RadNet Inc (RDNT) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen. Welcome to the RadNet, Inc. first-quarter 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.

(Operator Instructions)

I would like to remind everyone that today's conference is been recorded. I would now like to turn the conference over to Mr. Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet, Inc. Please go ahead, sir.

Thank you. Good morning ladies and gentlemen, and thank you for joining us today to discuss RadNet's first-quarter 2012 financial results. On the call today from the company are Dr. Howard Berger, Chairman and Chief Executive Officer of RadNet, and myself. Before we begin today, we would like to remind everyone of the Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995. This presentation contains forward-looking statements within the meaning of the 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 and contracts with radiology practices; recruiting and retaining technologists; receiving third-party reimbursement for diagnostic imaging services. Successfully integrating acquired operations; generating revenue and adjusted EBITDA for the acquired operations as estimated, among others, are forward-looking statements within the meaning of the Safe Harbor.

Forward-looking statements are based upon management's current preliminary expectations and are subject to risks and uncertainties, which may cause RadNet actual results to differ materially from the statements contained herein. These risks and uncertainties include those risks set forth at RadNet's reports filed with the SEC in from time to time, including RadNet's annual report on Form 10-K for the year ended December 31, 2011, and RadNet's quarterly report on Form 10-Q for the three-month period ended March 31, 2012.

Undue reliance should not be placed on forward-looking statements, especially guidance on future financial performance, which speaks only as of the day that it is made. RadNet undertakes no obligation to update publicly any forward-looking statements to reflect new information, events or circumstances after the date they were made or to reflect the occurrence of unanticipated events. And with that, I like to turn the call over to Dr. Berger.

Thank you, Mark. Good morning everyone, and thank you for joining us today. On today's call, Mark Stolper and I plan to provide you with highlights from our first-quarter 2012 results, give you more insight into the factors which affected this performance and discuss our future strategy. After our prepared remarks, we will open the call to your questions. I'd like to thank all of you for your interest in our Company and dedicating a portion of your day to participate in our conference call this morning.

We are pleased with the beginning of 2012 for two primary reasons. First, our first-quarter financial results place is on track to meet our 2012 projections. And second, during the quarter, we continued to execute on our plan to meet certain operating objectives that position us well for future years. Let me expand on both of these.

With respect to our first-quarter financial results, we're pleased to have driven strong aggregate and same-center procedural volumes. As many of you expected, are additive volume increase was significantly aided by the acquisition of the CML Maryland and Rhode Island operations, which contributed to the first quarter of 2012, but not that of 2011.

Our integration plan with these assets already ahead of our internal projections, and we expect to have increasing EBITDA and profitability contribution from these operations as the year progresses.

But, we are most pleased with our same-center procedural growth during the quarter, which exceeded 5%. While some of this organic growth was the results of A more mild winter in the northeastern United States this year, as compared to last year, we also observed volume increases in weeks that were not impacted by adverse weather conditions in either the first quarter of 2012 or 2011. This gives us reason for optimism for the rest of the year.

As a result of our strong first-quarter results, we are already approaching on a trailing 12-month basis the low end of our revenue and EBITDA ranges for calendar 2012.

Aside from our financial performance in the first quarter, I am pleased that we continue to execute on key business objectives that will help to position us for a long-term successful future. First, we completed the first installation of our comprehensive eRAD risk text and voice recognition implementation at our RadNet site.

We have been testing the integrated solutions at one of our facilities in Brooklyn, New York, and the result of greatly exceeded our expectations. This system is performing extremely well and has received rave reviews from our operating personnel.

We have given our IT group the green light to begin the system-wide rollout of the products throughout the RadNet network. We expect the majority of this implementation to occur by the end of the year, and we can look forward to significant operational efficiency and cost benefits from the implementation. We are certain that controlling our own IT infrastructure and having full command to customize solutions will be integral in our future growth and performance.

Second, during the quarter we announced a major partnership in the New Jersey market with Barnabas Health. We have talked for a long time about the importance of geographic concentration and the importance of building scale and leverage with local payors to ensure stable and fair long-term reimbursement rates. The Barnabas Health partnership, we believe, will accomplish this goal in our core market of New Jersey in a similar way the CML acquisition does for us in our Maryland marketplace.

The Barnabas relationship is three-pronged. First, we are establishing a state-wide contracting network to be initially comprised of the RadNet and Barnabas points of access in New Jersey, but could later include future sites we might purchase together and/or sites of other third-party providers. Our leverage with and importance to the local payors is greatly enhanced by Barnabas and RadNet joining forces in New Jersey.

Second, the joint venture will provide management services to the existing RadNet and Barnabas imaging facilities in New Jersey, to include amongst other functions information technology; marketing; utilization review; billing and collecting; transcription; medical records management; equipment maintenance; purchasing; and insurance.

The joint venture is designed to capture efficiencies resulting from implementing best practices across all of the networked imaging facilities, with the ultimate objective of reducing cost and improving quality of service and patient care.

The joint venture will also benefit from increased purchasing power resulting from its larger scale. In addition, it is anticipated that the joint venture can expand its management and contracting services to include third-party imaging centers and in-patient hospital radiology departments in the future.

