RadNet Inc (RDNT) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the RadNet Incorporated fourth quarter 2013 financial results conference.

Today's call is being recorded.

At this time, I would like to turn the conference over to Mark Stolper, Executive Vice President and Chief Financial Officer of RadNet Incorporated. Please go ahead.

Good morning. Thank you.

Good morning, ladies and gentlemen, and thank you for joining Dr. Howard Berger and me today to discuss RadNet's fourth quarter and full year 2013 financial results. Before we begin today, we'd like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. This presentation contains forward-looking statements within the meaning of the 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 operation as estimated, and our ability complete a successful refinancing transaction of our senior unsecured notes, 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 fourth 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, 2013 to be filed in the coming weeks.

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'd 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 fourth-quarter and full-year 2013 results, give you more insight into factors which affected this performance, and discuss our future strategy. After our prepared remarks, we will open the call to your questions. I'd like to thank all of you for your interest in our Company, and for dedication dedicating a portion of your day to participate in our conference call this morning.

I am very pleased with our performance in the fourth quarter and how we are positioned for 2014. Simply put, our fourth-quarter performance surpassed our own internal projections, resulting in our exceeding the high end of our revised guidance ranges for full-year revenue and EBITDA.

During the quarter, we experienced aggregate and same center revenue and procedural growth relative to last year's fourth quarter. And more importantly, we showed significant sequential operating improvement as compared to the prior three quarters of 2013. We accomplished this both through driving incremental revenue and procedures, as well as expense management, as we began to execute on our previously announced initiatives to eliminate $30 million of operating expenses from our business.

While we cannot determine with certainty why volumes improved in the quarter, we believe we may have benefited from the impact of increased procedures from patients in large deductible health plans who sought to utilize medical services prior to these deductibles resetting in 2014. Also, we noted additional patient volume in our centers from those who were early enrollees in health exchanges under the Health Reform Act. We continue to hope that we will benefit in 2014 from increasing enrollment in some of these health insurance exchanges.

Our financial performance is very sensitive to swings in same center volume and revenue performance. Even low-digit revenue growth can bring material incremental EBITDA and profitability. I'd like to take a few minutes and review some of our achievements in 2013, as they represent -- as they are representative of important aspects of our future strategy, and are essential to positioning us for success as we move forward in a dynamically changing industry landscape.

First, throughout 2013, we integrated the operations we purchased at year end 2012 of Lenox Hill Radiology, which is the largest non-hospital-based outpatient imaging center operation in Manhattan. Lenox Hill has been an operator in the New York City market for 25 years, and we could not have chosen a better platform from which to build as we continue to penetrate this exciting new market for us. We subsequently purchased a controlling interest in Park West Radiology, and acquired the assets of an additional center in Manhattan, which we branded Lenox Hill Radiology on 130 West 79th Street.

Also in August of 2013, we completed the acquisition of Manhattan Diagnostic Radiology, a multi-modality operation with four imaging centers located in Manhattan. That transaction increased our breadth of services, patient capacity and efficiency in Manhattan. We continue to be excited about opportunities within Manhattan and other boroughs of New York City.

Also during 2013, we furthered our relationship with the Barnabas Health System. We opened our first joint venture facility with Barnabas in Cedar Knolls, New Jersey. It became operational with most of the larger New Jersey insurance networks late in the first quarter of 2013. And then we constructed a second joint venture located in Morris-Sussex New Jersey during the second quarter of 2013. We commenced performing utilization management services for Barnabas Health's approximately 28,000 employees and dependents, with respect to their diagnostic imaging needs, and are providing these employees with a network of facilities throughout New Jersey.

In 2013, we also furthered the information technology initiatives, including voice recognition transcription and eRAD RIS and PACS, that we believe are important to the long-term success of our business. We began the rollout of our voice recognition transcription solution to our facilities across our networks.

We have seen both significant productivity gains and faster turnaround times for reports in the regions and centers that already deploy this technology. As a result, we've been able to reduce internal transcription costs. In centers we've actually already successfully integrated voice recognition transcription, we reduced report turnaround time by as much as 6 to 12 hours.

On eRAD RIS and PACS side of our IT initiatives, we continue to roll out these systems across our networks. Since the eRAD RIS and PACS have efficient outpatient workflow capabilities, we are able to operate our centers with fewer manual processes, thus ultimately leading to better efficiency and reduced costs. Still, we have challenges in front of us, as we must overcome reimbursement obstacles from government and private payors, utilization pressure and uncertain health reform.

As many of you are aware, we are faced with a $20 million to $22 million negative impact to our revenue in 2014 from changes in the Medicare physician fee schedule. We are meeting this challenge with the comprehensive $30 million cost savings plans which we have focused much of our management time and attention implementing off over the last several months.

