RadNet Inc (RDNT) 2012 Q2 法說會逐字稿

Good day and welcome to the RadNet Inc. second-quarter financial results conference call. Today's conference is being recorded. At this time, I would 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 second-quarter 2012 earnings results. Before we begin today, we'd like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995.

This presentation contains forward-looking statements within the meaning of the 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's actual results to differ materially from the statements contained herein. These risks and uncertainties include those risks set forth in RadNet's reports filed with the SEC from time to time, including RadNet's annual report on Form 10-K for the year ended December 31, 2011 and RadNet's quarterly report on Form 10-Q for the three-month period ended June 30, 2012.

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

And with that, I would like to turn the call over to Dr. Howard Berger, Chairman and Chief Executive Officer of RadNet.

Thank you, Mark. Good morning, everyone, and thank you for joining us today. On today's call, Mark and I plan to provide you with highlights from our second-quarter 2012 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 would like to thank all of you for your interest in our Company and for dedicating a portion of your day to participate in our conference call this morning.

We are pleased with our progress in the second quarter of 2012. First, our performance both on an aggregate and same-center basis showed significant sequential improvement over the first quarter of 2012. We also continued our trend of quarter over prior-year same quarter increases in both aggregate and same-center procedure growth, as well as aggregate revenue and EBITDA.

This quarter marks seven quarters in a row with positive same-center procedure growth and the eighth quarter out of the last nine quarters where we had both increasing revenue and EBITDA as compared with the prior year's same quarter. We are proud of the growth and consistency of our metrics.

With this quarter's results, our trailing 12-month revenue and adjusted EBITDA have increased to $662.6 million of revenue and $119.8 million of adjusted EBITDA. Including our second-quarter results, our trailing 12-months revenue is already approaching the midpoint of our 2012 guidance range for revenue, and our trailing 12-month EBITDA is already at the lower end of our 2012 guidance range for EBITDA. You may recall that our 2012 guidance ranges implied healthy growth over 2011 results.

A number of things give me optimism about the continuation of these positive trends in our results. First, we have not fully realized all the financial benefits from recent acquisitions. We expect the CML HealthCare acquisition integration to be substantially complete by year-end, and would anticipate additional consolidation benefits to be reflected in our financial statements in the second half of this year.

We are proud of the changes we have made with these operations and appreciate all the hard work and cooperation we have received from our regional operating staffs and our contractor radiology groups, particularly in Maryland. Based upon the early financial results and the positive feedback received from the local referring physician communities, hospital partners and regional payers in Maryland, we are more convinced than ever that the CML HealthCare acquisition is one of the most impactful transactions we have completed to date.

With regards to another recent acquisition whose benefits we have not fully realized in our financial statements, we completed the acquisition of West Coast Radiology at the beginning of the second quarter. This transaction significantly strengthens our position in Orange County, California. Not only do the West Coast Radiology sites broaden our footprint in Orange County, but it also greatly strengthens our physician capabilities in that region.

For almost 25 years, West Coast Radiology has been one of the premier radiology groups in Orange County. West Coast Radiology has successfully nurtured close relationships with several long-standing independent practice associations and other medical groups with whom they contract in Orange County, representing future expansion opportunities for RadNet.

We anticipate benefiting from certain cost savings and consolidation opportunities in the future with other existing RadNet sites, as well as further potential expansion opportunities that exist in that region.

Second, we expect to substantially benefit in the future from our new relationship in New Jersey with the Barnabas Health system. We recently announced the operational commencement of our multi-faceted joint venture in New Jersey and the establishment of the joint venture's first owned facility in Cedar Knolls, New Jersey.

RadNet has yet to realize the identified financial benefits from the joint venture, providing management services to the existing RadNet and Barnabas locations and imaging facilities to be owned directly by the joint venture. We also expect to benefit in the future from opening the new joint venture imaging Center in Cedar Knolls, New Jersey, which will be a full-service, all-digital multimodality facility. This center will replace RadNet's existing Morristown location, which is a single modality site whose operations will be transferred to the Cedar Knolls facility.

Together, RadNet and Barnabas Health have the opportunity to reshape the imaging landscape of northern New Jersey in ways that will benefit patients and referring physicians alike. Our joint venture will increase patient access to high-quality multimodality imaging and provide comprehensive low-cost offerings to referring physicians and regional health plans.

Third we are excited to reap the future financial benefits from our move into voice-recognition transcription services. We have partnered with M-Modal to integrate M-Modal's speech-understanding technology into RadNet's Radiology Information technology solutions. This integration, which we are targeting for completion by the end of our fourth quarter of 2012, will provide advanced speech recognition and documentation capabilities to RadNet's proprietary diagnostic software solutions. This technology gives radiologists high-productivity speech recognition and streamlines the diagnostic report production process and produces higher-quality documentation for referring physicians.

The result of this integration will be substantial cost savings from eliminating more expensive transcription costs we pay to employees and outside vendors, faster report turnaround to our referring physicians, as well as certain labor efficiencies we will achieve through the streamlining of related processes.

And finally, we are beginning to execute on select opportunities to improve our reimbursement profile with private payors, which can only be made possible as an outgrowth of our geographic clustering approach. We are pleased to report that we have received rate increases as a result of negotiations we initiated with several significant East Coast private health plans. The rate increases will fully mitigate the effects of some proposed Medicare cuts Mark will discuss in his portion of today's call that would result if CMS's recent publication regarding the 2013 Medicare fee schedule becomes the final rule governing next year's Medicare rates.

