RadNet Inc (RDNT) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the RadNet Inc. third-quarter 2010 financial results 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 your questions. I would like to remind everyone that today's call is being recorded and now I'll turn the conference over to Mr. Mark McPartland. Please go ahead, sir.

Thank you, operator. Good morning, ladies and gentlemen, and thank you for joining us today to discuss RadNet's third-quarter 2010 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, I would like to remind everyone that 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 US 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, contacts with radiology practices, recruiting and retaining technologists, and receiving third-party reimbursements from diagnostic imaging services, successfully integrate acquired operations, generate revenue and adjusted EBITDA or the acquired operations as estimated among others are forward-looking statements within the meaning of the Safe Harbor Statement.

Forward-looking statements are based on management's current preliminary expectations and are subject to the risks and uncertainties which may cause RadNet's actual results to differ materially from those statements contained herein. These risks and uncertainties include those risks set forth in RadNet's report filed with the Securities and Exchange Commission from time to time including RadNet's Annual Report on Form 10-K for the year ended December 31, 2009 and Form 10-Q for the quarterly period ended September 30, 2010.

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 reflect the occurrence of an unanticipated event. With that taken care of, 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 Stolper and I plan to provide you with highlights from our third-quarter 2010 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.

Our third-quarter financial and operating results further built upon the improved results of our second quarter. We continue to see steady and stabilized improvement in our procedural volumes, while at the same time we're focused on controlling costs, driving operating efficiencies and pursuing growth opportunities.

We're pleased that our revenue, adjusted EBITDA and procedural volumes exceeded our performance from last year's third quarter and improved on the results of both the first and second quarter of this year. These accomplishments occurred within a very difficult operating environment.

According to IMS Health, a market research firm, patient visits to physicians offices decreased 7.3% in July, 1.3% in August and 4.7% in September compared to the same months in 2009. These declines were consistent with those occurring in the first and second quarters of this year.

I'm pleased to say that over the last six months, our monthly same-center performance has consistently exceeded the year-over-year drop in physician office visits which gives us confidence that we are competing favorably in our markets and perhaps making small but significant gains in market share.

We've been able to help offset the small decline in same-center procedural volumes through consummating accretive acquisitions and through certain cost reductions. In short, we are realizing gradual margin improvement by capitalizing on our scale and market presence to lower our operating expenses and aggressively compete for physician referrals in our core markets.

These results give us additional encouragement for our 2011 outlook. With a cost structure that is predominately fixed, a slight improvement in our procedural volumes will make significant enhancements to our future financial performance.

As a more normalized level of healthcare utilization returns, our fixed cost structure, high operating leverage and continued focus on reducing expenses will enhance our margins and profitability. Another important point to note is that when analyzing our last six months of results, our adjusted EBITDA run rate is approximately $111 million which is at the very high end of our 2010 guidance level. This gives us a strong base upon which to build as 2011 approaches.

Furthermore, the procedural volume reports we have reviewed from October illustrates that the steady and stable improvement we have seen in our business since the first quarter of this year is continuing into the fourth quarter. Although November and December volumes tend to be influenced by the holidays, we feel we have significant momentum entering the fourth quarter and carrying us into 2011.

As we approach next year, we continue to look at methods to reduce the cost of delivering our services. Examples of this include our implementation of certain information technology platforms and related technology modules that will make our workflow more efficient.

Our acquisition of eRAD and the hiring of a software development team for a new radiology information system platform are key components of this strategy. Our focus beginning in 2011 will be to bring the best-of-breed technologies and productivity tools to our imaging centers.

Radiology physician partners, hospital joint venture relationships and ultimately to the industry at large. Additionally, we're working on workflow programs to make our radiology physician groups more productive and we'll be tying their compensation more closely to their work output.

On our last quarter's earnings call, I discussed two industry-specific trends that have been negatively affecting imaging procedural volumes particularly as it relates to CT and mammography. First, our industry has suffered from a decrease in the amount of CT scanning resulting from concerns surrounding the dosage of radiation patients receive during certain CT procedures, the impact of radiology benefit managers, or RPMs, and the trend of patients receiving CT exams in hospital emergency room settings in order to bypass preauthorization processes.

The second issue I discussed on the last earnings call was the impact on industrywide mammography screening as a result of the recommendation made in November of last year by the US Preventive Services Task Force. The recommendation stated that most women should have regular mammograms at 50, not at the previously recommended age of 40.

Recently, we have seen reason for optimism for the near-term improvement of the utilization and long-term continued use of both CT scanning and mammography. Last week, the results were released of a long-term national study on the effectiveness of CT scanning for the detection and tracking of lung cancer.

The study illustrated that CT scanning was far more effective than conventional x-ray exams for identifying cancer tumors. It is estimated that 157,000 Americans will die this year from lung cancer and that CT screening exams can reduce death by an estimated 20%. The result of this study was a national news story in notable medical journals as well as periodicals such as the New York Times and Los Angeles Times.

Furthermore, there have been numerous recent articles refuting the concerns over radiation exposure with respect to CT scanning. In particular, there was an article in the Los Angeles Times health section on October 11 where many experts agreed that the benefits of CT scans far outweigh their risks. As rational minds generally prevail in these matters, we're hopeful that CT scanning levels will return to a more normalized level in the near future.

With respect to mammography, there has been a vocal and steady outcry against the Task Force recommendation of last year by many of the powerful and knowledgeable women's health organizations. The result is that we are already seeing our mammography volumes return to more normal levels.

