RadNet Inc (RDNT) 2016 Q4 法說會逐字稿

Good day and welcome to this RadNet Incorporated fourth-quarter and full-year 2016 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. Please go ahead sir.

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 2016 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 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, 2016 to be filed shortly. 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 occurrences 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 and I plan to provide you with highlights from the fourth-quarter and full-year 2016 results, give you more insight into the factors which affected the performance and discuss our future strategy. After our prepared remarks, we will open the call to your questions. I'd like to thank all of you for your interest in our Company and for dedicating a portion of your day to participate in our conference call this morning.

When I look back at 2016, which was a year of operational (technical difficulty) I'm very proud of our numerous accomplishments. We completed no material acquisitions during the year. Instead, we focused on making our business stronger and one that is a stable and salable platform to support future growth and operational improvement. Before I discuss these accomplishments, I'd like to talk about the outstanding financial results that were driven by our operational focus.

During 2016, we grew both revenue and EBITDA 9.3%. Aggregate volumes decreased by [8.3]%. We produced over $35 million of free cash flow after capital expenditures and cash interest expense. We ended the year with over $20 million on our balance sheet, and reduced net debt by the same amount. We reduced our debt to EBITDA leverage ratio by over a half turn of leverage in one year to 5.3 times debt to EBITDA at the end of 2015 to less than 4.8 times debt to EBITDA at the end of 2016.

The fourth quarter's results were similarly strong, revenue of 4.3%, EBITDA increased 7.2% and net income increased $2.8 million over last year's same quarter. Aggregate volumes increased, especially in high-margin modalities, MRI, CT and PET/CT, which increased 2.6%, 3.1% and 4.0% respectively. Same center revenues increased in the fourth quarter by 2.8%.

Although I'm pleased with these results, I am more proud of our 2016 operational accomplishments. Some of these accomplishments drove our improved financial results while others positioned our company for long-term success and stability in the future.

Here are some of the key operating highlights from 2016. First, in 2016, we completed our information technology initiative to migrate the entire Company to our proprietary front end operating system, eRAD, and to a billing platform provided by an outside vendor, Imaging. We began the internal development of the eRAD system in 2009 when we decided we needed to control our own IT infrastructure. At that time, we recognized that our growing size and complexity demanded features and functionality from our IT systems that our outside vendors were either unable or unwilling to support or customize on our behalf.

The internal rollout of eRAD provides us with more uniform data, a common trading platform, and functionality that gives us operating and staffing efficiency that utilizes a common interface with our other IT systems like transcription, billing, and data warehouse. Our implementation of the Imaging software system creates efficiencies in our billing operation and the ability to have a common interface amongst all regions through eRAD, our claims processors, and certain performance dashboards. We exercise to create a common IT platform among all of our operations, including eRAD and (technical difficulty) as the time-consuming expensive (technical difficulty). Not only will we benefit from these initiatives as we continue to scale, it also has given us support expertise and experience to be able to more efficiently integrate new operations that we might build or acquire in the future.

Also, in 2016, we successfully created our first West Coast State Health System partnership. Late in the first quarter of last year, we signed a joint venture agreement with Dignity Health, Glendale Memorial Hospital in Glendale, California. The joint venture agreement consists of two imaging centers. The first center focuses on women's imaging and was previously owned and operated by Dignity Health.

The second center is a multimodality facility initially constructed by RadNet. This facility contains advanced imaging MRI/CT as well as routine (technical difficulty) x-ray, and ultrasound. While the joint venture became operational in June, RadNet and Dignity continue to explore further opportunities which could include RadNet's Breastlink breast (technical difficulty) managed offering and other oncologic capabilities.

The health system joint ventures have been a significant part of our Eastern operation where we currently have 12 joint ventures in Maryland and in New Jersey. The lessons we've learned and the experience we've gained from these East Coast relationships furthered our ability to successfully establish and operate the Dignity Health joint venture and will help with future partnerships in the West, which we hope to be able to discuss (technical difficulty).

Additionally, throughout 2016, we began assembling the components and frameworks to bring our Breastlink breast disease management offering to our regional operations in Montgomery County, Maryland and Manhattan.

Currently, Breastlink operates five comprehensive breast cancer diagnostic and treatment facilities in Southern California. This offering provides a full continuum of care to our patients and our medical outcomes have been extraordinary. We have demonstrated in California that assembling world-class breast imagers, medical oncologists and surgeons in the same medical practice on an outpatient basis can materially improve the experience and outcomes of patients. All this can occur while saving significant costs to the medical delivery system by eliminating or minimizing hospitalization and inpatient care.