Although we do not comment publicly on the names of specific payors with whom we are in negotiations, we can tell you the names of specific payors with whom -- excuse me -- we can tell you that these successful rate increases are the result of our dense market concentration strategy and the importance we have to regional payors relative to other imaging players in our markets.

This is the first time in our Company's history that we are having success in negotiating well-deserved increases for the important role we play in the healthcare delivery system. We believe that payors are beginning to recognize the value we bring, particularly as it relates to our significant cost and service advantage relative to hospital outpatient imaging departments.

Although we have yet to achieve the geographic concentration and presence we desire in all our core markets, these recent rate increases are illustrative of the wisdom of our overall strategy.

We are particularly encouraged by the performance of our business in light of the challenging macroeconomic environment and a healthcare environment that is burdened with decreased physician office visits and efforts to lower the utilization of imaging services. Our internal marketing and sales teams and other industry contacts all report that physician office visits remain at depressed levels; in many cases, at lower levels than in 2011. Our industry diverging performance, not only in this quarter but also that of the last several quarters, leads us to conclude that our marketing, contracting and operation teams are being highly effective relative to our competition.

We continue to observe the net closure of facilities in our markets. The financial and industrywide operating pressures have been steadily mounting since 2007 when the Medicare reimbursement paradigm was changed as part of the Deficit Reduction Act. Since 2007, our industry has faced further reimbursement challenges, greater legislative uncertainty and a substantially diminished access to capital, particularly for the small operators.

During this period, relative to our competition, RadNet has capitalized on its size, economies of scale, leverage with suppliers, professional management and a more favorable access to capital. These advantages have allowed us to grow and consolidate weaker operators over the last several years. In contrast, during the same period, many other operators have contracted and/or closed their businesses from these pressures.

We welcome this for a number of reasons. First, we have said for a number of years that overcapacity exists within certain imaging modalities, in particular MRI. As operators close their doors, some of this overcapacity is eliminated, leaving the survivors with greater volumes, efficiency and capacity utilization.

Second, we have noted that some of these closings have closed their doors permanently and have been part of the result of the physician self-referring category of operators. This group has been responsible for much of the over-utilization and abuse of imaging services over the last decade or so. As physician self-referrals leave imaging, we will see the legitimate procedures of these operators be redirected towards outpatient imaging centers like RadNet. Furthermore, eliminating some of these abusive operators who drive overutilization could lessen the focus CMS and private payors have on reimbursement and/or utilization management.

In addition to causing site closures, the increased pressures of our industry will continue to drive consolidation. Over the last several years, we have experience where assets have been bought and sold for historically lower multiples, typically in the three to four times EBITDA for some of the smaller operators.

M&A activity for us remains robust. This activity, however, will remain disciplined. We have talked often in the past about the criteria under which we would be willing to consummate transactions. These remain unchanged. We are most interested in multimodality operators in our existing core markets of California, the Mid-Atlantic and the tristate area of New York. Our efforts are also concentrated on transactions that are leverage-neutral or deleveraging. We are optimistic on our ability to identify and complete transactions under these criteria.

At this time, I would like to turn the call over to Mark Stolper, our Executive Vice President and Chief Financial Officer, to discuss some of the highlights of our second-quarter 2012 performance. When he has finished, I will make some closing remarks.

Thank you, Howard. I am now going to briefly review our second-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 second-quarter performance. Lastly, I will reaffirm our previously announced 2012 financial guidance levels.

In my discussion, I will use the term adjusted EBITDA, which is a non-GAAP financial measure. The Company defines adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, each from continuing operations, and excludes losses or gains on the sale of equipment, other income or loss, loss on debt extinguishments, bargain purchase gains and non-equity compensation -- non-cash equity compensation -- excuse me.

Adjusted EBITDA includes equity and earnings in unconsolidated operations and subtracts allocations of earnings to noncontrolling interests in subsidiaries, and is adjusted for non-cash or extraordinary and one-time events that have 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 like now to review our second-quarter 2012 results.

We were pleased with the performance of our business this quarter. For the three months ended June 30, 2012, RadNet reported revenue and adjusted EBITDA of $171.4 million and $31.4 million, respectively. Revenue increased $18.4 million, or 12% over the prior year's same quarter, and adjusted EBITDA increased $851,000, or 2.8% over the prior year's same quarter.

Although the increase in revenue and adjusted EBITDA from the second quarter of last year was partially driven by procedural volume increases from acquired entities, the same-center procedure volume increased 0.8% as compared to the second quarter of 2011.

We now have seen same-center volumes increase for seven consecutive quarters. We are certain that our organic growth is unparalleled in the imaging industry. Based upon our volume comparison with our competitors, and in particular with those we have seen as part of our due diligence processes related to potential acquisitions, our conclusion is that we are picking up share in our local markets in what remains a difficult operating environment.

For the second quarter of 2012 as compared to the prior year's second quarter, MRI volume increased 18.8%, CT volume increased 19.6% and PET CT volume increased 10.3%. Overall volume, taking into account routine imaging exams, inclusive of x-ray, ultrasound, mammography and other exams, increased 14.5% over the prior year's second quarter.

In the second quarter of 2012, we performed 1,053,077 total procedures. The procedures were consistent with our multimodality approach, whereby 76.8% of all the work we did by volume was from routine imaging. Our procedures in the second quarter of 2012 were as follows. 136,770 MRIs, as compared with 115,094 MRIs in the second quarter of 2011. 101,322 CTs as compared to 84,709 CTs in the second quarter of 2011. 6084 PET CTs as compared with 5516 PET CTs in the second quarter of 2011. And 808,901 routine imaging exams, compared with 714,716 routine imaging exams in the second quarter of 2011.