On the acquisition front, we remain active in evaluating and pursuing acquisitions which fit our core strategy of geographic concentration, multi-modality approach and exceptionally high-quality delivery of medicine. We remain committed to our three to four times EBITDA acquisition multiples.

The pressures of the economy, lack of availability of capital and competitive issues continue to make acquisition opportunities abundant to us. With almost $200 million of total liquidity, we will remain committed to our acquisitions that are leverage neutral or deleveraging and are core to our market penetration strategy.

We will be completing more of these transactions in the coming months and we hope and expect to benefit from their financial contribution, the potential cost savings efficiencies they bring and enhanced contracting leverage they will provide us. I would like to briefly address our 2010 guidance.

While our financial guidance for 2010 would imply robust fourth-quarter results, we are encouraged by the strong volume trends in the last several months which have continued into the fourth quarter as well as exceptional additional contribution from recently completed acquisitions and those to be completed in the fourth quarter. Thus at this point, our financial guidance remains within reach and we are choosing to leave guidance ranges unchanged.

At this time, I would like to turn over the call to Mark Stolper, our Executive Vice President and Chief Financial Officer, to discuss some of the highlights of our third-quarter 2010 performance. When he is finished, I'll make some closing remarks.

Thank you, Howard, and thank you all for participating in our third-quarter 2010 conference call. I am now going to briefly review our third-quarter 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 insight into some of the metrics that drove our third-quarter performance.

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 gains and non-cash equity compensation.

Adjusted EBITDA includes equity in earnings and unconsolidated operations and subtracts allocations of earnings to noncontrolling interest in subsidiaries and is adjusted for non-cash or extraordinary and one-time 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 would now like to review our third-quarter 2010 results. For the three months ended September 30, 2010, RadNet reported revenue and adjusted EBITDA of $140.1 million and $28 million respectively.

Revenue increased $6.7 million or 5% over the prior year same quarter and adjusted EBITDA increased $2.5 million or 9.8% over the prior year same quarter. On a sequential basis compared to the first and second quarter of 2010, revenue increased $15.9 million or 12.8% and $1.1 million or 0.8% respectively.

On a sequential basis compared to the first and second quarter of 2010, adjusted EBITDA increased $7.5 million or 36.7% and $0.6 million or 2.2%, respectively. The sequential increase in revenue and adjusted EBITDA from the first and second quarters is primarily the result of stabilized procedural volumes and the contribution from acquired facilities.

The sequential increase from the first quarter is also the result of unusually depressed volumes during January and February from the severe weather on the East Coast which significantly impacted our first quarter volumes. We are encouraged by preliminary procedural volume reports we have reviewed from October and are hopeful that the strong volumes continue through November and December which are always difficult months to predict because of the holiday season.

For the third quarter of 2010, as compared to the prior year's third quarter, MRI volume increased 6.9%, DT volume increased 1% and PET CT volume decreased 7.3%. Overall volume taking into account routine imaging exams inclusive of x-ray, ultrasound, mammography and other exams increased 4.7% over the prior year's third quarter.

In the third quarter of 2010, we performed 846,568 total procedures. The procedures were consistent with our multi-modality approach whereby 78.1% of all the work we did by volume was from routine imaging. Our procedures in the third quarter of 2010 were as follows.

100,387 MRIs as compared with 93,919 MRIs in the third quarter of 2009, 79,725 CTs as compared to 78,965 CTs in the third quarter of 2009, 5,099 PET/CTs as compared with 5,503 PET/CTs in the third quarter of 2009 and 661,357 routine imaging exams which include nuclear medicine, ultrasound, mammography, x-ray and other exams as compared with 630,276 of all of these exams in the third quarter of 2009.

Net loss for the third quarter of 2010 was negative $285,000 or negative $0.01 per share compared to a net loss of negative $1.7 million or negative $0.05 per share reported for the three-month period ended September 30, 2009 based upon a weighted average number of shares outstanding of 37 million and 36.1 million for these periods in 2010 and 2009 respectively.

Excluding non-cash losses and expenses from the marked to market of our interest rate swaps of $821,000, disposal of equipment of $451,000 and stock compensation expense of $793,000, RadNet would've reported net income of $1.8 million or $0.05 per fully diluted share for the third quarter of 2010. This compares with a net loss of $943,000 or negative $0.03 per share for the third quarter of 2009 excluding the same non-cash losses and expenses.

In addition to the losses on interest-rate swaps, disposal of equipment and stock compensation expense, affecting net loss in the third quarter of 2010 were certain other non-cash expenses and nonrecurring items including $164,000 of severance paid in connection with headcount reductions related to cost savings initiatives and $710,000 of non-cash deferred financing expense related to the amortization of financing fees paid as part of our new credit facilities and senior unsecured notes.

With regards to some specific income statement accounts, overall GAAP interest expense for the third quarter of 2010 was $12.8 million. Adjusting for the non-cash impacts from items such as amortization of financing fees and accrued interest, cash paid for interest was $6.7 million during the quarter. This compares with GAAP interest expense in the third quarter of 2009 of $12.4 million and cash paid for interest of $10.2 million.

Accrued interest related to our $200 million senior unsecured notes with interest we pay on a semiannual basis in April and October represented the primary reason for the low cash interest paid during the quarter relative to last year's third quarter. For the third quarter of 2010, bad debt expense was 6% of our revenue compared with an overall blended rate of 6.1% for the full year 2009.