The Breastlink offering is highly complementary to our imaging business and drives procedural volume, both because our health imaging business drives Breastlink patient volume and because patients with breast cancer are high utilizes of various advanced imaging modalities.

Much of our operational focus on the East Coast during 2016 entailed completing the integration of our New York acquired operations in 2015, most notably the Diagnostic Imaging Group and Lenox Hill New York Radiology Partners operation. During the year, we expended considerable time and resources to integrate these businesses into our IT billing, accounting, and operational infrastructure. Integration efforts included the rebranding of select centers, strategic relocation of some centers, the augmentation and changing of center level and regional personnel, and the consolidation of certain facilities. These efforts, although mostly complete, continue to take time and require financial resources (technical difficulty). Because of the major commitment we made to these operations in 2015, I believe they are positioned to show marked improvement in 2017 and beyond.

2016 was also an important year with respect to our capital structure. On July 1, we completed a refinancing transaction of our then $485 million first lien term loan and $117.5 million revolving credit facility. We effectively lengthened the maturity of these facilities to July of 2023 with respect to the term loan in July 2021 (technical difficulty). The transaction increases our financial flexibility, allowing us to grow our business with added capacity to create joint ventures and other attractive business structures.

Furthermore, the refinancing transaction extended the maturities of the loan and it eliminates our need from having to deal with any near-term maturity.

Additionally, subsequent to year-end 2016, we completed a successful repricing amendment for these same credit facilities. The amendment reduced our interest-rate by 0.5%, which amounts to approximately $2.4 million of annual interest expense savings. We'll use this additional cash flow to further deleverage our balance sheet or reinvest in our business for future expansion.

Finally, our activities in 2016 build executing on operational initiatives. The list of these is lengthy. For example, we restructured our previously decentralized appointment scheduling department on the West Coast into a centralized regional call center. We successfully renegotiated certain vendor contracts to save money on various medical supplies and consumables. We concluded our -- we concluded certain payor renegotiations in several of our East Coast markets, which resulted in increased procedural pricing and revenue. On the West Coast, our discussions with certain capital medical groups have resulted in higher per-member per-month rates for targeted patient populations for which we are contracted (technical difficulty) arrangement.

During 2016, we redesigned certain of our equipment repairs and maintenance contracts for a specific modality to improve equipment uptime, reduce costs and simplify logistics.

Finally, we substantially completed the all-digital upgrade of our installed computed radiography (technical difficulty). This program was designed to create more efficiency at our centers and to avoid certain financial penalties that would have otherwise been placed upon it in the future if we were to continue to utilize the older computed radiography technology.

At this time, I'd like to turn the call back over to Mark to discuss some of the highlights of our fourth-quarter 2016 performance. When he is finished, I will take some -- I will make some (technical difficulty)

Thank you Howard. I am now going to briefly review our fourth-quarter and full-year 2016 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 statement as well as provide some insight into some of the metrics that drove our fourth-quarter and full-year 2016 performance. I will also provide 2017 financial guidance levels, which were released in this morning's financial press release.

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, and excludes losses or gains on the disposal of equipment, other income or loss, loss on debt extinguishment, and non-cash equity compensation. Adjusted EBITDA includes earnings in unconsolidated operations and subtracts allocations of earnings to noncontrolling interest in subsidiaries and is adjusted for non-cash or extraordinary and one-time events taking place during the period. A full quantitative reconciliation of adjusted EBITDA to net income or loss attributable to RadNet Inc. common shareholders is included in our earnings release. With that said, I would now like to review our fourth-quarter and full-year 2016 results.

For the three months ended December 31, 2016, RadNet reported revenue and adjusted EBITDA of $224.9 million and $34.9 million respectively. Revenue increased $9.2 million, or 4.3% over the prior year's same quarter, and adjusted EBITDA increased $2.3 million, or 7.2%, over the prior year's same quarter. The vast majority of the revenue and EBITDA increase in the quarter is the result of increases in procedural volumes, mostly same center increases, and the effect of several payor contract increases we received in the latter half of 2017.

For the fourth quarter of 2016, as compared with the prior year's fourth quarter, aggregate MRI volume increased 2.6%, CT volume increased 3.1%, and PET/CT volume increased 4.0%. Overall volume, taking into account routine imaging exams inclusive of x-ray, ultrasound, mammography and other exams, increased 0.6% over the prior year's fourth quarter.