Lastly, the joint venture was formed to pursue new business opportunities. These opportunities could include medical oncology, comprehensive breast disease management, such as RadNet's California Breastlink operations, teleradiology, information technology and clinical trials work.

Besides the Barnabas transaction in the first quarter, we announced in early April the acquisition of West Coast Radiology in Orange County, California. Not only do the West Coast Radiology sites broaden our footprint in Orange County, but it is also strengthening our physician capabilities in that region. For almost 25 years, West Coast Radiology has been one of the premier radiology providers in Orange County.

West Coast Radiology has successfully nurtured close relationships with long-standing, independent practice associations and other medical groups with whom they contract in Orange County, representing future expansion opportunities for RadNet. This, like the Barnabas joint venture, consolidates a major market, increases our importance with local payors, expands our capitation opportunities and eliminates a formidable local competitor.

We remain excited about the future for our business. Regardless of the health of our economy, the status of healthcare reform or the outlook for healthcare reimbursement, diagnostic imaging remains an essential part of the healthcare delivery system. Imaging is squarely in keeping with the focus of medicine with respect to the early detection and diagnosis of disease and the focus on preventative and non-invasive techniques.

It is certain that diagnostic imaging will play an important role in healthcare in the future. Over the coming years, RadNet, with its expanding size and scope, has the opportunity to change the way imaging is delivered in certain regional markets.

RadNet is emerging as the efficient, low-cost operator in our markets, and we have positioned ourselves to address all of the needs of any potential partner, whether it is a hospital, health system payor or accountable care organization. At this time, I'd like to turn the call over to Mark Stolper to discuss some of the highlights of our first-quarter 2012 performance. When he is finished, I will make some closing remarks.

Thank you, Howard. I'm now going to briefly review our first-quarter 2012 performance and attempt to highlight what I believe to be some material items. I will also give some further explanation of certain items in our financial statements, as well as provide some insights into some of the metrics that drove our first-quarter performance. Lastly, I will reaffirm our previously announced 2012 financial guidance levels.

In my discussion, l 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 sale of equipment, other income or loss, loss on debt extinguishments, bargain purchase gains, and non-cash equity compensation.

Adjusted EBITDA includes equity and earnings in unconsolidated operations and subtracts allocations of earnings to non-controlling interest in subsidiaries and is adjusted for non-cash or extraordinary and one-time events taken 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 first-quarter 2012 results.

We were pleased with the performance of our business this quarter. For the three months ended March 31, 2012, RadNet reported net service fee revenue net of contractual allowances and discounts of $168.5 million. Revenue increased $24.4 million, or 17%, over the prior-year same quarter. The significant increase in revenue this quarter is the result of additional revenue from the CML acquisition, which we completed in the fourth quarter of last year, as well as organic procedural volume growth of 5.6%.

As a point of clarification, as many of you may have noticed, we have changed the presentation of our revenue and bad debts in our income statement to conform with ASU 2011-07 titled Healthcare Entities Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts and the Allowance for Doubtful Accounts for Certain Healthcare Entities.

We, like other healthcare entities, adopted this standard on January 1, 2012. As it relates to our discussion of revenue on this call and in the future, we are referring to net service fee revenue, net of contractual allowances and discounts, which is our net revenue prior to deducting bad debts.

Adjusted EBITDA for the quarter was $29.1 million. Adjusted EBITDA increased $3.4 million, or 13.3%, over the prior-year same quarter. Typically, first quarter is our most challenging quarter due to two primary factors. First, almost half of our operations are located in the Northeast, which is prone to adverse weather conditions which effectively reduce patient visits. This year, however, we experienced more mild weather conditions in operations than in last year's first quarter. As such, the lack of bad weather aided our same-center procedural volumes.

The second factor normally affecting our performance in the first quarter is a trend towards increased patient participation in higher-deductible health plans. The result of this is that more patients delay healthcare services to later in the year when they have utilized all or part of their out-of-pocket expenditures. This observed trend continues, and we believe it impacted our performance in the first quarter of 2012, as it did in last year's first quarter.

For the first quarter of 2012, as compared to the prior year's first quarter, aggregate MRI volume increased 23.8%, CT volume increased 23% and PET-CT volume increased 14.6%. Overall volume, taking into account routine imaging exams inclusive of x-ray, ultrasound, mammography and all other exams, increased 18.9% over the prior year's first quarter.

In the first quarter of 2012, we performed we performed 1.059636 million total procedures. The procedures were consistent with our multi-modality approach whereby 77.2% of all the work we did by volume was from routine imaging.

Our procedures in the first quarter of 2012 were as follows -- 132,637 MRIs, as compared with 107,153 MRIs in the fourth quarter of 2011; 102,648 CTs, as compared with 83,427 CTs in the first quarter of 2011; 6,059 PET-CTs, as compared with 5,289 PET-CTs in the first quarter of 2011; and 818,292 routine imaging exams, compared with 695,542 routine imaging exams in the first quarter of 2011.