With regard to our balance sheet as of September 30, 2010, we had $481.1 million of net debt which was net of $24.5 million of cash and we were undrawn on our $100 million revolving line of credit. This is a decrease in our net debt of $8.8 million during the quarter.

We repaid $5 million of notes and leases payable during the quarter and in the third quarter, we had cash capital expenditures net of assets dispositions of $12.2 million. Year-to-date we had cash capital expenditures net of asset dispositions of $33 million and entered into capital leases of $32,000.

Our net days sales outstanding or DSOs was virtually unchanged at 54 days as of September 30, 2010 from December 31, 2009 and the second quarter of 2010. As of September 30, 2010 our working capital was $29.5 million, down by about $2 million from June 30, 2010 but up by about $27 million from year-end 2009, primarily the result of our refinancing transaction.

As of September 30, we had approximately $200 million of liquidity under our current capital structure. This includes about $24.5 million of cash on hand, the availability of our $100 million revolving credit facility and $75 million available to us under the accordion feature of our senior credit facilities.

Finally, I would like to give a brief update on reimbursement. Though Medicare is only 20% of our revenue, my discussion will be about this book business. Our private pay business generally has experienced stable pricing and we estimate that it will continue to do so in the future.

As a number of you are aware, the Centers for Medicare and Medicaid services or CMS published its final rule about a week ago which governs 2011 reimbursement. As a result of the recent nature of CMS's release, our analyses are somewhat preliminary and will be refined as we progress into the fourth quarter.

The new CMS fee schedule contains a decrease in the RVU or relative value unit conversion factor of approximately 8.2% and incorporates the utilization factor, a variable in the practice expense section of the RVU calculation, rising to 75% from approximately 60% where it is currently set. However, these negative changes are mitigated by increases to the practice expense RVUs and many of the CPT codes we perform.

As a result, assuming stable rates within the hospital outpatient prospective payment system or HOPPS whose fee schedule for 2011 should be released around Thanksgiving time, our analysis suggests that changes to our Medicare reimbursement in 2011 will be substantially neutral to RadNet overall. We are pleased with the result and believe that CMS gave strong consideration to the economic and industry-specific pressures that imaging players have endured in 2010. I would now like to turn the call back to Dr. Berger who will make some closing remarks.

Thank you, Mark. As we enter the final weeks of our 2000 fiscal year, we have never been more optimistic about the future for RadNet. The recapitalization completed in April of 2010 has created liquidity and has established a more permanent capital structure for RadNet's future.

Additionally, the improving volume trends noted in the last several months have created further confidence in the stability and resiliency of our strategic business model. The industry pressures and lack of availability of capital are providing continued acquisition opportunities at historically low multiples.

However, in addition to the opportunity to grow the Company through these accretive acquisitions, we believe RadNet and the industry as a whole are better served by the diversification of new business opportunities which we intend to pursue aggressively in 2011. Ownership of imaging centers will always require substantial capital investment.

The opportunity to develop new platforms to augment our core competencies abound. In particular, as we announced last quarter, we entered the radiology information technology business. This is our first step in creating new revenue opportunities.

We anticipate that in the upcoming months, we will further expand in the areas of medical oncology, teleradiology and hospital-based operations. The goal will be to evolve RadNet into a company which can provide all of the core solutions for managing both hospital and outpatient radiology and imaging services.

We look forward to updating you on these developments either at our full-year 2010 earnings call in March or sooner as events unfold. Operator, we're now ready for the question-and-answer portion of the call.

(Operator Instructions) Paxton Scott, Jefferies & Co.

My First question is just as a clarification on your guidance. I understand you're reaffirming this morning. But one, were the acquisitions that you talked about that have not yet closed in Q4, were those included in the initial guidance? And two, are those basically what you're building in to bridge you from where you are today to get to that guidance? Thanks.

Paxton, the only acquisition that was not included in our guidance was the Progressive acquisition which we have not yet closed but we do expect to close any day now. We're waiting for a license to be transferred for us to do business in the state of New Jersey in order for us to close that transaction. So that will be part of the fourth quarter and we are counting on EBITDA contribution from those assets in order to achieve our guidance.

Just secondarily on that, it looks like you're kind of on target even without the acquisition of Progressive Health to hit your top line. So I was hoping you could just provide a little bit of color in terms of your costs.

Is it something in the cost structure that's running a little bit higher? And also, you could talk about your G&A.

I mean, I know it's not specifically broken out in the press release today but that has been running pretty lean and I was just hoping you could give a little bit more color in terms of your ability to kind of keep that pretty low going forward. Thanks.

Sure. It's actually very simple, Paxton. What we have been seeing this year and it's not any different from any of the other ancillary care providers in healthcare is that there has been a lower level of patients going into the system in 2010 than there were in 2009.

And IMS Health which we quoted in our script tracked the amount of patients going into physician offices and we depend obviously on the referrals of those patients from those referring physicians into our centers for our procedure volumes. So our aggregate procedural volumes have been going up this year which is driving some nice revenue gains, but the challenge that we have had which is not dissimilar to other players in our industry and other areas of healthcare services is on the same-center operations.

So our same-center operations have been slightly down and as you know, this is a high fixed cost business. And although we have been managing our costs I think extremely well this year which has allowed us to maintain EBITDA in the second and third quarters, actually beat EBITDA from prior years, the challenge we have is on the same-center side. And as we see volumes return to a more normalized level, that operating leverage is going to work in our favor and create a lot more EBITDA a lot more profitability in the future.