These reimbursement challenges create further opportunities for RadNet to separate itself from other industry competitors and participants. Although it hasn't been easy, we've adopted what many believe to be the only strategy that works in our industry. We remain committed to our focus on scale, geographic clustering and multi-modality. The dislocation in our industry has provided us a runway to grow our business, consolidate weaker industry players, and partner with large health systems and other healthcare institutions into the future.

At this time, I'd like to turn the call back over to Mark to discuss some of our highlights of our fourth quarter and full 2013 performance. When he is finished, I will make some closing remarks.

Thank you, Howard.

I'm now going to briefly review our fourth-quarter and full-year 2013 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 fourth-quarter performance. I will also provide 2014 guidance levels and discuss this morning's announcements regarding our proposed refinancing transaction.

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

Adjusted EBITDA includes equity earnings in unconsolidated operations, and subtracts allocations of earnings to non-controlling interests and subsidiaries, and is adjusted for non-cash or extraordinary and one-time events taking place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or loss attributable to RadNet Inc common shareholders is included in our Earnings Release.

With that said, I'd now like to review our fourth quarter and full year 2013 results. For the three months ended December 31, 2013, RadNet reported revenue and adjusted EBITDA of $178.3 million and $31.9 million, respectively. Revenue increased $19 million, or 11.9%, over the prior year's same quarter, and adjusted EBITDA increased $7.3 million, or 30%, over the prior year's same quarter. For the fourth quarter of 2013, as compared with the prior year's fourth quarter, aggregate MRI volume increased 16.8%, CT volume increased 5%, and PET/CT volume decreased 4.7%.

Overall volume, taking into account routine imaging exams inclusive of x-ray, ultrasound, mammography and other exams, increased 12.2% over the prior year's fourth quarter. In the fourth quarter of 2013, we performed 1,137,825 million total procedures. The procedures were consistent with our multi-modality approach, whereby 77.6% of all the work we did by volume was from routine imaging.

Our procedures in the fourth quarter of 2013 were as follows. 149,020 MRIs, as compared with 127,561 MRIs in the fourth quarter of 2012; 100,082 CTs, compared with 95,342 CTs in the fourth quarter of 2012; 5,666 PET/CTs, as compared with 5,944 PET/CTs in the fourth quarter of 2012; and 883,057 routine imaging exams, compared with 785,709 of all of these exams in the fourth quarter of 2012. Net income for the fourth quarter of 2013 was $1.2 million, or $0.03 per share, compared to a net loss of $4 million, or $0.10 per share, reported for the three-month period December 31, 2012, based upon weighted average number of shares outstanding of 39.6 million shares and 38.3 million shares for these periods in 2013 and 2012, respectively, and excluding the $55.9 million non-cash income tax benefit recognized in the fourth quarter of 2012.

Affecting net income in the fourth quarter of 2013 were certain non-cash expenses and nonrecurring items including the following. $529,000 of non-cash employee stock compensation expense, resulting from the vesting of certain options, warrants and restricted stock; $494,000 of severance paid in connection with headcount reductions related to cost savings initiatives; $675,000 of loss on the disposal of certain capital equipment; and $1.2 million of amortization of deferred financing fees and discount on issuance of debt related to our existing credit facilities and our 10 3/8% senior unsecured notes.

With regards to some specific income statement accounts, overall GAAP interest expense for the fourth quarter of 2013 was $11.2 million. This compares with GAAP interest expense in the fourth quarter of 2012 of $12.9 million. The lower interest expense is mainly the result of the repricing transaction that we completed in April of 2013, which lowered the interest rate on our first lien term loan by over 100 basis points. For the fourth quarter of 2013, bad debt expense was 4.2% of our service fee revenue, compared with 4.3% for the fourth quarter of 2012.

For the full year of 2013, RadNet reported revenue and adjusted EBITDA of $703 million and $112.8 million, respectively. Revenue increased $55.8 million, or 8.6%, over 2012, and adjusted EBITDA decreased $759,000, or 0.7%, over 2012. For the year ended December 31, 2012 -- 2013, excuse me, as compared with 2012, MRI increased 12.2%, CT volume increased 1.2%, and PET/CT volume decreased 2.4%. Overall volume, taking into account routine imaging exams inclusive of x-ray, ultrasound, mammography and all other exams, increased 9.3% for the 12 months of 2013 over 2012.

In 2013, we performed 4,525,490 million total procedures. The procedures were consistent with our multi-modality approach, whereby 77.6% of all the work we did by volume was from routine imaging.

Our procedures in 2013 were as follows. 592,050 MRIs, as compared with 527,853 MRIs in 2012; 400,027 CTs, as compared with 395,446 CTs in 2012; 23,448 PET/CTs, as compared with 24,035 PET/CTS in 2012; and 3,509,965 million routine imaging exams, compared with 3,194,933 million of all these exams in 2012.

