm glad you mentioned that. Can you talk about that a little bit more in detail as to what you are thinking and how that gets rolled out and what the opportunities are in breast disease management?

Yes. It is pretty well accepted throughout the industry that the entire process for a woman who has an abnormal mammogram and ultimately perhaps gets diagnosed with breast cancer can be a lengthy and very anxious period of time for a woman. Statistically speaking, about one out of every eight women will develop breast cancer at some point in their life and generally the process by which a woman goes through this is to first have a mammogram, have to come back if it's suspicious or abnormal. Once the abnormality is further defined, there may be biopsies necessary which generally can be performed in our imaging centers either stereo tactic ultrasound and now even MRI guided by (inaudible).

Once the diagnosis is more fully established, there has to be a referral to a surgeon. The surgeon then perhaps does some of their own diagnostic work up, including other more definitive surgery and biopsies, and then the patient then gets referred to an oncologist.

That process is not uncommonly taking women six, eight weeks sometimes three months during which as you can well imagine it completely puts them out of commission, as well as the anxiety for their family. What we're doing is incorporating that entire process into one center or groups of centers that will allow women to have a mammogram, the diagnosis, being immediately referred to one of our surgeons and then ultimate in concert with our oncologist and streamline the procedure.

One of the things that makes this exciting and effective is that we will be able to capture in an integrated manner all of the imaging which has become so critical for the diagnosis and treatment of breast cancer. The newer applications that have been developed really in the last couple of years including PET/CT, breast MRI scanning, newer types of diagnostic mammography, biopsy procedures and other specialty imaging has transformed the way breast oncology, breast cancer is practiced. And by having this in an integrated model, it will allow us to both streamline the process through which a woman gets the diagnosis and ultimately starts treatment and, will allow us to include within that, the ability to capture all of the imaging and perform it would believe at a much higher level.

The potential implications of that for our centers is that, based on this model and with the large number of women's health centers that we have, imaging centers in particularly Southern California and starting now in Northern California will allow us, I think, to integrate all of these processes and make this a far better outcome for the patients and a better business opportunity for us. To initiate this, we have purchased the practices of three of the most prominent surgeons and oncologists in all of Southern California.

The entity is known as Breastlink, which is a trademark name and can be looked up on the Internet, and it involves people who have worked at the highest academic levels here in California and who have established a reputation and only handle breast cancer as part of their practice. So we see this as an opportunity different from the way perhaps others have begun to approach oncology through radiation therapy and have focused our attention, really, on the medical oncology side starting first with breast cancer, and perhaps looking for opportunities to expand that and again be able to capture the imaging and other specialty procedures associated with this very serious disease.

Great. That's very helpful. Thank you very much.

Ann Hynes. Leerink Swann.

Thank you. Getting back to guidance, can you give us your assumptions for a [uni growth] of the [new] model when it comes to volume, pricing, bad debt?

Sure. With respect to volumes, we are assuming a 3% increase in our volumes.

Overall?

Overall.

Yes.

Correct. We would expect, on a blended basis we expect the PET/CT obviously to continue to grow faster than that. But we are taking a conservative approach with respect to our base business.

With respect to bad debt, we assume between a 6 and 7% percentage of net revenue, which is where it is today, which is reflective of the higher bad debt percentage that Radiologix has, because of its hospital-based billing contracts.

Okay.

And what was the third part of your question?

Pricing.

Pricing, we assume, my model assumes a 1% decrease in overall private payer pricing.

And when you say you are taking a conservative approach to your base business, is that economy driven or do you think you are just being conservative and [leave a move] to upside?

I've said this a number of times to folks is that we have been growing faster than 3% as evidenced in our press releases over the last few quarters. But at some point you run into capacity issues. At some point patient care can deteriorate. You can't always continue to grow your business at the types of same-store sales levels that we have today.

So my long-term model has a 3% same-store sales growth rate to it. And that is what we are comfortable in, in incorporating in our guidance.

Does your guidance include any other markets that you would input some of the digital mammography? Don't you have some capacity in California to upgrade that technology or your recent acquisition in Delaware?

Yes. Delaware has no digital mammography currently and that is in our plans to implement that, just like we have now done and almost completely finished in Maryland. And there are some additional digital mammography expansion opportunities here in California, although we have been working really on that program now for the last six months.

One last question. Are you providing any kind of free cash flow guidance?

Not explicitly, but if you were to take the EBITDA range that we gave, we also gave a maintenance level CapEx number as well as a expected cash interest or actually total interest expense number. So we, I believe, gave you enough information to back into kind of a steady-state free cash flow number.

Rob Mains. Morgan Keegan.

One follow-up to the question on the same-store growth. I might have missed it, Mark, but did you give the same-store fourth quarter growth in overall procedures? I have the specialties.

I believe I did. Let me go back to my own notes here. Yes. The routine procedures -- which includes x-ray, ultrasound and mammography -- the same store sales growth was 8.6%.