Let me add one other thing to that, Paxton. I think more specifically, addressing some of the margin issues, the second and third quarters saw significant cost associated with integration of acquisitions throughout the year.

Those are substantially complete right now and are essentially nonrecurring costs we do not anticipate seeing in the fourth quarter. So part of our margin improvement is in fact due to same-center store costs that we're controlling better as well as what we anticipate will be improvements going forward related to the tightness of the integration of these new acquisitions as well as ongoing measures as I talked about with information systems and other workflow opportunities that began late in the third quarter and which I believe will continue to yield significant opportunities going forward into 2011.

The other point to make here about year-to-date results is that the year-to-date results obviously include the first quarter where our business was hit by severe weather conditions and we lost about -- we estimate about $5 million of EBITDA during the first quarter. So that really affected our year-to-date same-center levels and we have been kind of making up for it in increasing margins since the first quarter.

Okay, that's very helpful. And then last question, you talked about your diversification strategy. I was hoping you could just give me a little bit more color there and kind of talk about how you see RadNet transforming potentially and what you see RadNet being as you exit say next year. Thanks.

As I mentioned in some of my closing remarks and to the extent that you have been aware of other actions or activities in the imaging industry, teleradiology is a very hot topic. Consolidation in the information system business has been robust and we believe that those should be and are core competencies of RadNet that we intend to bring in-house and utilize our enormous resources that we have in IT and in radiologists that are contracted with our centers to further enhance.

Along with that as I mentioned that we're looking at initiatives to expand our medical oncology practice, notably which has been predominantly in the breast cancer area of our Breastlink initiatives for the last couple of years, that expansion is underway as well as looking at ways to enhance that with other types of oncologic practices. And I think you can expect us to be more aggressive at looking into the hospital space where we find a number of players who are coming to us for core competencies and for capital to help transform their operations.

If you kind of roll all of those together, what we're really saying is that things like physician staffing through teleradiology, information systems as well as what RadNet has been doing for the last 20 years in terms of managing imaging, we believe are a total solution to many providers out there who need both our expertise and a more robust solution to some of their own specific needs. So I believe we are reflecting what's going on in the industry in general.

I think you can expect to see consolidation at all levels and movement towards what I call networks and larger health systems that we are principally the best strategic model in the markets that we're in given our very dense concentration into those markets. So we are looking at ways where we can grow the Company that do not require the same intensity of capital expenditures like you see in the imaging center business and have leveraged some of the resources and core competencies that we have been working on and honing here now for 20 years.

That's very helpful, that's all for me. Thank you.

Darren Lehrich, Deutsche Bank.

A few things here. I wanted to start with PET/CT which has obviously been quite weak this year. I'm just curious to get your thoughts on what you think might be going on in that particular modality.

It seems like it should be less economically sensitive yet we've seen weakness with some other companies as well. So is there anything new in the competitive landscape that you are seeing?

Just curious to get your thoughts. I know you went through a period of investment a few years ago, so just trying to understand whether this is a temporary thing or something more secular.

Two comments on that. First is recognize that PET/CT is a pretty small part of our overall revenue. So any increases or decreases in PET scanning will not have a major impact on the Company.

But more specifically from that, we believe that the introduction of more of the radiology business or business management utilization managers have had an impact in advanced imaging, what you're seeing in [MR/CT] and PET/CT scanning and I think the criteria for approving PET/CT scanning given that it is the most costly part of -- to the payers, the most costly part of their structure for imaging or within imaging has put additional pressure on that so that people are making it a little bit more difficult to get the PET/CT scanner today than we were seeing perhaps in the last year or two.

So I think that will change as more and more people look at the benefits which I think are very substantial with PET/CT scanning and probably consolidate the ordering of body scanning of CT into more of a one-stop PET/CT application when it's appropriate. And there has just been in my opinion an unfortunate but slow adoption of what we all believe is a perhaps one of the most important tools in the fight against cancer to be developed on the imaging side in the last 10 years.

Sure, sure. Maybe a comment or two if you could about just volumes in general. Obviously a lot of weakness we have seen pretty much everywhere across the healthcare services complex if you will.

Is the return to maybe a little bit better volume in October a function of co-pays, deductibles burning off? Any sense for whether we should expect a bigger bump in Q4 as a result of that? And maybe just kind of a broad comment if you could just about your thoughts on volume trends into next year.

As I was thinking about the last questions you had on PET/CT, I wanted to raise one other item that I had neglected and that is that we did see what I believe is a continued [assault] particularly in PET/CT from self-referral. And in a couple of our markets there were various medical groups that -- particularly oncologists -- that brought PET/CT into their office operations. And we're quite hopeful that that trend will be significantly impacted either legislation or changes in the requirements of credentialing and reimbursement by payers and there is some very aggressive legislation going after that.

And through various lobbying organizations, we and others tend to perceive at aggressively in a very broad way. Onto your next question, the volumes that we saw in October were a continuation of improvement in patient visits to our facilities that we began to see a nice uptick in the second part of the third quarter.

While there's been steady improvement since the first quarter which I think had some weather-related issues in addition to the economic issues, the improvement that we have seen particularly over the next 60 or 90 days has been rather dramatic with October showing us the best volumes virtually in every region that we've seen since a year ago October. The reasons for that at least in our centers I believe are not just perhaps some slight improvements in the economy.

It may be due to the falloff of the deductibles, but I think it's more importantly a reflection of industrywide issues that relate to providers going out, weaker providers going out, consolidation in the industry. The basic strategic model that we have which is multi-modality and that we find that the driver for some of the imaging that we do comes from routine imaging like mammography, x-ray and ultrasound.