Net income for 2013 was $0.05 per share, compared with net income of $0.12 per share in 2012, based upon weighted average number of diluted shares outstanding of 39.8 million and 39.2 million in 2013 and 2012, respectively, and excluding the $55.2 million non-cash income tax benefit recognized during 2012.

Affecting net income in 2013 were certain non-cash expenses and nonrecurring items, including the following. $2.6 million of non-cash employee stock compensation expense resulting from the vesting of certain options and restricted stock; $806,000 of severance paid in connection with headcount reductions related to cost savings initiatives; $1 million loss on the disposal of certain capital equipment; $2.1 million gain on the sale of imaging centers; and $4.6 million of amortization of deferred financing fees and discounts on issuance of debt related to our existing credit facilities and our 10 3/8% senior unsecured notes.

With regards to some specific income statement accounts, overall GAAP interest expense in 2013 was $45.8 million. Adjusting for the non-cash impacts from items such as amortization of financing fees and accrued interest, cash interest expense was $41.8 million in 2013. This compares with GAAP interest expense in 2012 of $53.8 million, and cash paid for interest of $47.8 million. For 2013, bad debt expense was 4.2% of our service fee revenue, compared with an overall blended rate of 4.2% for the full year of 2012.

With regards to our balance sheet, as of December 31, 2013, and unadjusted for bond and term loan discounts, we had $585.3 million of net debt, which is total debt less our cash balance. As of year end 2013, we were undrawn on our $101.25 million revolving line of credit, and we had an $8.4 million cash balance.

At December 31, 2013, our accounts receivable balance was $133.6 million, an increase of $4.4 million from year end 2012. Our net days sales outstanding, or DSOs, was 57 days at December 31, 2013, lower by 6.4 days when compared to 63.4 days as of that date one year ago.

Our accounts payable and accrued expenses were flat year over year, at approximately $106 million. Throughout 2013, we repaid $9.8 million of notes and leases payable, had cash capital expenditures net of asset dispositions and sale of imaging center assets and joint venture interests of $41.4 million.

I will now discuss how RadNet performed relative to our revised 2013 guidance levels, which we released upon announcing our third quarter 2013 financial results. For revenue, our guidance range was $700 million to $730 million; our actual results were $730.9 million. For adjusted EBITDA, our guidance range was $105 million to $110 million; our actual results were $112.8 million. For capital expenditures, our guidance range was $35 million to $40 million; our actual results were $41.4 million. For cash interest expense, our guidance range was $40 million to $43 million; our actual results were $41.8 million. And for free cash flow generation, our guidance range was $20 million to $30 million, and our actual results were $29.6 million.

Our fourth-quarter performance was stronger than that which was projected when we issued our revised full-year 2013 guidance levels. As a result, we exceeded the high end of our revenue and EBITDA guidance levels. And with respect to free cash flow generation, we are pleased that our actual results were at the very top of our guidance range.

At this time, I'd like to review our 2014 guidance levels, which we released this morning in our earnings press release. For 2014 fiscal year, we announced our guidance ranges as follows. For revenue, $700 million to $730 million. For adjusted EBITDA, $110 million to $120 million. For capital expenditures, $40 million to $45 million. For cash interest expense, $38 million to $42 million. And for free cash flow generation, $30 million to $40 million.

As reflected in our 2014 guidance, we are optimistic about 2014, even in the face of an estimated $20 million to $22 million negative impact to our 2014 revenue from the changes in the Medicare physician fee schedule, which we announced in December.

In response to these cuts, we launched an aggressive plan to eliminate $30 million of operating cost from our business. Our 2014 guidance reflects our confidence in achieving at least $20 million of these cost savings within 2014. Our guidance also incorporates what we are projecting to be a soft first quarter in 2014, due to the unusually severe weather conditions that have existed in the northeastern part of the United States in January and February of this year.

I'd now like to discuss our capital structure opportunity. s many of you have may have seen this morning in our financial results press release, we announced a proposed refinancing transaction of our $200 million 10 3/8% senior unsecured notes, due 2018. The intended refinancing may include a tender offer for, or redemption of, our senior unsecured notes, which would be replaced by new senior unsecured second lien -- excuse me, senior secured second lien term loan debt, and additional indebtedness, under our senior secured first lien credit facility.

The potential refinancing transaction would be subject to negotiations with current lenders of our senior secured debt, and market and other conditions. Thus, there can be no assurance that we will complete a refinancing transaction on terms that are favorable to us and to our investors. We also may engage, from time to time, in discussions with certain creditors of ours and holders of our senior unsecured notes as we pursue the potential refinancing transaction.

We have publicly discussed in recent quarters the possibility of lowering our cost of capital through refinancing our 10 3/8% senior unsecured notes with less expensive capital. Our objective is to reduce our cash interest obligations, provide us with additional operating flexibility, and lengthen the maturity of our most junior debt capital. If successful, we currently expect to consummate a transaction in April.