Net income for the second quarter was $0.07 per diluted share compared to a net income of $0.09 per diluted share in the second quarter of 2011, based upon a weighted average number of diluted shares outstanding of 39.4 million and 39.8 million for these periods in 2012 and 2011, respectively. Excluding a $1.7 million gain, or $0.04 per share, resulting from property and casualty insurance settlement proceeds in the second quarter of 2011 from the disposal of an imaging center in California, net income increased $0.05 per share to $0.07 per share in the second quarter of 2012.

Affecting operating results in the second quarter of 2012 were certain non-cash expenses and nonrecurring items, including $531,000 of non-cash employee stock compensation expense resulting from the vesting of certain options and warrants; $163,000 of severance paid in connection with headcount reductions related to cost-savings initiatives from previously announced acquisitions; $276,000 loss on the disposal of certain capital 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 a $1.2 million fair value gain from our interest rate swaps net of amortization of an accumulated comprehensive loss existing prior to April 6, 2010.

With regards to some specific income statement accounts, overall GAAP interest expense for the second quarter of 2012 was $13.475 million. This compares with GAAP interest expense in the second quarter of 2011 of $13.150 million. This slight increase is primarily due to incremental net debt on our books resulting from an increased revolver balance due to drawdowns to fund recent acquisitions, such as the CML HealthCare and West Coast Radiology operations.

One important item to note with respect to our interest expense is that our two interest rate swaps will expire in November of this year. Currently, because the rates are significantly out of the money relative to the spot rate of three-month LIBOR, upon expiration, RadNet is projected to save approximately $6 million of cash interest expense on an annualized basis.

Because the floating-rate credit facilities are subject to a 2% LIBOR floor and three-month LIBOR is far below this level, currently at about 44 basis points, we do not intend to execute any additional interest rate hedges. Essentially, we have a natural hedge up to a LIBOR rate of 2% because of the LIBOR floor.

For the second quarter of 2012, provision for bad debt expense was 3.7% of our revenue compared with 3.7% for the second quarter of 2011. For the six-month period ended June 30, 2012, our cash flow from operating activities was $40.8 million, which was an increase over the same period last year of $18 million.

With regards to our balance sheet, as of June 30, 2012, we had $553.7 million of net debt, which is total debt less our cash balance, and we were drawn $59.5 million on our approximately $121 million revolving line of credit, primarily as a result of our acceleration of cash capital expenditures in the first half of 2012 and the purchases of the CML HealthCare and West Coast Radiology operations. This is a decrease in our net debt of $1.7 million compared with March 31, 2012.

We repaid $3.5 million of notes and leases payable during the quarter. In the second quarter, we had cash capital expenditures net of asset and imaging center dispositions of $11.5 million. Year to date, we had cash capital expenditures net of asset and imaging center dispositions of $22.6 million.

Because to a certain degree we frontloaded our capital expenditures in the first half of 2012, we expect to benefit from increased cash flow from spending $5 million to $10 million less in capital expenditures for the remainder of the year. We anticipate using this additional cash flow for debt paydown.

Since December 31, 2011, accounts receivable increased approximately $3 million and our net days sales outstanding, or DSOs, was 59.6 days, a decrease of approximately three days since year-end 2011. The decrease in our DSO was the result of the typical reversal of cash-delaying effects of collecting deductibles at the beginning of the year from patients, as well as the collection of billings that we were holding related to certain payor negotiations, and particularly those related to the CT of the abdomen and pelvis, as discussed in previous financial results conference calls. During the second quarter of 2012, we repaid [$3.5] million of notes and leases payable and had cash capital expenditures net of asset dispositions of $11.3 million.

At this time, I'd 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 releases. For our 2012 fiscal year, our guidance ranges are as follows. Service fee revenue net of contractual allowances and discounts, $648 million to $688 million. Adjusted EBITDA, $120 million to $130 million. Capital expenditures, $35 million to $40 million. And cash interest expense, $46 million to $51 million; and free cash flow generation, $30 million to $40 million. We are on track according to our plan to achieve our guidance for the year.

I would now like to take a few minutes to give you an update on 2013 reimbursement and discuss what we know with regards to 2013 anticipated Medicare rates. With respect to 2013 Medicare reimbursement, we recently received a matrix for a proposed rates by CPT code, which is typically part of the proposal that is released about this time every year. We have completed an initial analysis and compared those rates to 2012 rates. We volume-weighted our analysis using expected 2013 procedural volumes.

Our initial analysis shows a drop of approximately 5% for 2013 rates, representing to us an estimated $6 million to $7 million of revenue decrease for next year for our Medicare book of business. Of course, these proposed rates are subject to comment from lobbying and industry groups, and there is no assurance that the final rule to be released in the November time frame of 2012 will reflect these same proposed rates. In recent years, the final rule issued in this time frame decreased from the initially proposed rates released earlier in the year.

Whether or not the final rule is consistent with the proposed rates, we are pleased to report, as discussed by Dr. Berger earlier in the call, that we have received rate increases as a result of negotiations we initiated with several significant East Coast private payors. These rate increases, along with cost savings we expect from integrating voice-recognition transcription capabilities, will fully mitigate the effects of the proposed Medicare cuts illustrated in CMS's publication and any private payor follow-on that could result.

I'd like now to turn the call back to Dr. Berger, who will make some closing remarks.

Thank you, Mark. I would like to emphasize as we conclude our prepared remarks that RadNet continues its steady and consistent course towards financial and operating improvement. Our business strategy is transparent and has been unwavering over the last several years.