And as the other providers either can't provide those particular modalities or as the weaker players which we're seeing substantially in almost all of our markets either exit or consolidate, we believe we're just picking up bigger market shares. In addition to that, we are raising the bar in a number of our centers in various regions with some newer technology.

As you can see, our CapEx in the third quarter was the most that it has been for the entire year and that relates to upgrading of equipment, particularly MRs, and to a lesser extent some CT scanning capabilities like 64-slice scanners that we believe are also driving more business into our centers and away from other competitors. So I believe you will continue to see us invest appropriately and aggressively in our centers and we expect the improvement that we're seeing now in the latter part of the third quarter and beginning here of the fourth quarter even through the early part of November should continue throughout this year and gives us some very good momentum into the -- going into 2011.

So we're very encouraged at our business model and our strategy is a significant driver even in an industry that is challenged with issues that we addressed throughout the remarks of our [close call] here.

That's great. Just maybe one housekeeping item for Mark. What was the revenue this period just of the I guess non-facility-based services? If you could maybe just lump those all together or however you are going to be breaking that out in any way going forward.

Yes, I don't have my detailed (inaudible) balance here in this conference room with me, so I can't give you an exact number. But our not -- let me just tell you what that revenue generally is.

It's revenue that we get from management fees from our joint ventures which are fairly substantial, revenue we receive from our oncology operations which is Breastlink. And we have some other kind of special group contracts that we get -- we perform some management services for. So those are the characteristics of that revenue but I don't have the breakout.

Alright, I'll follow up.

But it's relatively small -- it's less than 10% -- closer to 5% of our revenue.

Robert Mains, Morgan Keegan.

Good morning it's actually Chad (inaudible) for Rob Mains. Just a couple of questions here. The first is, can you give us a same-store routine imaging growth number?

Sure. The same-center routine imaging growth was down 2.8% which is slightly better than our overall same-store sales number which was down minus 3.3%.

Okay and then it looks like volumes overall are improving especially from Q1 and Q2. And your general impression is that things are stabilizing and that that volume [fines] should improve in 2011?

Yes, I think that they stabilized, they're improving and I think as I mentioned in a prior answer to Darren Lehrich's question, I think part of it is also our being aggressive in terms of deploying equipment that can be drivers of imaging into some of our centers in the more competitive markets. You'll be hearing about and seeing in our report that we're installing more [three test lay] MRI scanners and the first two or three of these that we put in, there has been a very good response at those centers and in those markets.

And while I don't think we are creating new procedural volume, I believe we are taking in some cases very significant share away from some of our competitors. Again, I believe that is part of the strength of our model where we do have very good cash flow and very good availability of credit to continue to invest in the centers.

And I should add that our ability to purchase some of this technology and new equipment is at extremely attractive pricing given what is a very weak market for sales from all of the major manufacturers. So, I believe it's a combination of issues, taking more market share from our competitors, some of our competitors closing or having to substantially pare down as well as just general improvement overall.

The best example I think that I can point to for the improvement overall is the significant increase we have seen in our mammography volumes over the last several months, perhaps the last four or five. And we are now seeing the highest level of mammography in our practices since the announcement as I referred to from the commission report last November.

So I think it's not just economic factors, but some of the bad press that we were getting and that imaging was getting has become more distant and the value of what we do is becoming more and more recognized as a benefit to the potential small risk of radiation exposure.

Good, that actually just answered my next couple of questions. I think that's all I have for you today.

Miles Highsmith, RBC Capital Markets.

Sorry to harp back on the guidance topic, but I just want to make sure I understood the comments earlier. I guess we've been running 27 to $28 million of EBITDA the last couple of quarters and the guidance would imply Q4 in the 31 to 35 type range.

By my calculations, the acquisition won't add too substantial of an amount in the fourth quarter. So is it right that I understand that the bulk of the -- if you are able to get into that range, the bulk of that, of achieving that would be related to better volumes and the leveraging of a fixed cost business model?

I think a good portion of that, some of it also, Miles, relates to I think integration costs that we had in the second and third quarters from a fairly substantial number of acquisitions that we did throughout the year that were one-time expenses and that go way here in the fourth quarter. So, I really think it is a combination of controlling costs, one-time costs that go away, improving volumes and acquisitions that will be completed here in the fourth quarter.

Just in terms of the one-time costs, I am assuming they were not added back to EBITDA in the recent quarters. Can you give us anything directionally? Is this -- is it in the $1 million, $2 million type range or is it hundreds of thousands? Anything you can quantify for us there?

Well you're right, it was not added back and that over probably the period of the year, it's probably in the $1 million to $2 million range, yes. But that would be for the whole of the year, Miles, not any one quarter.

Okay, great, that's helpful.

It did tend to be greater in the second and third quarters because that's when a number of these larger acquisitions did occur.

Got it, thanks. Then I just wanted to go to a couple of broader topics, Howard, and I guess on the heels of the election, I'm wondering if you have any general comments as to how that could impact the industry.

I guess I'm sort of looking back -- we look back to DRA, back a number of years ago that was done legislatively, and before DRA, the freestanding imaging Medicare payments were somewhat higher than hospitals and now DRA in many cases has leveled that. I'm curious just about your thoughts that some will argue given a lighter overhead maybe than the hospital, if you have anxiety that those Medicare rates have come below the hospital rates at some point either legislatively or otherwise.