Net loss for the first quarter of 2012 was $111,000, a roughly breakeven on a per-share basis compared to a net loss of $876,000 or negative $0.02 per share reported for the three-month period ended March 31, 2011. Based upon the weighted average number of shares outstanding of 37.7 million and 37.3 million for these periods in 2012 and 2011, respectively. This represents an improvement in our net income for the quarter of approximately $765,000.

Affecting operating results in the first quarter of 2012 were certain non-cash expenses and non-recurring items, including $1.2 million of non-cash employee stock compensation expense resulting from the vesting of certain options restricted stock and warrants; $449,000 of severance paid in connection with headcount reductions related to cost savings initiatives from previously announced acquisitions.

$24,000 loss on the sale of certain [capitive] equipment; $771,000 of non-cash deferred financing expense related to the amortization of financing fees paid as part of our existing credit facilities; and $937,000 share market value gain from our interest rate swaps, net of the amortization of a cumulative comprehensive loss existing prior to April 6, 2010.

With regards to some specific income statement accounts, overall GAAP interest expense for the first quarter of 2012 was $13.6 million. This compares with GAAP interest expense in the first quarter of 2011 of $12.9 million. The increase is primarily due to incremental net debt on our books resulting from, among other things, increased borrowings from the $41 million acquisition of the CML HealthCare subsidiaries completed in November.

Adjusting for the non-cash impacts from items such as amortization of financing fees, losses or gains related to the fair value adjustments of interest-rate hedges and accrued interest, cash paid during the first quarter of 2012 for interest was $6.8 million compared to $6.3 million for the same period in 2011.

Based upon the accounting changes of the ASU 2011-07, for the fourth quarter of 2012, provision for bad debts was 3.9% of our revenue compared with 3.5% for the first quarter of 2011. We have noted little change in our ability and performance in collecting patient debts and cannot identify any trends at this point which would lead us to conclude that this bad debts percentage will change meaningfully in the future.

With regards to our balance sheet, as of March 31, 2012, we had $555.4 million of net debt, which is total debt less our cash balance, and we were drawing $60.7 million on our $121 million revolving line of credit, primarily the result of our acceleration of cash capital expenditures and the purchase of the CML assets. Since December 31, 2011, accounts receivables increased approximately $5.5 million, primarily the result of the effects of deductibles in the beginning of the year.

However, our net days sales outstanding, or DSOs, decreased by 1.7 days to 60.85 days as compared with the fourth quarter of 2011. The decrease in our net DSO is a function of our collecting certain money that was released from billing holds associated with negotiations that concluded towards the end of last year and the beginning of 2012. This was somewhat mitigated by the cash delaying affects of collecting deductibles at the beginning of the year from our patients, which I discussed earlier.

During the first quarter of 2012, we repaid $4.5 million of notes and leases payable and had cash capital expenditures net of $2.7 million of asset dispositions of $11.3 million.

At this time, I would like to reaffirm our 2012 fiscal-year guidance levels, which we released in March as part of our 2011 fourth-quarter and full-year earnings press lease. For our 2012 fiscal year, our guidance ranges are as follows. For service fee revenue net of contractual allowances and discounts, our guidance levels are $648 million to $688 million, which is equivalent to our original guidance of $660 million to $700 million as adjusted for the adoption of ASU 2011-07.

Our adjusted EBITDA guidance range is $120 million to $130 million. Our capital expenditures guidance range is between $35 million and $40 million. Our cash interest expense guidance is between $46 million and $51 million, and our guidance for free cash flow generation, which we defined as adjusted EBITDA less total capital expenditures and cash paid for interest, our guidance levels are between $30 million and $40 million.

We are tracking according to our plan to achieve our guidance. Incorporating our results this quarter, on a trailing 12-month basis, we are approaching the low end of our 2012 guidance ranges with close to $640 million of trailing 12-month revenue and approximately $119 million of trailing 12-month adjusted EBITDA.

At this time, we have little to report on the reimbursement front. As we reported in November of last year, shortly after the 2012 Medicare Physician Fee Schedule was finalized for 2012, we estimate a $2.5 million to $3 million negative impact from Medicare reimbursement in 2012. As a reminder, Medicare represents approximately 20% of our business. We remain comfortable with this estimate, and at this time we know little about Medicare reimbursement for 2013.

CMS typically releases a preliminary proposal for reimbursement under the Physician Fee Schedule in June or July. After a comment period, CMS generally releases the final schedules in October and November under the Physician Fee Schedule and HOPPS, or Hospital Outpatient Prospective Payment System. We will keep you abreast of these developments and give you updates in the current months.

With respect to reimbursement for our commercial payors, we remain committed to our strategy to develop the scale and market leverage we need in our regions to have directed dialogues and negotiations with these payors, which result in stable and fair pricing in the coming years.

We continue to seek important strategic transactions like that of the CML acquisition and Barnabas Health partnership in Maryland and New Jersey, respectively, that further this strategy in our local markets. I would now like to turn the call back to Dr. Berger, who will make some closing remarks.

Thank you, Mark. In our last conference call, I discussed at length the importance of our obtaining negotiating leverage with commercial payors in our regions. I say that imaging continues to be the target of reimbursement reductions by both CMS and commercial payors, often without justification or concern regarding patient access to essential imaging services.