Our strategy is to continue to execute on the principal business tenets that will ensure our future success. The first of these is scale. In our highly-fragmented industry, which is suffering immense pressures of lower reimbursement, decreasing utilization and lower availability of capital, size matters. Our cost structure, leverage with suppliers and payors and industry relationships with powerful joint venture partners set RadNet apart from other industry players.

We will continue to make strategic acquisitions in our regions, particularly tuck-in transactions of single centers and small groups. We will also continue to leverage our scale and expertise to partner with powerful local health systems and hospitals.

We are also focused on deleveraging. Although we will continue the expansion of our business both organically and through acquisition, we are very mindful of leverage. Not only do we expect deleveraging throughout the continued growth in our operating metrics, i.e., the EBITDA, but we also expect aggregate debt paydown. We expect to demonstrate our free cash flow model to lower our debt in the last half of 2012.

The third tenet of our business focus is on efficiency, cost containment and maintenance of operating margins. As discussed earlier on this call and in previous quarters, we have key initiatives that will drive performance and continue to mitigate any reimbursement pressures that may occur in the future. An example of these are the implementation of our eRAD, RIS and PACS systemwide, voice-recognition transcription, effective purchasing of supplies and equipment maintenance, and the consolidation of costs and the elimination of unnecessary expenses with respect to our newly-acquired operations. We will continue to identify other avenues to save costs and achieve efficiencies with our business in the future.

And finally, our strategy continues to diversify our product offering. This has included our entry into radiology software, teleradiology and professional services and medical oncology niches that are heavily imaging dependent. We are leveraging these capabilities to provide a continuum of services to joint venture partners who seek an imaging partner who can provide a solution to all their diagnostic needs. Furthermore, each product offering represents a unique growth opportunity in and of itself, and these offerings are far less capital-intensive than our core business.

We continue to believe our strategy will manifest itself into long-term and steady growth, deleveraging and profitability, benefits that will inure over time to all of RadNet's stakeholders, both shareholders and lenders alike.

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

(Operator Instructions). Brian Tanquilut, Jefferies.

Hey guys, congratulations. Howard, just a question. So you talked about rates on the East Coast, you are getting some increases there. Just wondering -- is that something that we are going to see you guys try to make a push for across the system? I know you have got the concentration in your locations. But is the back-and-forth between you and the payors starting to tilt towards RadNet's favor?

Yes, thanks, Brian. That is a constant effort on our part in all regions, and one where I believe we are having some significant and important dialogue. And I think the key to the comment I am making is the word dialogue.

It is highly unusual that any small operator is going to have any impact on their reimbursement, let alone the dialogue with the payors that will potentially have some meaningful outcome in terms of reimbursement. So I think the fact that we are having a dialogue and that we have already achieved increases from payors is something that helps validate the RadNet strategy.

So Howard, is it safe to say that the issues we have been talking about in the past few quarters with payors is starting to abate or decrease at this point?

Well, I think the dialogue is increasing and we are being very aggressive here. And what is particularly, I think, important here is that the conversations are very collegial. They are not really hostile or aggressive in the sense that people are pounding back at us about why we should have rate increases. We are demonstrating that we are a better alternative, generally, speaking to hospital-based imaging, which has substantially higher reimbursement, that our centers are much more attractive and accessible to patients, and are generally better at state-of-the-art, not only in terms of modality, but in terms of IT services. So the conversations have been good, I think they have been positive and I think it is giving recognition to the importance that RadNet plays in its core markets.

Okay. And then Howard, we saw DaVita, for example, a big ACO in your backyard. So just wondering, as we think about the growth of ACOs going forward, I mean, how is RadNet preparing to position for the eventual shift in the system to an ACO model?

I think the best example I can give you is the relationship that we have now implemented here with the Barnabas Health system in New Jersey. We have similar kind of relationships with many hospitals, particularly in the Maryland marketplace, with about eight or nine joint venture partners we have. And we will be seeking other health systems that I believe can use not only the expertise that we have in managing imaging, but more importantly enjoy the access that we provide for imaging in their marketplaces. So I think you will see in the future, as we pursue more of these opportunities with hospitals, that we will marry up to them.

The interesting part about the DaVita acquisition of HealthCare Partners is not so much, I think, just kind of the ACO model, but it was an attempt by DaVita really to diversify their own revenue sources, given what I think they perceive to be reimbursement pressures in the dialysis space for the future.

Our initiatives will definitely be more with other providers who can bundle services together for both inpatient, outpatient and other medical specialties that rely so heavily on imaging that the value of the RadNet sites in their marketplaces is indispensable.

The one thing I would add to Dr. Berger's explanation is that we have been capitating with large medical groups here in California, for the most part, for over 20 years. And our experience and comfort with assessing utilization risk, taking that risk, managing that risk and doing it profitably fits in perfectly with what we understand the ACO model to ultimately be, which is essentially providing the responsibility for patient care, putting that responsibility for patient care on the provider, having the provider take that risk and manage that risk.

And we can fit in well with that model because, as we do here in California, with the healthcare partners and other large medical groups, who in turn take that risk for managing HMO lives, we can essentially sub-capitate or take the imaging risk from them and we assume that utilization risk and it is our responsibility. And we have proven that we can manage that responsibility profitably, where we take that risk and manage all of the imaging.

So I think that 20-year experience in capitation fits in real well with the ACO model going forward.

Thanks for that answer, Mark. And then last question for you -- so you talked about the Medicare rate cut, 5%, roughly, you have $5 million, $6 million. Are you going to -- you talked about mitigation, but are you going to be able to fully mitigate that, do you think?