In the fourth quarter of 2016, we performed 1,519,272 total procedures. The procedures were consistent with our multimodality approach whereby 77.7% of all the work we did by volume was from routine imaging.

Our procedures in the fourth quarter of 2016 were as follows: 190,594 MRIs as compared with 185,742 MRIs in the fourth quarter of 2015; 140,910 CTs as compared with 136,696 CTs in the fourth quarter of 2015; 6,538 PET/CTs as compared with 6,285 PET/CTs in the fourth quarter of 2015; and 1,181,230 routine imaging exams as compared with 1,182,039 exams of routine imaging in the fourth quarter of 2015.

Net income for the fourth quarter of 2016 was $3.7 million, or $0.08 per share, compared to net income of $881,000, or $0.02 per share, reported in the three-month period ended December 31, 2015. These numbers are based upon weighted average number of shares outstanding of $46.4 million -- 46.4 million shares and 46.5 million shares for the periods in 2016 and 2015 respectively.

Affecting net income in the fourth quarter of 2016 were certain non-cash expenses and nonrecurring items, including the following: $908,000 of non-cash employee stock compensation expense resulting from the vesting of certain options and restricted stock; $349,000 of severance paid in connection with headcount reductions related to cost savings initiatives; a $392,000 loss on the disposal of certain capital equipment; and $801,000 of amortization of write-off of deferred financing costs and loan discount related to our existing credit facility.

With regards to some specific income statement accounts, overall GAAP interest expense for the fourth quarter of 2016 was $10.6 million. This compares with GAAP interest expense in the fourth quarter of 2015 of $10.7 million.

For the fourth quarter of 2015, bad -- excuse me, 2016 -- bad debt expense was 5.5% of our service fee revenue compared with 5.4% for the fourth quarter of 2015. We are pleased with the flat bad debt percentage as providers are required to collect more and more dollars from patients directly in the form of copayments and coinsurance. The controls and procedures we put in place at the centers that have become more effective at collecting money for patients are enabling us to keep bad debt stable relative to our service fee revenue.

For the full year of (technical difficulty) 2016, the Company reported revenue of $884.5 million, adjusted EBITDA of $133 million, and net income of $7.2 million. Revenue increased $74.9 million, or 9.3%, and adjusted EBITDA increased $11.4 million, or 9.3%, over 2015. While a portion of this growth was related to same center performance, we were also benefited by having a full year's worth of the contribution of the Diagnostic Imaging Group acquisition, which we made on October 1, 2015.

For the year ended December 31, 2016, as compared to 2015, MRI volume increased 7.8%, CT volume increased 7.9%, and PET/CT volume increased 7.9%. Overall volume, taking into account routine imaging exams, inclusive of x-ray, ultrasound, mammography and other exams, increased 8.3% for the 12 months of 2016 over 2015.

In 2016, we performed 6,109,622 total procedures. The procedures were consistent with our multimodality approach whereby 77.9% of all the work we did by volume was from routine imaging.

Our procedures in 2016 were as follows. Please note that, starting in the third quarter of 2015 and going forward, we standardized our procedural volume categorization among regions according to our internal KBI, or key business indicators, dashboard. So, the volumes I will be quoting for last year's comparison period will be slightly different than those I reported at this time last year. Because the restated procedure volumes for last year's period are calculated under the same methodology as the current period, the comparisons between the two periods are accurate, as are the conclusions that can be drawn.

Here are the volume numbers: 757,668 MRIs as compared with 703,091 MRIs in 2015; 569,247 CTs as compared with 527,629 CTs in 2015; 26,227 PET/CTs as compared with 24,312 PET/CTs in 2015; and 4,756,480 routine imaging exams as compared with 4,383,947 of all these exams in 2015.

Net income for 2016 was $0.15 per diluted share compared to net income of $0.17 per diluted share in 2015 based upon a weighted average number of diluted shares outstanding of 46.7 million shares and 45.2 million shares in 2016 and 2015 respectively. Affecting net income in 2016 were certain non-cash expenses and nonrecurring items including the following: $5.8 million of non-cash employee stock compensation expense related from the vesting of certain options and restricted stock; $2.9 million of severance paid in connection with headcount reduction related to cost savings initiatives, primarily in New York; a $767,000 loss on the disposal of certain capital equipment; $5 million gain on the return of common stock related to one of our New York acquisitions; and $5 million of amortization and write-off of deferred financing fees and discount on issuance of debt related to our existing credit facilities and refinancing transaction.