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

Thank you, Mark.

In summary, we are optimistic about 2014. Our business continues to be a strong cash flow generator, as we demonstrated in the fourth quarter. We ended 2013 undrawn on our revolver, and with over $8 million of cash on our balance sheet. Going forward, we plan on having a more balanced approach with respect to what we do with our free cash flow. In recent years, much of it was spent on acquisitions.

In the future, while we believe we remain reasonably active with small tuck-in acquisitions, much of our free cash flow will be used to repay debt and deleverage our balance sheet. If successful, our proposed refinancing transaction will aid in this by potentially lowering our cash interest expense and providing additional funds for debt repayment. Furthermore, it should be noted that, of our $40 million to $45 million capital expenditure guidance level n 2014, $12 million has been earmarked for the repayment of operating leases on existing equipment as part of our cost savings initiatives.

Put differently, we expect to spend between $28 million and $33 million on new capital equipment during 2014. This will provide free cash flow for debt repayment and deleveraging. Our near-term focus will continue to be on executing our cost savings initiatives. Our ability to mitigate reimbursement pressure is greatly enhanced by, and in some cases only exists, because of our scale.

We represent important and sizable books of business for many of our operating partners and vendors. These partners recognize their responsibility in assisting us with mitigating the reimbursement pressures, and have cooperated with us for the long-term benefit of all parties. Additionally, as we have grown, new opportunities for efficiency have surfaced. We remain confident and energized that our operating strategy is what is necessary for sustained success in our industry.

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

(Operator Instructions)

Brian Tanquilut, Jefferies.

Congratulations. First question for Howard or Mark. The cost savings that you outlined, if you don't mind just giving us details on what exactly we're looking at? Then how should we think about the ramp in the realization of those cost savings? The last part on that question would be, should we expect it to be at that $30 million run rate exiting 2014?

I'll take that question. In reverse order, we do expect to be at that run rate by the end of the year. The cost savings initiative is broken down into several components. Some of it is for headcount reduction, which we have at this point already completed. The initial phase of that, which we indicated in the closed call of the third quarter in November, and are looking at other opportunities to go even beyond that.

Other cost-saving measures come from, as we mentioned in this closed call, conversion of operating leases, as well as other areas that involve the implementation of our new IT systems, related to RIS, PACS and voice recognition. All three of those initiatives are well underway, and will be completed before the end of the 2014 calendar year. So the combination of those primary three sources, along with other negotiations with vendors on purchasing of supplies and materials, give us the $30 million that we talked about.

The opportunity, we believe, is for the substantial bulk of those to actually be implemented by the end of the third quarter, many of which, as I said before, are well underway. But in particular, the rollout of our IT solutions, which has been long in coming, is now well underway, and is an aggressive schedule to get the entire 250 centers of RadNet on the new platform by the end of the third quarter.

So certainly, exiting the year, our ramp will be at the $30 million. With any additional opportunities that we're looking at, it may even exceed that going into 2015.

Okay. Then Howard, obviously, Q4, the volumes were good. But as we think about market share shift within the industry, I'm guessing you guys are gaining share from the mom and pops. But what are you seeing now in terms of share shift into the hospital and vice versa?

I know you have your partnership in New Jersey. Is that the model that we should see going forward, where these hospitals would partner more? Are you seeing more interest in that sort of arrangement?

Well, I'll answer that question, and maybe broaden it just a little bit. I believe that there's going to be major shifts, and a continuation of work out of hospitals and into ambulatory centers. I'm of course being somewhat general with that, because that includes not only imaging but outpatient surgery centers, lab work, et cetera. I believe that the wake up call to the commercial payor's has now been well recognized, that the cost structures and reimbursement to the hospitals is substantially greater than what is achievable in the outpatient sector.

As a result, many of the payor's are now doing plan design that will help direct patients to more affordable imaging, as well as other outpatient procedures. As well as being very active in that process itself, in making their insured people aware of this, and hopefully even directing them more so. The hospital systems that recognize this are certainly going to be looking more actively about how they increase their outpatient presence. Barnabas, to their credit, was one of the first to do that. And we believe that there will be others that will knock on our door to look at similar types of strategy.

The key to this, which I think is a very real one, and is a word that is creeping more and more into the lexicon of all providers, is population health. The idea of just shifting business, if you will, from outpatient -- into outpatient centers from inpatient, doesn't address the overall issues that I believe the traditional fee for service model encompasses. More and more people are talking about taking larger groups of patients and moving them into more controlled economic alliances, partnerships, with many providers. Imaging being perhaps the most prominent of those, given the prolific nature of that need in the medical community and in the population.