I think that's a good question. It's a little bit of crystal ball gazing here. But as far as the election results, I'll try to keep my comments just to healthcare and not be too political.

But I think generally speaking, the political outcome of the recent elections are very favorable for healthcare. The proposed legislation and -- not proposed, but passed legislation, I think needs substantial modifications which I believe will be forthcoming.

Whether they happen now or we have to wait until the presidential elections of 2012 I think is somewhat moot. The fact of the matter is is that I believe there has been a bit of an overhang if you will awaiting this election and there now has to be a better dialogue amongst the parties to craft more sensible and practical issues.

I think at the end of the day, for us in imaging, it's probably less about reimbursement and it's probably less about who the political parties are that are in control. There is a rationalization for imaging that is and has been occurring now for the last two or three years as you've correctly pointed out that started with the DRA back in January 2007 and really has gotten a bigger head of steam up in the last really 12 to 18 months.

And where I'm going with that is that there were and continue to be too many providers for either stand-alone imaging such as MRI or MRI/CT providers and -- and I continue to make this a focus -- self-referral into physician offices. And what I believe that the process that is underway now will demonstrate that the needs to provide access to the almost 80% of what is requested for imaging, meaning routine imaging, as opposed to the 20%, although it's the bigger driver of profitability for MR and CT, will have to take into account that a reduction or a consolidation in this industry cannot be at the expense of access for the majority of people and physicians who require our services.

It is I think long been overlooked as to the importance of the routine imaging providers that really present the access that is not available generally in hospitals. And as a note, most hospitals or many hospitals don't even do mammography let alone do it in a way that is near what we do in terms of a comprehensive mammography service and one that ultimately like we have here on the West Coast becomes more comprehensive with breast disease management.

So I think as I have seen over my years here, the marketplace is rational whether it talks about companies or whether it talks about how companies need to evolve. And I think that for RadNet's benefit as well as the industry as a whole, there needs to continue to be some shakeout of the weaker players.

There needs to be continued effort to reduce self-referral which we are aggressively involved with both in the marketplace as well as from a lobbying standpoint. And we need to get the appropriate parties to recognize that full-service providers need to be the core of the delivery system in imaging and that it can't be done really at the level that it needs at hospitals and it can't be done at the level that it needs with a shrinking universe of these players that provide the access for the preponderance of imaging that needs to be done.

So I think if we just let the process continue whether it is the credit markets and the availability of capital, whether it's reimbursement issues or whether it's healthcare legislation, the rationalization will occur and eventually the parties in power, which really isn't the legislators, it's really more the payors -- remember 80% of our business is non-Medicare and we are having ever-increasing dialogue with payors and radiology business managers or benefit managers I should say to provide the access and pricing that they're looking for and in return make certain that we get large volumes.

So I like our position, I like what is going on, but I don't lose any sleep over what is happening from a legislative standpoint. I think as I continue to harp here, I think a rationalization of this and a rationalization approach will prevail to provide the necessary access and services that are so important to the healthcare industry in general.

That's great, I appreciate all those comments. And I have one last one.

In terms of some of the areas of diversification, you guys have talked a little bit about medical oncology, hospital-based opportunities. I'm just wondering, you've done some good acquisitions this year in some areas where you're building some share sort of consistent with your historical freestanding imaging model.

Are you seeing less of those opportunities incrementally, and thus you're looking at some of these areas of diversification? Or is it more hey, there's some really great areas where we can diversify our business that can be accretive and then we'll get back ultimately or continue to look at the traditional freestanding imaging. I'm just curious what you are seeing there. Thanks.

Yes, very good question, Miles. I think what I'm trying to articulate here is that at RadNet, we are not seeing any slowing down. If anything, there is an increasing interest and opportunity for us in the acquisition arena and the multiples certainly aren't going up, they're going down.

And in many of the cases, if we were to kind of show you some of these models, the purchase price that we are able to achieve is at times less than the actual assets that we are acquiring. We expect that to continue.

I think more importantly, what we have recognized is that there are ways for us to diversify the Company without large capital investment but which can be drivers into opening up opportunities for us in the hospital-related area and in perhaps the oncologic area. And things like teleradiology, IT systems, while I think that they are largely commodities and while they are certainly going to experience their own issues regarding pricing, what they do are give us a much broader range of services to go into opportunities that may have a more immediate benefit to some of the potential targets that we have.

But then once we're in, we can open up a much broader range of RadNet opportunities to expand those relationships. So I think what I'm saying is that the hospital initiatives, oncology initiatives and teleradiology initiatives ultimately become a way for us to open the door for discussions into even more broader opportunities for RadNet.

Henry Reukauf, Deutsche Bank.

Just two quick questions. First is, you've had a pretty good buildup in the New Jersey area in the last year and you've done that in the face of a very difficult market. Can you kind of make some comments on how that area is doing actually relative to your expectations?

I'm sorry, I got distracted for just a moment with somebody at my door. Could you repeat the question?

Yes, just in New Jersey, you've made a pretty good (multiple speakers) you've kind of focused it as an area of growth. Is that living up to your expectations?

Yes, we really entered the New Jersey market less than a year and half ago and with the completion of the acquisition this quarter that we announced earlier for the Progressive imaging, we now will be up to about 16 or 17 centers in New Jersey and they're almost all in what would be defined the Northern New Jersey market.

We see enormous consolidation opportunities there. Prices for our acquisitions have been very attractive and it's taken us a while to take some of these assets and revamp them or reinvigorate them.