Yes. Just between the two areas that we stressed today on the call with respect to increases we receive from private payors through some recent negotiations, as well as the implementation of voice recognition by year-end, we will fully mitigate not only the Medicare cuts themselves, but any sort of private payor follow-on that we might predict.

Got it. All right. Thanks, guys. Congrats to you.

Thanks, Brian.

Darren Lehrich, Deutsche Bank.

Thanks. Good morning, everybody. So I guess I wanted to pick up where he just left off, with regard to just the outlook for 2013. Obviously, $6 million or $7 million is not all that different than the type of pressure that we have seen in prior years, maybe just a little bit bigger. But your base is bigger and I just want to make sure I understand what you are saying.

So are you just saying that you have got some discrete things that you think will offset that? And are you ruling out the ability to grow in 2013? Because I think aside from the discrete items that you have discussed here, you have got a lot of acquisitions that will ripen next year. You have got probably a few other things in terms of your other businesses that might contribute more. So I just want to understand what the message is on 2013.

Obviously, we haven't issued 2013 guidance yet. But I think your statement was correct that aside from the Medicare cuts and the mitigation we have with those cuts, there are other growth areas that we expect to take advantage of next year. As well as just simply the annualization and the optimization of acquisitions that we have completed either at the very end of 2011, i.e., the CML acquisition, as well as acquisitions we have made this year, like the West Coast Radiology acquisition, that aren't yet fully realized in our historical financials, and in 2013 obviously we will be fully baked in and should be completely optimized by that period.

So although we haven't issued guidance for 2013, I feel fairly confident to say that our 2013 guidance will be higher, materially higher than our 2012 results.

That's great. Okay, I just wanted to clarify the message there.

The other thing I just want to cover is on growth. And first, just to clarify, you have provided some commentary on same-store revenue growth, separate from just the volume. So I am assuming it was slightly below the volume because of pricing, but can you just comment on that?

And then, Howard, just as far as volumes go in general, clearly a lot of mixed signals across the healthcare services complex so far this year. Are you seeing anything different in terms of referral patterns in your markets that are noteworthy? It is obviously a little bit of a deceleration from what we have seen in the last few quarters. I know weather was a factor last quarter. But maybe just some broader comments on what you think you are seeing in this quarter's volume result.

Mark, do you want to take the first part of Darren's --?

Same-store revenue?

Yes.

Yes, sure. You are correct. As has been the trend over the last couple of quarters, our same-store sales revenue was slightly -- same-store sales procedural volume was slightly up this quarter at 0.8%. Our same-store revenue was down, which incorporates business mix and reimbursement changes, and that was down 2.6% for the quarter. So your assumption was correct.

Did you want to address volumes?

Yes, I think that as we addressed in the remarks, Darren, that there is a slowing of referrals, generally speaking, in the imaging industry. And I don't think this is something that we are uniquely capable of opining on. We see it in literature that comes out about the marketplace in general, with decreased physician offices. We see it in publications from the various people that follow the imaging industry. And I think for perhaps the first time in the last 10 years, instead of the imaging industry growing, it is actually flat or probably even just shrinking a little bit.

That being said, we can't be completely immune from those issues and they will have an impact. What we are doing to offset that is being aggressive in our markets with improving or increasing technology that is a driver for people and a reason for people to shift business to more state-of-the-art facilities, getting more involved with electronic medical records and ease of information flow, which all of the referring physicians and payors are acutely in need of. We are doing small tuck-in acquisitions where we see other operators closing so that we are getting, I think, a bigger piece of the market share in almost all of our markets, which is helping sustain our volumes.

But I think the long-term horizon with the decreased office visits and continued efforts on the part of a lot of parties out there to decrease imaging utilization will continue and ultimately have a desired effect in our case of putting more pressure on our competitors than it does on us, and then ultimately our being the beneficiary of that.

We are also trying to get to more exclusive relationships with our payors as we come in and talk to them about rates. Part of what they are looking for is better access and better facilities, and in exchange for volumes that are more exclusive to our centers, we will be very aggressive in those conversations about where they are sending their business and trying to gather, again, a bigger part of the market share.

That is helpful. And the last thing I had, just maybe a brief question here. Is there anything that you guys are doing in terms of positioning yourself in your placing for more of the consumer-driven side of the equation? In other words, putting pricing a little bit more available into the consumers who are (inaudible) -- some aggregators of that? Just curious if you were working with any of those?

Yes, we are, Darren. We have initiatives on both sides. Conversations with people who have software products or systems that make the pricing in a marketplace available to the consumers so they are more freely capable of determining where they get the biggest bang for their buck. And generally, by the way, that is in trying to show them the pricing that might occur in hospitals, where they generally have substantially higher co-pays and deductibles than they do in freestanding imaging centers.

And then we're also working as part of our IT initiative on a web presence that will allow consumers to more readily see who we are, where we are and what we offer in the way of services and pricing to those people who are becoming ever increasingly more cost conscious of where they get their imaging done.

Okay, thanks a lot.

Miles Highsmith, RBC.

Hi. Good morning, guys. Just to clarify first, any sequestration, if it held up, would be incremental to the $6 million to $7 million, correct?

We don't -- I mean, we don't know one -- we don't know what Medicare would do with its proposal at the end of the year, based upon us moving forward with sequestration. So at this point, we just don't know what CMS's move would be at the end of the year.

Okay, fair enough. And forgive me -- I can't recall how much if any specificity you gave on this. But I was curious if you could make any comments on CML with respect to where margins might be, where they are going, kind of get the Companywide margins, any commentary in that regard.