I also stated that RadNet and its radiologist partners are prepared to do what is necessary to negotiate with payors for fair pricing instead of simply accepting imposed pricing. In several key RadNet markets, these conversations have already begun, and the payors have been receptive. The process will not be completed overnight, but we are encouraged by the tone and open mindedness.

We have worked extremely hard over the past five years to assemble under one roof the full breadth of diagnostic imaging services, including owning and operating outpatient centers; managing inpatient hospital-based radiology operations; providing remote off-site teleradiology services; running certain oncology practices that dovetail with diagnostic imaging; and designing and implementing IT systems to manage and tie together all these imaging-related capabilities.

This positions RadNet as the imaging player of the future and the one that is best positioned for the future of healthcare as the imaging market continues to experience dislocation as a result of reimbursement, utilization and access to capital pressures. Operator, we are now ready for the question-and-answer portion of the call.

Thank you.

(Operator Instructions)

Brian Tanquilut, Jefferies.

Good morning, guys. Howard, you talked a lot about the scale billing strategies that you guys are putting in place. Just wanted to hear your thoughts, or your vision, for the hospital partnership side of RadNet's strategy going forward. We saw you do the Barnabas deal. Is that something that we should expect more of going forward? Or is this more of an opportunistic alliance at this point?

I think it is actually both, Brian. It was very opportunistic. The Barnabas health system sought out a partner that could help expand their reach for imaging services and give them capabilities that they don't possess internally. And our conversations, while they a spread out over a rather substantial period of time, well over a year, has resulted in what we think is a somewhat unique situation in New Jersey. Given both the size of our current operation, there, and the Barnabas footprint in, particularly, northern New Jersey.

So, I think there are some unique issues that represented. But I would remind you that two years ago we had no centers at all in New Jersey. So, the result of our aggressive acquisition and obtaining a presence in New Jersey brought these conversations to a head here that we could not have anticipated a couple of years ago.

It's clear that there are other major health systems, primarily in the Northeast and mid-Atlantic area. Some of which we already have relationships with that we could expand upon and others that I believe will either take the cue from what we have done with Barnabas, or as we develop a better footprint in some of the Northeast states, will certainly gain some traction, I think, with other large hospital systems in those marketplaces. So I don't expect this to be the only one, but I think it is in and of itself unique and gave us an opportunity that wouldn't have existed.

The issue of accountable care organization's and the consolidation of networking providers is on everybody's lips, and I think as time goes on, you will see other efforts that we are already thinking about or in discussions with come together as the whole healthcare system itself, I believe, begins to evolve into a new delivery system.

So Howard, as you weigh your growth approach going forward, do you -- right now, are you leaning closer towards the hospital partnership strategies? Or would you still prefer the stand-alone acquisitions of freestanding agencies -- or freestanding imaging centers, sorry?

I think the freestanding imaging centers are our best near-term market opportunities, Brian. As I mentioned in my closing remarks, dislocation, which is a term that you investors like to use, I think is very much afoot in imaging, and we continue to get calls from people that are interested in becoming part of a larger organization. I think that the tools that we've built to run imaging, whether it hospital-based or up the middle of the fairway for us in our outpatient imaging centers, is a key part of creating the efficiencies and networking opportunities.

So I see people needing the kind of expertise that we have, the scale and size. And again, with the theme of having high concentration of centers in geographically dense markets, is something that I think everybody we talk to embraces on some level right now. And, you're more likely to be able to create that in the near term by having relationships in some form or another with other outpatient imaging providers.

Howard, last question for you. How do you see the imaging space develop going forward? We have heard some folks talk -- and maybe you can tie this back into the ACOs -- but we have heard some folks talk about getting basically a holistic or a comprehensive diagnostic platform or an offering. Is that something that you think that the imaging industry has to turn to or will have to be part of going forward? Or can the imaging industry go at it alone given the reimbursement pressures you are getting from both CMS and the private payors?

I think that is a good question, Brian. That conversation, although at a very superficial level right now, is something that we are already talking about with the Barnabas hospital systems, and I'll give you an example. One of the things that we have identified as a need for Barnabas is not only to increase their footprint and access points for their patients in diagnostic imaging but also laboratory.

So, it wouldn't be unheard of if most of our centers also become draw stations for some of the laboratory work both to make it more convenient for their patients, as well as have a way to get it these services consolidated in one location. Clearly, with our footprint and a lot of these states of many outpatient sites that are often quite remote from a hospital, this represents I think a very good opportunity.

And, it is, I think, furthering the concept of providers of any kind, whether it be diagnostic or whether it be hospitals, consolidating their services to be both more efficient and more convenient for their patients, and ultimately, control costs. So, I do see movement at least perhaps in the outpatient space related to other diagnostic testing.

Where the RadNet centers and access points, given how large these are and how many we have in our markets, could be used for other convenience of services for patients. It is not unusual for a patient that needs a CBC to also need a chest x-ray. So, getting those in one place and particularly being able to bundle these services together, is something that I believe a lot of people will be looking for and at in the future, and we will certainly be there for that.

All right thanks Howard.

Thank you, Brian,.