Right. No. My question is if you look at all procedures. Routine, plus PET plus CT plus (multiple speakers).

No. I did not do that as an average. But I can (multiple speakers) offline I am happy to do that for you. It is not a difficult calculation.

I would imagine on a weighted basis you are going to be closer to that routine number than where you were for MRI and CT, right?

It weights closer to that because almost 77% of our business on a volume basis, on a scan basis is retained.

Fair enough. If I look at the guidance for EBITDA and kind of back into where the margins are, it's obviously above where you were in the fourth quarter on a steady-state basis.

Is that a reflection of seasonality that we should be building into the fourth quarter because you mentioned that you have some timing issues that happened in Q4? Or is there some pretty significant improvements that you are expecting on an operating EBITDA basis as well?

I think there is some seasonality that we saw last quarter, the fourth quarter, related both I think to some adverse weather conditions on the East Coast -- as probably most of you who are on the call are from the East Coast know that December, January and even into February was a rather severe winter and it did affect a number of our centers even those that are used to some of the harshest conditions that perhaps like in Rochester.

But that being said, the other part of that was the way the holidays fell out this year. Both December 25th and January 1st were on Tuesday, I believe, and had a substantial impact on lower volumes during those two weeks than we might experience in a year where the holidays fall either on a Monday or a Friday. I believe that based on the experience that we had in the fourth quarter, we will project some seasonality and impact -- and see some impact this year in the fourth quarter again as I think that the holidays flip from Tuesday to Thursday, which doesn't necessarily make it better for us. But, nonetheless, having had that experience of last year we will certainly, I think, reflect to do a little bit less.

That being said, the fourth quarter, though, should be benefited by all of the initiatives that we described being fully operational by the fourth quarter, by the third and fourth quarter actually. And so it will make it a little bit more of a challenge for us to compare the fourth quarter of this year to the fourth quarter of last year as we outline a lot of the changes that occurred to the Company based on acquisitions, expansion of centers, and the implementation of basically four or five new centers.

So, on a margin basis then, what you experienced in the second and third quarter we should view as kind of more normal than what happened in the fourth?

I would say it is on the low side. The low side. I would expect it to be a little bit better. Remember by the -- certainly by the end of next year, all of the integration opportunities for Radiologix will have been completely realized. So that there will be some other benefits I believe in each of the quarters of this year, and particularly in the second, third and fourth.

Yes. I mean, our EBITDA margin is running close to 20%, maybe a hair higher than 20% now. And we believe there is an opportunity to increase that by 200 to 300 basis points.

Apropos to that, it's been about four months since you first talked about Papastavros. Anything change there in terms of the profile of the whole operations, revenues, margins, anything like that?

No. Not that we have seen now. We are very comfortable with the practice. We think there is a lot of growth opportunity. There has been an underinvestment in both systems and equipment in that market, particularly, as I mentioned earlier we will be implementing a full digital mammography there which, given their volumes, will have a substantial impact on their revenue along with some other initiatives that we have.

So we view the Papastavros acquisition every bit with as much enthusiasm as we did when we first announced it. And we have been keeping very close to the operations there, ever since we announced the acquisition.

Then just to clarify it, the full digital conversion full digital mammo conversion there. That is embedded in your CapEx and revenue EBITDA guidance?

Yes it is.

Papastavros. Okay. Then last question, Mark. The cash interest expense guidance for '08, you talked about items that made GAAP interest expense different from cash in '07. Do those go away for the most part in '08?

No. Those will continue. The deferred financing cost which is related to the GE credit facilities is being amortized over the life of the credit facility. So those have another five years before they run off and it is being amortized on a straight line basis.

This swap is a little more difficult to predict because essentially that one swap which goes through our P&L is mark-to-market every month; and to the extent that we have a loss on the mark-to-market that it is a non-cash hit to our interest expense to the extent that that month is a gain, it is a benefit to the interest expense. So what that swap is doing is providing more volatility in our income statement, but it's obviously very difficult to predict.

That one particular swap, however, does expire in April of next year. So at least it will be off our P&L at that point.

So for modeling purposes we have to add at least an extra 1.6 million (multiple speakers) benefit from the swap?

The interest expense -- I'm sorry, Rob. I misunderstood your original question. The interest expense number that is there is a total interest expense, not a cash interest expense.

Okay.

So it compares to the interest expense that you'll see on our income statement this year which was a hair more than $44 million.

That's very helpful. Thanks a lot.

That concludes our question-and-answer session. I will turn the conference over to Dr. Berger for additional or closing remarks.

I want to thank you all for joining us this morning and taking time out of your busy day. I hope that the conference has been useful in giving you some insight to the Company's performance and initiatives. We look forward to talking to you again when we have our earnings call for the first quarter which would be in May, in late May.

But thank you all and have a good day.

That concludes today's conference. You may disconnect at this time.