With regards to some specific income statement accounts, overall GAAP interest expense in 2016 was $43.5 million. Adjusting for the non-cash impact from items such as amortization of financing fees and accrued interest, cash interest expense was $37.5 million in 2016. This compares with GAAP interest expense in 2015 of $41.7 million and cash paid for interest of $36 million.

For 2016, bad debt expense was 5.5% of our service fee revenue compared with an overall blended rate of 4.8% for the full year of 2015. There was no operational change in our collection for (inaudible). This increase is simply a reclassification we made at the end of the third quarter of 2015 between contractual allowances and discounts and bad debt related to the migration of our new billing system. Without this reclassification, our bad that percentage would have remained flat year-over-year as it did in the fourth quarter.

With regards to our balance sheet, as of December 31, 2016, unadjusted for bond and terminal discount, we had $634.9 million of net debt, which is total debt less our cash balance. As of year-end 2016, we were undrawn on our $117.5 million revolving line of credit and had a cash balance of $20.6 million.

As Dr. Berger mentioned earlier, we have reduced our debt to EBITDA leverage ratio by over one half turn of leverage in the year, from 5.3 times debt to EBITDA at the end of 2015 to less than 4.8 times debt to EBITDA at the end of 2016.

At December 31, 2016, our Accounts Receivable balance was $164.2 million, an increase of $1.4 million from year-end 2015. The increase in Accounts Receivable is mainly from increased patient volume and revenue countered by strong collections throughout the year.

Our DSO was 61.2 days at December 31, 2016, lower by 4.7 days when compared with 66 days as of the end -- as of this date one year ago, which is mainly due to improved collections occurring after the migration of our operations onto a new billing platform.

Throughout 2016, we had total capital expenditures, net of asset disposition and sale of imaging center assets and joint venture interests, of $60 million. Approximately $59.3 million was paid for in cash, approximately $1.3 million was financed with capital leases, and we recognized $523,000 in proceeds from the sale of equipment.

I will now discuss how RadNet performed relative to revised 2016 guidance levels, which we released first upon our fourth-quarter and full-year 2015 results, and then as revised upon announcing our second- and third-quarter 2016 financial results. Our revenue guidance range for total net revenue was $870 million to $910 million. Our actual results were $884.5 million. For adjusted EBITDA, our guidance range was $130 million to $140 million and our actual results were $133 million. For capital expenditures, our revised guidance range was $55 million to $58 million. Our actual results were $60 million. For cash interest expense, our guidance range was $37 million to $40 million and our actual results were $37.5 million. And for free cash flow generation, our revised guidance range was $40 million to $50 million. Our actual results were $35.6 million. We are pleased to have achieved our guidance ranges for revenue and EBITDA.

During the year, we spent over $10 million of additional capital expenditures then originally budgeted, the vast majority of which was to replace most of our installed base of CR x-ray systems, as previously discussed by Dr. Berger. Although these were necessarily and beneficial expenditures for RadNet long-term, the additional spending caused us to end the year below our guidance range for free cash flow.

At this time, I'd like to review our 2017 fiscal year guidance levels, which we release this morning in our financial press release. For 2017, our guidance ranges are as follows: for total net revenue, $895 million to $925 million; for adjusted EBITDA, $135 million to $145 million; for capital expenditures, $55 million to $60 million; for cash interest expense, $35 million to $40 million; and for free cash flow generation, $40 million to $50 million. The guidance assumes no acquisitions and is derived from a true same-center model. It is built from a budgeting process that is completed at the center level and takes into account all opportunity to end risks facing each center. The low end of our guidance assumes approximately 1% internal revenue increases, while the high end of the range assumes between 4% and 5% topline growth. We are projecting that capital expenditures will remain about flat relative to what we spent in 2016, and we continue to have tight control on our operating expenses.

Our cash interest expense guidance reflects the repricing of our senior credit facility partially mitigated by the cost of an interest rate cap we purchased in the fourth quarter of 2016 on three-month LIBOR designed to partially protect the Company in a rising interest rate environment.

We have many reasons to be optimistic about 2017, and hope that many of our -- hope that many of our prospects enable us to outperform our guidance.

With respect to reimbursement, 2017 will have flat Medicare rates. By mid-2017, the vast majority of our integration efforts related to our New York Radiology Partners and Diagnostic Imaging Group acquisitions will be complete. As Dr. Berger mentioned earlier, we will benefit from launching Breastlink operations in two of our East Coast regions during the second quarter of this year. We also expect additional revenue in 2017 from our continued adoption of 3D breast imaging. And finally, we expect to begin operations in 2017 of our new -- of several new health system joint ventures.