In prior conference calls -- or [conference] calls here -- earnings calls -- all the same -- we have suggested that the revenue from CML was about $70 million, and that we expect those assets to be able to contribute with similar margins as we experience generally in our core business, which is in the 20% range. So I think if you do the math on that, you can readily see what our expectations are, which we believe we will meet or exceed as we get to all of the integration that the purchase of those assets provided us with.

We are substantially along that path, but there is a lot more to go because the complexity of some of the integration involves different radiology groups, joint ventures with hospitals and integrations of centers with both the operational side and the IT side of it that need to be fully completed before we can see all those benefits.

But I think I have given you some guidance of what our expectations are for the CML transaction, and that we have not realized all that we think we are capable of achieving from that. We do feel that in 2013, we will have a full year of that benefit as part of our 2013 guidance when we issue that in the early part of 2013.

So 2013, you think, you will be at Companywide margins for the whole year. Did I hear that correctly?

Yes.

The other way to say it is we think our integration will be substantially complete at the end of this year.

Right, right. Okay, thanks. And a couple of kind of broad questions. Can you characterize your commercial pay rates, just kind of generally speaking, relative to other players in the market? And not the hospitals; relative to other freestanding imaging providers. Are you guys generally in line? Are you significantly either over or under what you would consider to be averages out there? Thanks.

Well, I think generally speaking, the rate that we get paid in most markets is the same for all freestanding imaging center operators. What we are attempting to do with these recent negotiations is begin to depart from what the general fee structure is with the commercial payors for their freestanding facilities versus what they will negotiate with RadNet.

And we are starting to see that departure. We are unlinking the connection between Medicare reimbursement and what the commercial or private payors are paying. And we are attempting to get increases, as Mark described in his remarks, over what we were getting paid in 2011.

So the net effect is that I believe our reimbursement models will begin to separate us from the competitors in terms of better reimbursement, and more importantly, unlinking it from any of the Medicare cuts and continued reimbursement issues. There is a lot of payors out there, so this is not an overnight process, but we are clearly going after the larger payors, where the discussions are a little bit more open and where the opportunities are greatest for RadNet.

Okay. But if I am hearing you correctly, you are not substantially above market, for example, which is I think more important consideration.

Yes, I don't think we are substantially above market, but we are significantly below market relative to the hospitals.

Right, right. Okay, last one for me. Can you give us just an update -- and then general question -- where the freestanding Medicare rates are currently versus HOPS? My sense is it is lower. What is your best guess? Are we kind of 80%, 90% of the HOPPS rates at this point?

If you remember, Miles, going back to 2007 with the advent of the DRA, why there was such an impact on the industry was that at the time, the HOPPS rates for the advanced imaging, the MRI, CTs and PET CTs, were substantially lower than the Medicare fee schedule. So when we became subject to the lower of the two rates, we had to sustain a significant cut in MRI, CT and PET CT.

What CMS has done over the last four years, starting in 2010 and these projected rates for 2013 represent are consistent with the strategy is they've had a four-year phase in, and they talked about changing certain variables in the RVU formula, like the -- in the assumption that -- the utilization assumption in that as well as some conversion factors. What they were attempting to do, and I think when we did the analysis for 2013 based upon their CPT codes, they are attempting to lower the Medicare fee schedule so it was more on par for the advanced imaging modalities as compared with the PS HOPPS schedule.

And with the 2013 cuts, they have substantially done that. So today, when we look at -- for advanced imaging where we are being reimbursed, it is now the majority of those CPT codes is now falling under the Medicare fee schedule; whereas two, three years ago the majority of those CPT codes were being governed by HOPPS.

Great, thank you so much.

Henry Reukauf, Deutsche Bank.

So, Mark, is it just so now you are under it, so the reimbursement is less than the HOPPS rate. That is what we should take away from that, right?

Correct. Not for all CPT codes, but for more than 50% of CPT codes on advanced imaging, which is where these -- the focus of reimbursement has been over the last five, six years, we are now subject to the Medicare fee schedule.

Just on those advanced (multiple speakers).

I should say the physician fee schedule.

On those -- so on the -- and the more advanced codes under the physician fee schedule versus the HOPPS, do you know what percent below now -- how far they have lowered it?

Yes, I would say they are within 10% on average of each other at this point.

But 10% lower?

Yes.

Okay. And then on the volume, I think a couple of other people mentioned deceleration. I know, Howard, it is tough, you have said, in terms of volume out there with the doc visits and stuff. But when I look back, I guess volume was very strong same-store in the first quarter and [to say] fourth quarter of last year and really started to pick up in the third quarter of last year, almost like kind of a bump. And now it seems to be slowing.

Was there something that kind of one-time bumped that, the same-store sales growth, and now we are kind of going into what we should see maybe flat same-store growth? Or what was it that caused the real acceleration for the last two or three quarters relative to this quarter?

Well, the first quarter, Henry, was an anomaly. Because if you remember in the first quarter, we generally have a significant amount of seasonality related to our northeast operations, where we have weather issues in the first quarter. And this year's winter was unusually temperate, so we didn't have many site closings and our volumes were extremely strong. So we cautioned everyone last quarter to think that we could continue to comp at 5% to 6% same-center volume growth, and part of it was due to the winter. So that was an anomaly (multiple speakers).

But if you go back -- I was just kind of looking back over the last several quarters. Because, yes, '10 was a rough winter in the northeast. But it does look like there was -- for a long period of time, you really were picking up a little bit. There is nothing there, other than just it was a better quarter, to suggest that same-store volumes could grow and not shrink?

I know it has been seven, but I am not sure where to think about kind of the same-store volume growth; that is more what I am getting at. Because it does look like it decelerated a lot this quarter, not just vis-a-vis last quarter, but the quarter before and the quarter before that.