So I think 2014, and certainly going into 2015, is going to be a very significant year of change. How rapidly the change is adopted is going to be (technical difficulty) the various providers and payor's recognizing and coming together in different economic models than what we have been traditionally used to. I think this will be something that will be seen across the United States.

Hopefully, as our strategy has indicated, we are in the major population areas, where about 25% of the total United States population resides. Shifts for population health management, and other forms of partnering, certainly can bring large volumes of patients under control.

We at RadNet, of course, have been involved in what I'll call population health management through our capitation in California. We see that opportunity now being something more seriously considered outside of California, as people look at that as a better model for managing costs and managing access and quality of care.

So in answer to your question, we are excited about these opportunities. I think that they will certainly have significant impacts on the smaller players. I believe some of those shifts are going on.

There's a continuing escalation of providers out there that are either closing up their operations or looking for safe havens with bigger systems, like ourselves. I believe the shifts that we're going to see are going to set the path for major changes in the delivery of healthcare over the next 5 to 10 years. I believe RadNet will be in the markets that we're in, and perhaps even in new markets, that might be -- that might attract opportunities to us and for us, are things that you might expect to hear from us.

Last question for you, Howard. Just to that last point. So as we think about free cash flow, you're guiding to $40 million to $45 million, roughly, of free cash. How should we expect you to deploy that? Would you -- sorry, free cash of $30 million to $40 million.

Would you consider going to new markets and making acquisitions? Or what's the plan right now for free cash deployment? Thanks.

Our primary goal for 2014, as Mark outlined in his statements, is for pay-down of our debt and deleveraging. So I think you may see more comments about that in our proposed refinancing. That will be more of a commitment for that for the Company.

While that is something that we will aggressively be pursuing, if there are opportunities for us to go into other markets that truly represent long-term opportunities, and require us to use some of that cash for the purposes, we'll look at those on a case-by-case basis. I believe if we do find those opportunities, they will represent significantly different types of long-term benefits and vision for the Company than what we have traditionally been looking at.

Got it. Thanks.

Darren Lehrich, Deutsche Bank.

Maybe just on that last point, with regard to your views on leverage. Can you just help frame, in broad strokes, what you think your longer-term target leverage might be?

It sounds like you're coming to market, maybe, with a little bit of a different view about that. So it would be helpful just to frame it.

Sure, Henry. It's Mark.

It's Darren.

I'll take -- sorry, Darren. I'm talking about your colleague here. (laughter) Darren, yes.

At the end of the year, we're finishing up on a pro forma basis, currently a little bit under 5 times EBITDA on a total debt to EBITDA basis. I think long-term, we'd like to see us be closer to around 4 times, perhaps even slightly below that. I think we're very comfortable with our leverage today.

Given our cost of capital and where we see our cost of capital going, we have significant free cash flow, as indicated by our $30 million to $40 million free cash flow guidance range for 2014. So we sleep very well at night, and we feel comfortable with our capital structure today. But going forward, I think that we'll have more financial flexibility and more opportunity to grow the business if we were down closer to about 4 times.

Sure. Okay, that makes a lot of sense. Then when we think about your cost savings initiatives, and the free cash flow guidance you provided, can you confirm whether or not cash restructuring costs are part of that free cash flow outlook? Will cash restructuring costs be material in 2014?

Sure. They will not be material in 2014. The only costs or restructuring costs associated with achieving the roughly $30 million of cost savings is related to headcount reductions or severance. If you notice, in the fourth quarter, we had some meaningful severance there.

So a number of these -- or most all of these headcount reductions occurred within 2014, so -- within 2013. So as 2014 rolls on, we don't expect to have any meaningful severance or any other restructuring costs.

Okay. Thank you. Then a couple other things briefly here. Just as it relates to your commentary in Q1, obviously, none of us would be surprised about weather impact. But just thinking about it in the context of the last time we had a major event was Q1 of 2010.

Do you think, based on what you're seeing, that it's similar? Or can you put it into some framework? Just to help us think through how impacted the weather has been in the business here?

I think as we mentioned, Darren, the guidance that we gave did include what we expect to be a soft first quarter, given the weather conditions in the Northeast. The weather pattern, which I think has affected virtually all businesses out there, is extraordinary. There is no way to avoid that kind of effect on the business.

That being said, we do separate out, in our guidance and in our forecasting, the volumes on the West Coast have been extraordinarily high. Some of which, I believe, is a result of factors that we talked about, meaning some people getting into the new health insurance exchanges. I think deductibles at -- people are being a little bit more diligent on where they get their outpatient services, given that they've got more financial responsibility for that.

I think we're seeing that in California because of the high population here, and the large number of people that we expected to see going into exchanges. We are working closely with a number of the large payor's here on things like plan design and aggressive patterns of moving patients from hospitals to the outpatient facilities, and I think that what starts in California, the jet stream does blow West to East.