And we are starting to see the results of those efforts pretty substantially here in the late third quarter and into the fourth quarter here. So we expect to be pretty active.

It is a substantial book of business for us that is growing and there are opportunities even outside the outpatient market there that we are beginning to look at. So while it's a new market that we have entered into, it is one that I think has extremely high upside opportunity for us and which we're going to continue to be very aggressive about.

You think it will get meaningfully better over the course of time here since it seems to be an area of focus?

Yes, absolutely.

Just on the volume side, back on the -- for your capitated business, how are the volumes on a same-store basis year over year for that capitated business going since that seems to be a cleaner number, no real acquisition issues in there?

Henry, the capitated business, the volumes there are tracking kind of the same-center levels that we're seeing across our network. So the same -- I would say the same issue that you have in terms of people going to see their primary care physicians we are seeing within our capitated business as well.

So we've seen a slight decrease in utilization under those contracts. Now it doesn't necessarily make those contracts massively more expensive because as you know, in our model, there's a high fixed cost associated with the facilities and with the personnel at the facilities.

So that -- what's nice in the capitated business, we do get annual increases in reimbursement under that book of business which generally tracks increased utilization over time and we will still get those next year. But we did see a slight decrease in the utilization under those contracts.

Is it the same rate that you saw overall, I think 3.3%?

Yes, in that range.

In that range, okay. Thanks very much.

Elie Radinsky, CCP.

Just a quick question here. Do you have the same-store statistics without capitation, only the payors that are not capitated?

No, we don't track that.

You don't even track that?

In other words, we don't report that. We obviously track it because we have requirements from the medical groups and the HMOs themselves to report statistical [encounter] data, but as I just said with the question from Henry, we are seeing the same level of decrease in utilization within our capitated contracts as we are in our business overall on a same-center basis.

With the capitated contracts, are you seeing that managed care is trying to because utilization is lower to recapture some of that in next year's contracts from a pricing perspective?

No.

No (multiple speakers) I'm choking on your question. Actually, Elie, we continue to drive increasing reimbursement from our capitated providers because even though they might be stable or perhaps slightly lower than their utilization, the contractual pricing we get is still somewhat below the California standard that we have set.

And so we are getting increases virtually on every contract we have on a yearly basis. And as Mark mentioned, it's generally somewhere in the 2 to 3% range, in some cases 5%. So it's a very good book of business for us and the increases just continue to get them closer to the target that we would like to see them at.

And typically these are -- these tend to be two to three year arrangements and historically speaking, utilization increases within this industry on an annual basis, so that one year in lower utilization is not going to be viewed as a trend by either us or by managed care or these medical groups, so that the paradigm of this type of pricing and the escalators associated with these contracts won't change because of one year's utilization statistics.

Okay, Howard, that should bring a smile to your face, not choke you up. I'm sorry about that.

Just as a follow-up question to that, however, is just to play devil's advocate because this question is asked to me a lot, given the fact that now it is commonplace to have higher co-pays and deductibles and sometimes significantly higher for advanced diagnostic imaging procedures, if that trend continues and if in fact that trend is a major contributing factor to a reduction in overall utilization, how do you have confidence that utilization is going to start returning to its historic levels?

Well, the pushback that I would give you on that is that we have been doing effectively radiology utilization management for our capitated groups here for 15 plus years and the utilization that we're seeing in these groups is substantially below the national averages. So while we might see slight changes here, they won't be that dramatic, number one.

Number two, remember again like the rest of our book of business, since this is generally comprehensive capitation agreements, meaning that we do everything from routine x-rays to MRI and PET scanning, we are still driving the vast majority of that business, 80% in that range for routine imaging for which there has really been no reduction at all. So that will comprise the bulk of our utilization in these contracts --

Howard, I'm sorry, the question wasn't about capitation. The question was about (multiple speakers) assumption of utilization throughout your book of business especially on the fee-for-service side.

(multiple speakers) do you have confidence that that will return given the fact that we now have higher co-pays and deductibles and those co-pays and deductibles continue to increase?

I don't really see that being an impact. We have had that out here on the West Coast. We're not seeing it dramatically on the East Coast.

And I don't think that most people when they are told that they need either an MRI or a CT scan are willing to give up the potential medical benefits for that based upon co-pays and deductibles. It's just way too important.

If there's anything that they give up, it might be things that they would consider to be more elective. But once your referring physician has determined you need an MRI or a CT, it's not a question of if you get it. It's a question of how quickly you get it.

Carter Dunlap, Dunlap Equity Management.

Yes, in answering the issues that caused the EBITDA from say Q2 to Q3 into Q4, you discussed the leverage and then also the absence of several one-time expenses. And thinking about it going forward into the next fiscal year, are there any one-time benefits that would make the range that we're hoping for in Q4 not be sort of a starting point?

I'm thinking about one benefit here which is really an earnings benefit that we will realize over the next two years as opposed to an EBITDA benefit and that relates to our interest rate swaps. So currently we are in a substantial negative marked to market position on our two interest rate swaps to the tune of about $9 million which is net of about $3 million of an amortization expense that we are going to have to recognize through interest expense over the next two years.

But that $9 million net marked to market negative position over time as we plan to hold these swaps through maturity will amortize out as a benefit to other income line item. Currently if you've noticed in the quarter, we had about an $821,000 negative other loss this quarter.