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

Thank you Mark. Our results in 2016 demonstrated the (technical difficulty). As we move into 2017, our focus will continue to be on our operational improvement. While we continue to be in the market to evaluate opportunistic acquisitions and further our strategy of regional concentration and multimodality approach, I believe these opportunities in 2016 will be in the form of smaller tuck-in transactions of independent operations. In 2017, we will continue the progress we have made in launching Breastlink (technical difficulty) in Maryland. We will expand and broaden several of our existing joint venture relationships and establish joint ventures with new partners. We intend to expand our capitalization business on the West Coast, and to pursue opportunities to begin risk based contracting in our East (technical difficulty).

We remain optimistic about our future and position in the healthcare industry. The healthcare industry continues to consolidate and move toward ambulatory outpatient services. Regardless of what happens with Obamacare and what type of reforms the new administration will enact, diagnostic imaging will remain a necessary and growing part of the healthcare delivery system. Our business touches virtually every specialty (technical difficulty) and as the population continues to grow and age is focused on early detection and accurate diagnostic disease continues, and as medicine seeks noninvasive means to detect and treat diseases, diagnostic imaging will continue to be more prevalent and at the forefront of medicine.

Patient and health plans continue to look for low-cost alternatives to the hospitals for outpatient imaging. We are that alternative. We have shown our willingness and interest in partnering with local hospitals who will now then participate alongside us in the growth of outpatient imaging in their markets.

I believe we have never been better positioned as a company than we are today. We remain the largest outpatient provider of imaging services in all of our core markets. We offer a broader service line to payors and patients but, most importantly, we've become better and more efficient at performing virtually every aspect. I look forward to updating you on the many initiatives we discussed on our call today during our first-quarter and financial results call in May.

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

(Operator Instructions). Brian Tanquilut, Jefferies.

This is Jason Plagman on for Brian this morning. First, I appreciate the insight on your outlook for same facility revenue growth in 2017. How should we be thinking about the volume component of that? Is it -- are you assuming basically flat plus or minus 1% or so, or what is embedded in that same facility revenue guidance?

Good morning Jason. Because we are facing no Medicare cuts in 2017, we expect our overall pricing to be fairly flat from 2017 versus 2016, so we are assuming in our guidance that the low end of the guidance would have about a 1% kind of same center performance with 4% to 5% at the high end. We did receive some pricing increases in our East Coast marketplaces and in our capitation contracts on the West Coast, so we will be benefited slightly by some increases there, but we are assuming flat pricing anyhow.

Okay, that's helpful. And regarding your comments on the capitation, are you able to quantify or give us any magnitude of the impact of those increases, and your update on your efforts and potential timing of agreements on the East Coast as well?

Sure. With respect to the West Coast, remember we have about 35 of these arrangements, and they all have renewal dates throughout the year or come to anniversary, year anniversaries, throughout 2017. So what I can tell you is that we've received over $2 million worth of price increases on the capitation side with contracts that have already been renegotiated or termed out. But we have other -- we have more opportunity throughout 2017 as we come to those anniversary dates. That's on the West Coast.

On the East Coast, we talked in the last earnings call, and I believe the prior one, that we are in discussions with a number of large medical groups particularly in one of our markets, the large East Coast market, surrounding full risk based contracting and a capitated arrangement, and we are hoping that, within 2017, we will be in a position to announce one of these relationships on the East Coast, which will be a watershed event for the Company. Historically, risk based contracting has been a California phenomenon, a Florida phenomenon, and a couple of other states. But we think if that, under the Affordable Care Act, that risk based contracting will continue to take hold in other marketplaces and we will be on the forefront of the ability to take on that risk with respect to imaging, having done it for 20 years on the West Coast. So, we will be excited when we are in a position to announce something hopefully this year.

Great. Last one for . E, any objective our target you are trying to reach for debt leverage at the end of this year as well as maybe in 2018?

Sure. Well, I can give you a reference point. We delevered the Company by a half a turn with respect to our debt to EBITDA ratio between year-end 2015 and year-end 2016. I think that shows what the Company is capable of in a year where we really focused on operations and had no material acquisitions to speak of. Our guidance assumes a similar type of year where we are focused internally on acquisitions -- excuse me, on internal operations and on a same center model. So I think, if we are sitting here a year from now on our earnings call and we've deleveraged another half a turn, I think that is reasonable to expect. We would love to be close to four times EBITDA by the end of the year as possible, and it's somewhat dependent upon where we are with respect to our EBITDA guidance for 2017.