A couple of comments on that, Henry. First of all, starting in the second half of last year, we kind of became a little bit more aggressive with what I will call offensive CapEx, rather than defensive. So there were certain selected markets where we felt upgrading, particularly our MRI scanners, was going to have a significant effect on volumes in some of our markets, particularly on the East Coast, and Maryland and New Jersey were two prime examples of that.

So I think we got a bump in the last half of the year from that kind of effort on our part. And we are going to continue that because I think that is a differentiator in today's marketplace, because access to capital is tough and with decreasing reimbursement, your smaller operators are less and less inclined to make those kind of investments with all the uncertainty.

And by the way, the level of sales in the non-hospital, standalone fixed imaging space for MRI and CT and PT scanners has probably dropped over the last couple of years by maybe as much as 80% to all of the major vendors. I am talking about Siemens, Phillips, and GE.

And so what we are doing is very aggressive and unusual in our markets and I think helped us in the latter half of last year, and to some extent, in the first part of this year.

I also think there was an interesting phenomenon in the first quarter of this year that with the milder weather, unusually mild weather that we had on the East Coast, I think work that we might have normally seen in the second quarter was actually seen in the first quarter. So there was some shifting, if you will, because when weather is bad, it is not that people don't ultimately go to doctors and get these services, but they delay them because of either the lack of desire to get out or the fact that in really bad weather, people just don't go to offices because they are closed.

So I think we saw people in the first quarter being a little bit more willing to do what they normally would do towards the end of the first quarter or into the second quarter accelerate, and we are now seeing a little bit of that softening, if you will, from that first quarter. But I believe what we are seeing in the second quarter of this year is more the new norm, as we have called it here, that the Company will be adjusting to in order to better budget and anticipate what our needs are and our staffing requirements are.

So I do think there are reasons that the slowdown is something now that we are seeing, that was generally being seen in the marketplace, but was masked somewhat by our strategy of both capital expenditure, as well as just outshining our competitors in terms of our own marketing.

Okay. And in terms of the next couple of quarters, you know, you are going to have some tough comps. Do you think you can keep same-store growth going? Does it feel like that, at least this far into this quarter?

Our goal is to try to keep our volumes pretty consistent with what we are seeing here -- or what we saw in the second quarter. We think we can maintain those volumes.

But again, I think some of that is going to come at the expense of other operators, because clearly there is not going to be growth like we have seen in the past. So any ability on our part, if there is a slight deceleration in the industry as a whole, it is going to have to be made up from other operators that either we consolidate or that go out of business.

And then just getting back to one of the earlier questions, since the volumes were up, it does look like pricing was down, it looks like MRI and CT were actually up pretty well. PET was down, but that is not a big portion of the business. Was there a cut in one segment of the business that particularly kind of pulled on the top line?

Well, remember that most of the cuts that have occurred and that were implemented in 2012 primarily impacted MR, CT and PET CT. And while that only represents about 25% of our volume, it represents about two thirds of our revenue. So when you have a disproportionate decrease in your advanced imaging, which it generally provides you with your higher margins, it is not surprising that that would have a disproportionate impact on the Company's overall performance both on the revenue and the EBITDA line.

The most significant cut, Henry, was to the bundling of the CT of the abdomen and pelvis. And we saw more follow-on, as expected, from the private payors because they had to assign a certain reimbursement to this new CPT code. One of the things we have been working very hard on this year and we are having some success, at which we have intimated on this call, is to go back and renegotiate the rates that were assigned to the CT of the abdomen and pelvis by the private payors. But that was the most significant of all cuts we have shelved in 2012.

In other words, to amplify on what Mark just said, it was -- we are trying to unbundle for the private payors what Medicare bundled, and which the private payors followed with in 2012. And we are having, fortunately, very good success with the larger payors in getting the bundled unbundled again.

Okay. I remember, Mark, you gave us the -- on that -- I forget what it is now -- but on the pelvis and abdomen, you gave us kind of the high/low. So could you just repeat that? Of what that was supposed to be going -- last year, if all the commercial guys followed on.

(Multiple speakers) now it's following on next year you will be able to unbundle it, so it sounds like you got hit with $3 million this year and then next year you're going to be able to unbundle it again. Is that kind of what I'm hearing?

Yes, with some of the private payors. I don't have the estimates that we gave last year (multiple speakers) in front of me now. But what I will do is I will e-mail you the conference call script where we gave those estimates.

Okay. And then just a last one. Pipeline full, you feel good about the opportunities. You know, you have got some capacity on the revolver. Do you think you need to come to market with -- raise additional capital to fulfill the supply, I guess, of good deals that you see out there?

Not unless it was an unusually large transaction. We are very comfortable with our revolver capacity and our free cash flow.

And free cash flow. That will suffice in terms of (multiple speakers).

And we face no near-term maturities. Our offer is in place through 2015. Our senior term loan is through 2016. And our bonds mature in 2018. So we are comfortable with the current capital structure as it now stands, particularly for the small to midsize acquisitions.

Great. Sounds like a real good job in a tough environment. So thanks very much.

Alan Weber, Robotti & Company.

Good morning. Just a few follow-on questions. You know when you talk about the negotiations with some of the payors and that will offset some of the Medicare cuts, obviously that is part of your real strategy and strength of your scale. My question was -- when you talk about that for next year, is that with all of the payors kind of addressed or is there kind of more upside to that?

We have had ongoing discussions throughout this year, which are actually being -- are culminating or consummating now with the larger payors, and that has been our major focus because that is where the larger dollars are. We will turn our attention -- or we already have begun turning our attention to the smaller payors, where the benefits are perhaps not as substantial, but in aggregate they could be.