We expect to see similar patterns there once the weather clears. Because again, we are in major metropolitan areas, where I think a lot of people will be moving into these systems.

I think -- I would like to just make one other point clear. I may have talked about this on other closed calls. One of the unique strategies of RadNet is that we are multi-modality. You can see, by our consistent results, that more than three-quarters of our volume is from routine imaging.

If you look at the type of people who are going to be moving into some of these new products, it's people that are going to need primarily routine imaging, not necessarily the advanced imaging, which is generally associated with people that have either illnesses or other needs to get MRI, CT and PET/CT scanning. We think that's an enormous benefit here, because capturing those patients for the routine imaging will ultimately lead to a larger volumes on the advanced imaging side of it.

So our strategy, and our discipline, I think is going to provide rewards for us. We're seeing that in California, where we have not been hampered by these weather patterns. Once the weather patterns improve, which I think spring is pretty much around the corner here, I think we're going to see similar results here.

I know in our relationship, which is near and dear to you, Darren, with Barnabas, this is something that both systems, meaning RadNet and Barnabas, are anticipating. Because they, since we are as close to them as we are with any of our hospital partners, tell us that inpatient volumes are being challenged. It's one of the reasons why they sought a partnership with us, is because they knew they needed more access to ambulatory services.

In northern New Jersey, where Barnabas is, there was no other candidate other than RadNet to really define that relationship. I think that relationship has been an overwhelming and unqualified success, which, when other people become more aware of it, will certainly want to embrace that also.

So I think that the guidance that we've given does anticipate that the fourth quarter will be -- excuse me, the first quarter here will be a little bit on the weak side. But that, once these weather patterns improve, we expect to see, like we are here on the West Coast, substantial improvement in our volumes.

That's helpful color. Last thing, briefly, Mark, the NOL position that you're in, please?

Yes. It's still North of $200 million, both on a federal and state level. So although we -- since we put the deferred tax asset on our books in the fourth quarter of 2012, although we've had a significant tax provision throughout 2013 as it relates to using that deferred tax assets, we still, for the most part, except for some state taxes, where we're not in an NOL position in those states, we still have very little cash taxes that we're paying.

Okay. Great. Thank you.

Henry Reukauf, Deutsche Bank.

Congratulations on a really nice quarter, and some good guidance too. On the cost savings that you have, can you say what your -- of the $30 million, what are your entering into the -- what you entered into the year with? How much you had realized, or run rating out of the fourth quarter?

Better than half of it is what we started the year with. The two major cost saving initiatives, which was buying out some operating leases and headcount reduction, were completed before the end of the year, and did have a small impact in the fourth-quarter results.

So of the $30 million, well over half of that was achieved, as well as a couple of other initiatives with our vendors and some cost savings and purchasing initiatives. So I think it's -- I'm comfortable saying that, rolling into the year, we probably had already $20 million of the $30 million in place, that would be realized on a run rate some time here in the first quarter.

Okay. So we can almost say that you're pretty much going into the first quarter offset the impact that you're going to see from the price reduction?

Yes.

Okay. Then your -- since weather isn't impacting volumes in California, and it sounds like things are going well, how do you see volumes in California? You mentioned they were up. What degree?

I'm -- are you talking about the first quarter?

I'm thinking about the first quarter, because it sounds -- you sound pretty optimistic about it, particularly in California. It's obviously going to be weak on the East Coast.

Again, we're only barely two-thirds of the way through. Even January itself, on the West Coast, given the holidays and the ramp up here, perhaps are not quite as indicative. But I'm confident that our volumes here on the West Coast will be higher than what our overall guidance for volume increase is.

Part of that is that we are getting increasingly more incoming calls from groups that want to go to capitation. Now, these are people we already maybe doing business with, but who are looking to fix their costs, take advantage of the utilization management tools that we've honed here over 20 plus years, and start directing their business into a network of imaging centers like what RadNet has so profoundly here in California, that I think is going to cause some significant shifts in the marketplace.

So I think California, again, is a bellwether for what we can expect in other parts of the country, and -- or let's say in the Northeast marketplace here. In terms that used to be dirty words, like capitation and other forms of partnering, are clearly now much more on the forefront of payers' mines and providers' minds.

So given the fact that managed care is so extensive here in California, it shouldn't be considered unusual for us to be fielding more of these calls and opportunities here. But I think it's just a matter of time until it's embraced in some form in other parts of the country. Whether you want to call that population health, whether you want to call it accountable care organizations, I think all of these terms are just more of a way of talking about how the traditional fee for service model may be changing for large books of population.

So I think RadNet, fortunately, over its long history here of managing large geographic areas of centers, and in populations. Most importantly, handling large volumes and books of business, which I can't overestimate the value of what we've been working on now for three years with our information systems. There is so much opportunity to automate and remove many, many manual processes that have we have been hampered with, the whole industry has, for years, is now something that is a reality.