But ultimately that has to turn around and will create a $9 million benefit to earnings over the next two years on a schedule that is uncertain, meaning it has to do with people's forward view of the yield curve of interest rates. But by definition, the swaps have to go to zero by maturity. Other than that benefit which will be an earnings pickup but not a cash flow pickup, I can't think of any one-time financial benefits.

To answer it on the operations side of it, other than what we mentioned, I don't see any one-time benefits. What I ssee are continued and long-term benefits from the investment that we've been making into workflow and information systems.

We need to have everybody understand that this is a potential significant impact in the Company's operations which while it won't be seen overnight, we should start seeing the results of some of this early in 2011 and continuing out through the year. And our entrance into that market so that becomes a core competency of RadNet cannot be underscored or -- it should be underscored.

The opportunities long-term for improvement and not operating efficiencies and ultimately our margins are a major driver in the current efforts of the Company to reign in our costs and benefit from what really is a technology driven business.

Thank you, just to refresh my failing memory, if we go back to whatever normal was, what was the normal volume of Q4 say seasonally compared to one, two, three?

I think the volumes in Q4 generally tend to be impacted by the holidays in November and December and can be quite variable. What I was referring to is that the volumes that we saw in October and which are appearing to continue into November here are the best volumes that we have seen since October of last year and the beginning of November.

Remember that as I explained, we did have some impacts in the fourth quarter related to mammography and that report of that commission as well as the way the holidays fell out. But we are very encouraged at all the initiatives that we have been undertaking and are giving us robust returns to those volume levels and generally speaking, the third quarter and fourth quarter from a per day volume standpoint tend to be the best of the year for us.

Sean McMahon, Kennedy Capital.

Mark, can you talk about moving your physicians to more variable [compact edge]? how many of your physicians today are actually on that program and how many -- how quickly can you ramp the rest of your physicians? And maybe lastly, the margin differential between having a physician on the variable comp versus more of a fixed base package.

Maybe I'm better off answering that question. The group that really is on that fixed cost model is really here on the West Coast and that is because we have the staff model physician group here that has been run under the Beverly Radiology Medical Group.

That is now being revised to be our view or work output model that will be beginning to take place into the start of the first quarter of this year. We have been preparing that now for the last 60 days and have a little bit more work to do, but that model will change beginning January 1.

And the potential improvement for that to our bottom line is very substantial. I don't think I want to at this time give any more color to that because we have to try to make certain that the opportunities that we think are available there can be realized.

But I think as we go through 2011, we will be able to give better visibility into that as well as I believe you will see it impacting our results as we go through the year. But it's not inconsequential.

The number of radiologists that are potentially impacted by this change is somewhere in the neighborhood of 75 radiologists. So it's a substantial number of radiologists and I think you can draw some conclusions from that yourself.

I'm sorry, how many do you have today, how many radiologists do you have today?

Total for the Company is about 350.

Sean, to go back to your original question, the groups on the East Coast are already on a kind of productivity or revenue share arrangement. The difference is that on the East Coast, we recognize our revenue after we have paid these physicians their fees.

So these physicians, the relationships are long term, they won't change. The comment in the script comment in the script is specifically related to Beverly Radiology Medical Group which is kind of the West Coast group which is roughly 75 physicians out of the 350.

Let me add one comment because somebody might say well, why haven't we gone to that model earlier. And the reality is that the entrance into a more robust software system and information technology are allowing us to make this more of a virtual business today than we could have even a year ago.

So, our entrance and acquisition into the software business as well as potentially here into the teleradiology business are creating opportunities that really didn't exist both from a staffing standpoint and more importantly from a technology standpoint that are allowing these efficiencies to be realized.

Are you -- the savings from moving those physicians into that type of model, is that kind of baked into the -- some of the savings people were thinking about on the eRAD acquisition or would that be above and beyond what kind of we're hoping?

It's above and beyond that.

The savings we built into the eRAD acquisition was strictly licensing and software maintenance and support that we would otherwise have to pay that we will no longer have to pay from essentially in-sourcing that solution.

I don't know if you commented on this earlier on the call, but did you talk -- I think you've been talking about trends are improving, volumes are improving. Maybe in the last couple weeks of October, can you talk about maybe just October itself, the improvement you are seeing year over year? Is that up mid-single digits or better?

When you say year over year, are you referring to last October or are you referring to earlier this year?

Both if you have it. So if you have the year-over-year and sequential, just kind of momentum that you're talking about here in October. What are you comparing that against? And maybe talk about the actual number, how much improvement are you actually seeing in the business?

Well, if I compare it to last October which was probably one of the best individual months that we have ever had, the volumes in October of this year are approaching those numbers. So I would say we're very close to those levels and in a few cases particularly interestingly enough on advanced imaging, we are even exceeding those.

But I would say it's pretty much about the same. But recognize that that is a fairly dramatic improvement over what we saw in the beginning and second quarter of this year.

If you compare our volumes at least in October, so we're talking only about one third of the quarter at this point, but as you compare our October volumes to the second-quarter volumes, they appear to be up perhaps about 2 or 3% overall, not looking at any specific modality, but overall for the Company. In our business, that is a pretty substantial improvement. And I am talking about same-center stores.

Thank you very much. That was very helpful.

There are no further questions at this time. I'll turn the conference back over to management for any closing or additional comments.

Again, I would like to thank everybody for taking the time out and their continued support of RadNet and its employees. We will continue to endeavor to be the market leader that provides the services and looks to appropriate return on investment for all of our stakeholders. Thank you for some of the excellent questions that you posed today and look forward to our next call. Thank you.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. You may now disconnect.