But there is literally hundreds if not thousands of payors out there that we have to have these conversations with, and we went for the ones where we get the biggest bang for the buck. So I anticipate that this will be an ongoing process for as long as we are doing close calls, that will be a focus of the Company here to constantly look at our reimbursement from all payors.

Okay. And then the West Coast Radiology that you acquired in this quarter, is that similar to CML in terms of not having kind of RadNet-like margins, or was that operating more like you guys?

They did not have RadNet like margins, and so just like the CML, we expect margin improvement for that operation as we get it more and more fully integrated into the RadNet systems.

We don't see very many operators out there with RadNet type margins, so almost all of the acquisitions that we do, we expect to ultimately be even more delevering or more accretive -- however you want to pose it -- as they get more and more integrated into the RadNet systems.

And those systems include staffing, purchasing, IT, other supplies and then reimbursement. For example, with the CML acquisition, some of the revenue that we took over is going to benefit from the improved reimbursement that we are seeing, particularly in the Maryland marketplace. So there are a lot of benefits that RadNetization, as we like to call it here, accomplishes both on the top line and on the bottom line.

Okay, great. Thank you very much.

Omar Vaishnavi, BlueMountain Capital.

Hi, thanks for taking the call. I had a couple of questions. You mentioned in this Barnabas press release that you sold one center to Barnabas. Can you guys talk to us about how much it was for, if there was any sort of multiple on that, and when you will get the proceeds on that?

The multiple on that was five times our EBITDA. We expect that transaction to close this quarter; in other words, before September 30. And we will continue to participate through our joint venture and management services in that center's performance. So while we sold the center and the surgical assets, the revenue stream and upside profitability from that center will be future benefit down the road to RadNet.

Right. And can you guys also disclose how much proceeds you sold it for, or no?

I'm sorry?

How much it was sold for? Was it $5 million, $10 million?

It was about $4 million.

Okay, $4 million. Great, thank you. And then, now you guys are net income positive, and I believe if you look at it post the swap expiration, there is an incremental bump from that as well that you will get next year, and that is going to increase your restricted payment basket. Would you guys consider above and beyond the sort of basket you have in your credit facilities right now, if your net income keeps growing the way it was, share buybacks, dividends or bond buybacks in the future, or sort of any sort of capital structure related changes?

Well, I am happy to say we are not going to do bond buyback because we are trading at par, maybe even a little bit above par. There is a good news and a bad news to that.

And as far as buying shares back, I don't particularly see that that is a high likelihood here. But it will all be driven by what the share price is and what we believe the inherent value of the Company is.

We will always look at opportunistic sales or of acquisitions, depending upon the metrics and the importance that any particular opportunity presents itself in our core markets.

Let me expand on the share buyback answer, in that we have not bought shares back even though we have a basket to do so right now, partly because we think the best use of our capital for the shareholders is to go out and continue to grow the business, particularly when you can acquire acquisitions at three to four times EBITDA multiples. And when you run the math and you look at the accretion for doing that relative to buying back our stock at almost any price, no matter how undervalued we feel, it is more accretive to increase the EBITDA and the profitability of the Company to do so.

But to the extent that there are opportunities in the future to buy back stock or to the extent that we feel like -- that some of the acquisition opportunities or the pipeline slows down and we think that that is a good use of our capital, we will do that. And to the extent that we have the room in our baskets by virtue of the restricted payments basket in our volumes and restrictions we have with our senior credit facility.

And I will make one other comment along those lines. Again, part of our focus is deleveraging too. And it may be far better to create equity by paying down debt than it is buying stock back, given that every dollar of debt that we pay off ultimately produces a dollar of value to the equity. And in an leveraged operation like we are, with as much debt we have, that is probably the best use altogether of our free cash flow and capital.

Okay. And last question I had was on eRAD. You guys didn't talk about it a lot. How has it been progressing? Is it still expected to be by the end of the year? When do you guys think you will have a sense of how much it can really contribute to 2013 versus 2012?

I think by the time we do our 2013 guidance, which obviously with our first quarter close call -- excuse me -- with our fourth quarter, end of year close call, we should have a pretty good idea then. As we mentioned in the opening remarks, the full implementation of the voice recognition piece, which is where the greatest part of our savings will be, should be substantially complete by the end of the year. So that in 2013, the majority of that benefit will be realized as part of our 2013 guidance.

But then there are other elements of it on the risk side and on the tax side which we have just started to implement, and which should be substantially complete by the second quarter of next year and which also come with significant savings.

So I think by the time we are ready to give our full-year results, meaning the fourth quarter and full-year for this year, we will be able to better quantify that or certainly incorporate it into our 2013 guidance.

And when you guys give 2013 guidance, given you guys have a lot of positive initiatives going on beyond just your normal operations, do you think that things like your eRAD and the M-Modal voice-recognition, your JVs, will you guys try to give some color as to how much those initiatives are contributing versus just your core operations?

We might do it, particularly with the IT side of it, because that is a little bit more readily calculable. Some of the other places tend to get a little bit murky in terms of how you identify those, and we have generally have not done that in the past.

Okay, great. Thanks again.

That does conclude today's question-and-answer session. At this time, I will turn it back over to management for any closing remarks.

Thank you, operator. Again, I would like to take this opportunity to thank all of our shareholders for their continued support and the employees of RadNet for their dedication and hard work. Management will continue its endeavor to be a market leader that provides great services, with an appropriate return on investment for all stakeholders.

Thank you for your time today and I look forward to our next call.

That does conclude today's conference. Again, thank you for your participation.