It's probably in, at this point, already, maybe one-quarter to -- more than that, about one-third of all of our centers, and rapidly moving to be put into all of them on a single platform. Which will create workflow efficiencies, cost reductions, and which, I believe, are not only important from a financial standpoint, but managing these large populations that I think we're going to be seeing with. I'm very proud of our IT operation.

I believe the eRAD product, which combines RIS PACS, voice recognition, critical test reporting, and utilization management tools, is a unique and probably best-of-breed product right now in the marketplace. There are plenty of players in there that we compete with that I make that statement very boldly. I'm not putting down anybody else's product, but this is a product that has been designed for -- to handle large volumes of business in individual centers and geographic regions, which does not exist out there anywhere else.

Okay. Then last one, maybe for Mark, on the guidance. Am I thinking about this right? If I look at the low end of the guidance, it seems like the cost savings are going to offset the plus a little bit, the reduction from reimbursement cut. So, kind of the low end of your guidance assumes a flat year with those two things offsetting each other, and you're remaining flat?

Then the upside of the guidance, explain how you -- is my thinking on the right on the low end? Then how do you get to the high end? What are the factors there that drive the nice increase?

Sure. I think that's accurate. The low end of the guidance assumes, essentially, a flat year, with the cost savings that we achieved on a LTM basis -- so they're related -- it's 12 month basis, as the of the end of the year, kind of equal out with the reductions and reimbursement.

The higher end of the guidance assumes some growth in same-center procedural volumes, which we achieved in the fourth quarter of 2014, but was a -- was difficult to achieve in something that we weren't able to achieve in the first three quarters of 2013. As utilization continued to be managed, and as patients have moved and migrated more toward these higher deductible plans that have been much more consumer-istic and judicious about utilizing healthcare services. Not just imaging, but all healthcare services. So the top end of the guidance does assume some growth.

Okay. Thanks so much.

Duncan Brown, Wells Fargo.

Maybe following up on 2014 guidance, can you talk about your expectations for commercial pricing in 2014?

Sure. Our guidance assumes flat commercial pricing, which is something that we have been able to achieve over the last couple years. We have had some reductions with the very small part of our business that has rates that are tied to Medicare.

For instance, Medicare Advantage plans, which we categorize in our commercial insurance payer class, along with the HMOs. But for the most part, the rest of our commercial book of business has been flat, in some cases, as we discussed last year.

We received some nice price increases in the mid-Atlantic region, where we have a significant concentration of centers, and where we are a very significant part of the provider network for all of the insurance companies in that region. So we're assuming flat pricing on commercial book. Then our capitated book, which represents about 9% to 10% of our business, we receive annual price increases, as utilization continues to go up, even under our managed utilization functionality.

For the managed Medicare, can you remind us what percentage of your overall book that is? Or is percentage of commercial, depending on how you look at it?

Yes, I don't have that offhand, but it's very small. Our commercial book of business is about 58% of our entire book of business. Of that, if it were 5%, I'd be surprised.

Got you. Thank you.

Then on the Q1 guidance, commented it's going to be on the weak side. Can you remind us, was Q1 2013 negatively -- if I recall right, it was negatively impacted by Sandy as well.

Obviously, the bigger impacts were Q4 2012. So are you saying it's going to be weaker than the Sandy -- it's going to be more pronounced than the Sandy impact was in Q1 2013?

We don't have enough information in front of us, given that we haven't closed two of the three months of 2014. But what I can tell you is that, if you remember, Sandy occurred, I think it was late October of 2012.

A lot of the impact was in that fourth quarter of 2012, but there were -- there was some lingering effect into 2013. We had some other weather issues in the first quarter of 2013.

What I would tell you is, just from a gut feel here in first quarter 2014, it's probably more akin to when Sandy hit in that fourth quarter than it was to the first quarter of 2013, with the lingering effects of Sandy and some other weather. But it's really too early to speculate, Duncan.

No, that's fair, and I appreciate the commentary. Maybe a higher level question. Just in general, when you have these sort of weather issues, do these volumes -- and this may be too high level of a question. But do these volumes just get deferred and you eventually realize the? Or are they by and large just lost opportunities?

I think they're mostly lost opportunities. The reason I say that is, the only way you realize those is if you can take the patients that weren't done, and do them by having capacity in your centers to double up your business. Most of our centers are pretty busy and can't absorb that, number one. So you lose those slots forever.

Number two, the bigger issue is that remember, these volumes, or the impairment of these volumes, is not singular to outpatient imaging. When we're not open, generally speaking, the doctors who refer us patients are not open. Either because they can't get to their offices or their patients can't get to their offices. As a result, those patients wind up getting their services pushed back, simply because we don't get the referrals, given that their referring doctors' offices are closed, also.