Darren Lehrich, Deutsche Bank

Thanks. Good morning, everybody. Obviously, the revenue growth has been very good, and the same-store was a nice surprise for us. I guess I'm just time to get a better handle on the operating expense growth. Sequentially, your revenues were up about $7 million. Your OpEx was up about $10 million.

I would love to just get some commentary on expenses, whether there is anything unusual here in the quarter. More specifically, Mark, maybe if you could just comment on G&A levels. Where they are running, and where they were last year first quarter, where they were in the fourth quarter just so we can understand sequentially in year over year, what is going on there?

There wasn't anything or isn't anything unusual here in the first quarter with respect to our G&A or our operating expenses. You have to realize that with the CML acquisitions that we acquired in November, although they are tracking towards our planned target of revenue in EBITDA, they are not going to yet be at the operating margins at the rest of our business. That is one contributor right now of margin decrease that you have seen. We expect that to turnaround as the year progresses and, obviously, into next year as we continue to interface those assets successfully.

One other thing I will mention is that we are gearing up for a significant roll out of our IT systems. So, we have beefed up some staffing within information technology who is going to work on the integration and all of the associated training that relates to getting a radiologist trained on our PACS system and getting all of our front office and operations personnel to be trained on the new RIS system. So, you will see that throughout the rest of the year.

Okay, that's helpful. As we think about CML and, of course, the margin impact there, I can understand. How do you think that moves forward as you move through this year in the dilution of margin from that acquisition? How do you think that might progress? And then second of all, just as far as severance cost goes, we have been seeing between $300,000 and $500,000 a quarter for a number of quarters here. Is that consistent with how we should see that track over the near term? Or do you think that is more or less winding down?

I would expect to continue to see severance in the second and third quarters specifically related to acquired operations that we have taken over in the last couple few years. We did have a significant reduction in force at the end of last year and here in the first quarter. But, I would imagine after the next two quarters, barring any additional significant acquisitions, you might see that severance number go down.

Okay. That's great. As far as the equity and earnings line from joint ventures, is this about the right level that we see here in the first quarter? Any commentary on how you think that might track in dollar terms for the balance of the year?

Yes. I think this is a good estimate of a run rate. We did have a re-class based upon certain management fees that were being paid to RadNet from these unconsolidated joint ventures, so there was some change in accounting. It didn't change, obviously, our EBITDA or our earnings, but there was just a re-class between revenue and earnings in unconsolidated joint ventures. But, if you take this first quarter, I think it is a good basis for projection going forward.

Okay, great. The last thing I had here was on CapEx, a little bit higher than we were looking for. I think you mentioned there was a little bit of an acceleration. How are you thinking about CapEx spending in some of the projects we're working on? Is it just that you front-loaded them? Or, are you seeing more opportunity to put the capital to work, and so we might be tracking at the upper end or even higher than what you guided?

I think two questions there. Generally speaking, Darren, if you go back and look historically, our first quarter is always the one that has the greatest CapEx, I think, and I'm doing this from memory, Mark. Last year it was over $11 million, wasn't it, last year in the first quarter?

It was $15 million last year --

You're testing me.

Oh, it was $15 million last year.

Yes. In the first quarter of last year it was almost $14 million of cash CapEx in the first quarter.

Okay. So the pattern --

Sorry. $15.6 million. Darren you're right. $15.6 million.

Darren, you need a job as a CFO? You should know those numbers (laughter). Actually, I should know that. But, I think the pattern, if you will, is going to be similar this year as it was last year. So, the first quarter is often front-loaded. This year we are building two new centers, which are one in New Jersey and one in Brooklyn, as well as a replacement and expansion here in Temecula. So, those are very active processes that are underway here that have a lot of CapEx associated with it.

And at the end of the day, I am comfortable -- we will probably be at the high end of our guidance given what we see some of the opportunities that these particular sites and others that needs that we have that will probably push us towards the higher end of the range. But, most of this, in our opinion at this point, all of the things that I'm talking about are really growth CapEx items that should also have common increase in revenue, which should push us to the higher end of our guidance on the revenue side also.

I was going to mention one other thing, Mark. In the CML and integration of that. CML, the projection of revenue, was close to $70 million, and we are tracking nicely on that right now. I want everybody to recognize that when we bought the operation, which we bought as a whole, it was a stock purchase in the middle of November, it came with very little EBITDA associated with it at that point in time.

It was not unexpected to us that while we would see good growth in revenue, the margins would probably suffer for a quarter or two as we aggressively integrate data into our mid-Atlantic operations. I think you can expect to see margin improvement as we move forward, but I think it is important to know that we added on an annual basis $70 million of revenue that out of the gate had relatively small contribution to the EBITDA margins.

That's helpful. Okay, thanks very much.

Douglas Dieter, Imperial Capital.

Good morning. I just really wanted to focus on the Barnabas transaction as a joint venture. You obviously have 16 centers in northern Jersey. Are you going to serve as their primary provider of imaging? I am just trying to understand from a revenue perspective, how material is this to your business over the next 12 months or 18 months? Can you give us any sense on what that contribution you expect minimally to be? And also, what costs do you need to incur up front to get that JV going?

I will try to explain a little bit, Doug, about the relationship itself. The relationship requires very little, if any, capital investment on our part. It is primarily, at least at the outset here, a management agreement. The Barnabas outpatient centers and their hospitals, as well as all of the RadNet centers will form a network of centers in New Jersey that would be managed by the joint venture.

Now, it's the anticipation that the joint venture itself will be able to affect savings, primarily from the Barnabas facilities in terms of our management skills and other resources that we are going to imbue their operations with. That being said, since this is primarily a management contract, and it is a joint venture, there won't be a lot of revenue but there could be some nice margin improvement for us associated with these management services that will run through the joint venture.

We are already working one center that they will be a joint venture partner with us, and we expect other centers that the joint venture will acquire to expand its network. So as we go deeper into the year, there may be more revenue associated with this, but I want to caution everybody that RadNet is the minority partner here.

We own 49% of the joint venture. So any revenues that come out of the joint venture will not be consolidated on our financial statements. But they will on the Barnabas. So, we will get the equity method of improving our margins and adding to the EBITDA from that standpoint.

I don't think you see a lot of revenue enhancement given the fact that we are the minority partner in this operation. But, we will be getting management fees, and the joint venture itself should be generating revenue, which I think will help significantly improve our margins, particularly, obviously, in the New Jersey marketplace. I think you can expect to see a lot of opportunity there, and as they begin to unfold, we'll give you more color on it. But, I would caution that won't add a lot of revenue to the RadNet balance sheet.

And I should go back to my answer to Darren's question because Dr. Berger reminded me of this. That to the extent that the Barnabas joint venture, which is an additional unconsolidated joint venture of ours, produces significant net income, that would be a reason why our income statement account of equity and earnings of unconsolidated joint ventures would go up in the future.

(inaudible) part of a network. Does this have any bearing on actual volumes as well? So you are saying it going to improve margins but not improve revenues. How about volumes in those centers?

That sounds like a great toss-up question for me. Thanks Doug. Actually, we expect volume increases as we negotiate with payors for better reimbursement for perhaps more exclusive contracts to help drive more volume into the existing centers and the expanded network, as well as, I believe, just increases that we're likely to see as New Jersey itself is undergoing I think a substantial consolidation.

So, I think there is a number of ways that we and Barnabas, through the joint venture, will benefit. There also is a way for us and Barnabas to benefit by growth in these existing centers. Either by revenue or reimbursement increases or volume increases that the benefits of which actually go through the joint venture, not to the individual participants. So, we see a lot of ways that the joint venture can bring substantial value to both partners, if you will.

My last question is are you in discussions with the other major networks and health systems in New Jersey to just expand on this right now? And any expectations for any additional signings over the next 12 months in New Jersey?

We are in discussions with payors up and down the East Coast from Maryland all the way through New York, and that includes New Jersey. The conversations, as a mentioned in my closing remarks, have a very good tone to them. And, in particular New Jersey, a couple of meetings that we have already had, the payors like the fact that we have come together with Barnabas in this joint venture and have the opportunity to perhaps take on risk and do other forms of contracting much closer to what we actually do here in California.

I think you might see over the coming year, here, some transplant of that core competency here in California filing onto the East Coast. I think you can stay tuned for some potential announcements that we will have in the future with some of these payors, as well as other kinds of providers out there.

Am I assuming it is more of a capitated type of business? Is that what is your alluding to?

I think capitation, unfortunately, is a very narrow term, Doug. What I really want to do, and which capitation is in some respects, it's a risk-sharing model. And, that is the kind of things that we're talking about. If you look at really, fundamentally, what ACO is supposed to be about, it is risk sharing. Whereby, if you can affect savings, then the parties that are participating in that, can both benefit from it.

And I think whether it is a capitation model, whether it is some kind of floor, ceiling and sharing the benefits, risk sharing and changing the dynamics of how imaging and perhaps other services are delivered is clearly on the horizon. Not just for RadNet and Barnabas, but for everybody out there. I believe at least in imaging, you can expect RadNet to lead the way in those conversations.

Thanks a lot.

Henry Reukauf, Deutsche Bank.

Good morning. Congratulations on a nice-looking quarter. On the Barnabas contract, do we think of revenue as that's consolidates -- deconsolidates? Should we see revenue affected on a sequential basis?

No. There could be a unique situation here or there, Henry, but as a rule, the centers that we own and that they own are currently staying within the ownership of the existing operator, either us or Barnabas. Sharing in upside opportunities is going to be seen through the joint venture, so we don't expect much of our revenue to go to an unconsolidated operation.

Okay. Just to delve a little bit more into the volume growth, which has been good and looks to have accelerated over the last three quarters. I know this is -- weather influenced this quarter little bit. Is that something that is sustainable? Is there anything, a competitor that went out of business, that is helping to drive that? Where is that coming from?

As I said before on prior earnings calls, I think this is a zero-sum game now. Almost all of the information that we are receiving, whether it has been from the American College of Radiology or even CMS itself, shows that there is a flattening or perhaps even a slight decrease in overall imaging. We think that our success, at least to this point, in same-store sales growth is a function of competitors going out of business, which we are seeing in many of our markets.