Perhaps the most difficult part of really understanding this is that 99% of what we do -- maybe that's a little bit much. But a very, very high percentage of what we do is elective work. As a result, sometimes people who are ill, if they get better, they may decide not to go to the doctor in the first place, or not need a test.

So some of the work may never get done, given the fact that there's a deferral in the entire system of having these patients go through the healthcare process of diagnostic evaluation and treatment. So it's very disruptive, and I don't believe that we're going to have the chance of recovery.

Think of it as an airline. When the airlines are down, and those seats are lost, they're lost forever. It doesn't mean that the people who fly that airlines can get booked on the next flight, which is probably already full anyhow. So there's a lot of similarities to the airline industry, I think, when it comes to imaging.

All right. Great. Thanks a lot.

Elie Radinsky, Cantor.

Congratulations again on a good quarter. Just two quick questions for you. Now that you're in California, and many other states that are participating in the Medicaid expansion and the Affordable Care Act, can you discuss any thoughts that you may have on that program for the year, given that you've had two months of experience in that, if any?

The second thing is, when you talked about refinancing your bonds, you mentioned that your proposal to do a second lien and other debt or other financing, what would that other financing be? Thank you.

I'll take the first part, and then I'll defer the second part, Elie, to Mark.

What we're seeing, and probably didn't anticipate, would be the case, is that a number of these new insured are rolling into the large medical groups who we already have capitation arrangements with. That process didn't really start getting some legs until, probably, the month of February, where we are now getting contacted by our groups and telling us to be prepared for some significant upward enrollment in their HMO products.

So what we're now moving towards is a recognition that these patients, who primarily were either not being -- did not have access to healthcare, because they didn't have insurance. Or were just winging it, if you will, and doing only what they had to, are fairly aggressively making their way into the various exchanges here in California, in particular, that is resulting in, at least what we're seeing, of a fairly exciting and growth of the HMO products that we just didn't anticipate. I'm not sure if anybody did.

It is going to, I think, increase our volumes at our centers. More importantly, because so many of these are falling into our existing capitation arrangements, we're going to see some nice increase in revenue, even if these people are not immediately seeking outpatient imaging procedures.

So this is something that we thought might happen, but couldn't put any real definitive or certainty to it. It appears to be gaining some significant momentum here, as we move through the month of February and into March, where we're being notified that these people are beginning to fall under these programs.

I doubt that we will see this as quickly on the East Coast, because of weather-related issues. But I believe the phenomena, given the fact that we're in high demographically populated states, will ultimately be the same in places like New York, New Jersey, Delaware, and Maryland. So it may be a little bit of a delayed reaction on the East Coast, but I think we're very buoyed by what we're seeing on the West Coast.

Elie, I'll take the second part of your question, which was a question about the sources of funds in our refinancing. What we're contemplating is to raise a $180 million in a second lien term loan, and $30 million tack-on to our existing term loan B, our first lien term loan. So part of the interest rate savings will come from an expected lower interest rate on the second lien term loan, and the other part will come from the fact that we're replacing some junior capital with more senior capital.

And the expectation is for at least a 300 basis points improvement in that refinancing? Is that fair to say?

I can't publicly comment on that right now, as we are going to be hitting the private markets this week, inclusive of a bank meeting on Thursday. But I can't really say much more than that. I think that it's safe to say that we wouldn't be going out into the marketplace unless we thought that there was a material interest rate savings to the Company.

Excellent. Good luck on that.

Thank you.

(Operator Instructions)

Alan Weber, Robotti & Company.

Can you talk about -- you've seen more publicity about doctors joining hospitals, and what you're doing? What impact do you see that long term, both in California and on the East Coast?

Good morning, Alan. I think it's less of an issue on the West Coast here, just given the nature of the hospitals and the landscape here, particularly with managed care. So we don't see a lot of that here on the West Coast. We are seeing some of it. But just given the number of doctors, the population here, the impact overall would be very, very small.

The East Coast is a little bit different. I think there's more aggressive competition for groups on the East Coast. While we are seeing it in some markets, it really hasn't had much of an impact here.

Again, on the East Coast, which is a little bit different, particularly in New Jersey and in Maryland, which are two of our bigger regions, we are aligned with major hospital systems, four of them in Maryland and one of them in New Jersey. So to the extent that those hospital systems wind up being part of the physician consolidation and acquisition. We actually expect to benefit from them, that has been something that we have been seeing. But overall, I don't expect this to be a major impact at all in any of the markets that we're in.

Okay. Great. Thank you very much.

(Operator Instructions)

And it appears there are no further questions at this time.

All right. I want to thank everybody for taking the time to listen to our closed call here. Management will continue its endeavor to be the market leader that provides services with appropriate return on investment for all of its stakeholders. Thank you for your time, and we look forward to our first quarter closed call in May.

And that does conclude our conference today. Thank you all for your participation.