Number two, I think we are doing a good job of taking business away from the competitors. And part of that comes not just through getting in front of them but also capital that we are now investing in the way of growth capital by putting in more advanced technology than we might have in the past. Feeling that is not only a driver for doing new techniques and protocols, but it also is a differentiator from our competitors.

So, we are putting a lot of pressure in our markets, both by responding to the technology developments as well as using that as an opportunity to differentiate ourselves and put the pressure on our competitors, which will ultimately, I think, cause them to either fold or potentially look to consolidate.

How sustainable that is? There's a lot of other factors. The economy, I think, is still weighing on people here. Reports that we see show decreased physician visits, and that ultimately has to lead to less imaging. Again, if we are increasing and it is somewhat of a zero-sum game or slightly decreasing, then we're taking it from our competitors.

How long we can continue to do that? I don't know. But, we are very confident that the product we put out there is one that is differentiating ourselves from competitors and will at least allow us to be the most successful operator in our markets.

Henry, I will add two other factors as to why I think we are benefiting from increase in same-store sales. The first is we have remained fairly aggressive in spending on capital expenditures.

I think what has happened with the last few years, given the reimbursement pressures within imaging, as well as the lack of availability of capital that the smaller players are facing, as well as utilization pressures in general because of the overall economy, expenditures on capital equipment in our industry have really dried up significantly. And, if you talk to GE and Phillips and Siemens, Hitachi, they will confirm that.

I think the fact that we have continued to spend $35 million to $40 million a year on CapEx means that our equipment fleet is fairly state-of-the-art, or fairly current, relative to those with whom we compete. I think that also helps drive same-store sales volumes.

Then, I think we are also seeing a decrease -- and this is a subset of people going out of business, but we are seeing a decrease in the physician self-referral portion of the imaging industry. Where we've noted on and anecdotal basis that there are folks that who had bought scanners five or six years ago, these may be orthopedic groups cardiology groups, et cetera, who are getting out of the self-referral business.

Either because their scanners have aged, and they don't want to continue to feed capital into the imaging business or that they see the writing on the wall, ultimately it where either physician self referral will be legislated against or that the private payors have just become much more aggressive in terms of putting in place pre-authorization processes or accreditation standards that make it more difficult to continue to self-refer imaging.

Okay. Then, is there anything there here that would anniversary a year after that has given a nice bump? Or is a pretty much the growth we're seeing broad-based? There's no one thing that is really driven it in this zero-sum gain market?

I would say it is more broad-based. When we calculate our same-center volumes, we eliminate all centers that aren't fully in the first quarter of last year and fully in the first quarter of this year. So, we try to eliminate anything that might be not considered, legitimately, a same-center growth.

Another thing too, that remember most of our centers, the vast majority of them, are multi-modality centers. And as we get a new referral sources, referring physicians, if a competitor of ours maybe loses his MR business to us because we have upgraded the MR, we then will generally see additional business from that referring physician because we are doing all of the imaging that they might not have been able to get in one place before.

So, I think it is another key element of our strategy is that, and more and more people I think are ascribing to this, that being a multi-modality provider is really critical for long-term viability in this market.

And Howard, you talked about the HMOs, and you are seeing progress that. Is it just that you have been able and they have been responsive to your conversations? Instead of asking for decreases, you're seeing stable pricing? Or have you been able to reverse the trend where have come in with some price decreasing, you've been able to increase the price? Just a little bit more on that.

I think it is a combination of all of the above. I think in my closing remarks I said this was not going to be an overnight success. Everybody that we are talking to understands that the way RadNet has evolved into being a major requirement in their market for access to imaging means that they cannot do without our centers. So, I think the issue about us being willing to take pricing decreases has clearly been put square in the eyes of most of, if not all of, the major payors out there that it's just no longer going to be acceptable.

It does not mean that they're rolling over and giving us double-digit increases. But, we need to -- they need to recognize, which they are, that we are a good partner. We are stable partner. And that in order to continue to provide the outstanding quality of care that we do, we have to get reimbursed reasonably for our services. And it means that we're not just going to be willing to accept pricing decreasing any more.

I think in all of the markets that we are in, those conversations are underway, and I am very encouraged with the tone. It may very well be that while we cannot really be certain what is going to happen with volumes given the marketplace, decreased utilization, et cetera, we do hope to achieve revenue enhancement in virtually every market that we are in, to some extent.

Okay. The last one. I just noticed that the PET-CT volume actually increased this quarter. I think it has been under a bit of pressure. I know it's a small portion of your business. But I think another competitor is having quite a bit of trouble with the PET business in terms of pricing. Are you seeing -- it looks like that has switched around for you? Is there anything changing there in terms of pricing, or does it just happen be good quarter?

Remember our results were aided by CML in this quarter and that they do a fair number of PET scans. So I don't think there was -- there was a slight increase in PET --

On a same-store basis. Yes. --

-- on a same-store basis we were up a 5.8% in PET.

Yes. I think we were seeing a little bit of improvement there. Again, almost every one of our PET-CT scanners does CTs, routine CTs as well as it does PETs. So, we are not quite as concerned about volume increases in PET as long as we can keep the room that piece of equipment is that busy. We are working, and we hope to have some announcement on that with some potential clinical trials, with some exciting new Alzheimer drugs and PET-related scanning for that could be a nice driver of PET imaging.

On a personal level, I'm very optimistic about the future for PET scanning. I think it is one of the real important imaging developments in the last 20 years, 15 years, that I believe as some of the pricing pressures abate a little bit. People will continue to see the clinical utility of this wonderful technology, and it will expand applications.

We're very confident. We have, I think, about 35 PET scanners now on a system-wide basis, which is rather substantial. And, we see very good, if not increasing volumes, but it is a very small part of our business.

To put it in perspective, Henry, the 5.8% increase on the same-center basis for PET represents only doing 307 additional scans in the first quarter for PET-CT. So, I don't know that we are necessarily representative of the overall industry on this particular modality.

Alright. Thanks very much.

Omar Vaishnavi, Blue Mountain Capital.

Thanks for taking the call. Last quarter, you guys broke out CML revenue. I don't know if you broke out EBITDA, too. Would you guys be able to do that for this quarter? And if not, can you talk a little more about the types of levels of margin improvement that you're going to see in the next two quarters?

Yes, sure. We'll break out the revenue because that is what we initially reported when we acquired the business. And we will talk in general about that EBITDA, and where we think that is going. In the quarter, it was a most $17 million of revenue contribution from ARS.

With respect to EBITDA, what we said that in the past, and we continue to be very confident and bullish that we will get there, is that if you look at the overall contribution on a pre-corporate overhead basis of our Maryland operations and, for the most part, the CML operations, although there is a small piece of the revenue that is coming from the Rhode Island centers, but most of this is in Maryland, that our existing Maryland operations run at north of a 25% EBITDA contribution margin.

We believe that what will happen is that over time these CML operations should look like that on a pre-corporate overhead basis. Obviously, on after corporate overhead, we're running as a company roughly in the high teens --19%,18% EBITDA margin. There's no reason to think that we can't get there with CML, and we expect to get there by the end of the year.

Great. You mentioned on the call earlier, and I figured this might be the case, that there is going to be some costs associated with implementation of the eRAD. I'm guessing most of the benefits associated with it will be right at the end of 2012 or beginning of 2013. Can you guys give any rough guidance as to what the cost of implementation would look like?

I think it is a little too early to give you the idea of the cost of implementation. A lot of the cost -- and actually it is a good question, I hadn't thought about it, will actually be capital investment costs in related to storage and servers and modems, et cetera, things that will help the network, if you will, function.

So, a lot of our IT this year, and which we saw in the first quarter and will probably continue through the second and third quarter, will be cost not necessarily related just, as Mark explained before, in terms of personnel but also in terms of capital expenditure to get this entire implementation rolled out.

I just want to emphasize that this is not just a PACS system. Our new eRAD application, if you will, is PACS, RIS, voice recognition, critical-test reporting, we're going to be in clinical decision support and other tools that we expect to imbue it with that will have enormous workflow and productivity enhancements.

While I think there are front-end costs, they will be very small relative to the long-term benefits that will present both in terms of improving perhaps our margin and decreasing cost, as well as continuing to give us a competitive advantage over other operators. But, I think it is a little too early right now for me to be able to identify those more specifically.

Got it. And last question is you guys have talked about $14 million of CapEx in the quarter, $35 million, $40 million total was the guidance. The first quarter is typically heavy. You mentioned a lot of new centers and some IT-related CapEx spend, some of which was related to eRAD, what would you guys estimate generally, either in the quarter or for the year, is the maintenance-related portion that we should think about on a recurring basis versus the one-time growth initiative stuff that you might have incurred more of in this quarter?

Generally speaking, in prior years, we have felt that maintenance and growth were about equally balanced. Maybe a little heavier towards maintenance than it was to growth. Given the fact that we're building some new centers and the IT initiatives. By the way, IT initiatives also include call centers. We put a brand new centralized call center in New Jersey, which Barnabas is very excited about as it will fall -- all the centers will fall under that eventually.

But, I think this year will be a switch perhaps from -- if we spent $40 million, a greater portion of the will be growth CapEx than maintenance CapEx because I look at anything that we do in a new site as really being growth CapEx. Meaning the build out for that as opposed to cosmetics that we're always in our centers to keep them updated cosmetically, or aesthetically.

So this year, perhaps, rather then it would be 50/50 or weighted a little bit more towards maintenance CapEx, I would think the pendulum would swing the other way, and it might be maybe 55/45 in favor of growth CapEx. I think that trend will continue. We're going to be more aggressive about growth CapEx going out into the future.

Great. Thanks for taking my questions.

And with that, gentlemen, we have no further questions today. I like to turn the call back over to you for any final and closing remarks.

Alright. Again, I would like to take the opportunity to thank all of our shareholders for their continued support and the employees of RadNet for their dedication and hard work. Management will continue to endeavor to be the market leader and provide great services with appropriate return on investment for all stakeholders. Thank you all for your time, today, and I look forward to speaking with you on our next second-quarter close call.

And with that, ladies and gentlemen, once again, that does conclude today's call. Thank you for your participation, and have a great day.