All right.

In terms of 2018, it's a little hard to tell sitting here now, but I think we're going to be in the same position where we would love to be able to deleverage the business up to a half a turn in 2018 as well.

Great. Thanks.

Per Ostlund, Craig-Hallum.

Thank. Good morning guys. I wanted to start with a question related to the EBITDA guidance. So, I appreciate the color on revenue guidance and the thinking there, sort of that 1% to kind of on the high end 5% internal growth. Your EBITDA guidance sort of implies kind of 1.5% upwards of 9% growth. I guess I'm wondering sort of how you view the gating factors in light of the benign reimbursement environment that could get you toward the upper end of the EBITDA guide. What are the opportunities on that front?

Sure. It's a few things. We have enjoyed, up until this quarter, I think 10 quarters in a row of same center positive volume comps, so we anticipate being able to continue that type of internal growth. During 2017, we will be expanding some existing joint ventures. We hope to be in a position to announce several new joint ventures throughout the year, which will create growth. We are enjoying some growth in our mammography business from the adoption of 3D breast imaging, or tomosynthesis, which will provide growth in 2017 as well. So, there's a lot of initiatives that we've got internally to really drive growth that I think are going to be positive. Also we've seen some increasing enrollment on the West Coast within our capitated medical groups, which we grew our capitated business nicely here in 2016 over 2015, and we expect to have growth in capitation over -- for next year. We grew it over 9% this year. The prior year, we had tremendous growth, over 25% in our capitation business. So we see some opportunity there. So all of those things I think could allow us to hit the middle to high end of our guidance in 2017.

One other item. In 2017, we will benefit from a full year of increased reimbursement from some of our East Coast operations that were finished towards the middle of the year and (technical difficulty) that's a partial year benefit from 2016.

Perfect. Thank you for all of that color. And actually, you touched on one of the other things that I wanted to ask about, which is the deep path 3D mammography. I was just sort of wondering if we can get kind of an update on your rollout. I know it's been kind of -- it's certainly been seen as an opportunity and something you've been increasingly working toward. I'm curious perhaps most specifically about the recent bill signed by Governor Cuomo in New York. That's a big market for you. And with them covering 3D mammography now, does that kind of change your rollout plans there or accelerate anything beyond what you are already looking to do this year there?

I think that the rollout, or continued rollout, of 3D mammography will be less influenced by reimbursement than you might otherwise think. Partially (technical difficulty) we offered 3D mammography to all of our patients (technical difficulty) choice. If it's covered already in the health benefit plans they have, then we would accept that and (technical difficulty) a surcharge or additional copay for that new technology. So with the adoption by other payors, whether it's New York or recently United Anthem and Blue Shield in California have announced coverage of 3D mammography, it will just shift that burden, rightfully so, away from patients and to insurance companies. So our plan is to continue to roll that out, remain unaffected by the various adoption of the health plans, primarily because we see it as a growing and essential part of our delivery system, and that it is and continues to be proven to be better medicine for the protection of breast cancer. Most of the articles we are seeing have raised the ability to earlier diagnose breast cancer, which ultimately becomes a benefit to the health (technical difficulty) as a whole. And our particular model is one of the reasons why we are (technical difficulty) in the New York market that we believe these opportunities will help drive the Breastlink model which then (technical difficulty) for us.

Okay. That makes sense. One more question if I could. You referred to 2016 as having been a year without material acquisition, and it sounds like, by and large, unless something presents itself, 2017 would be perhaps a little quiet on that front as well. I'm just sort of curious as to how you think about that. Was it -- were these -- was last year and then perhaps this year more of a situation where you were really prioritizing the internal development, prioritizing deleveraging, prioritizing integration of New York Radiology and DIG? What are sort of the factors, valuation, those sorts of things, that maybe led to 2016 being a little quieter and maybe 2017 being a little quieter as well? Thanks.

I think all of the things you mentioned (technical difficulty). We had done some rather substantial acquisitions in 2015 as well as (technical difficulty) perhaps a smaller tuck-in. All of those were important in terms of where we want to be in our various markets but do come at a cost (technical difficulty) from a financial and investment standpoint, but a cost also in terms of the distraction and conversion of our (technical difficulty) internal resources to help standardize the business and platforms that we are on. So we felt that it was both a good idea for us to internally focus our efforts, to be able to facilitate getting (technical difficulty) platforms and rightsizing in our business and acquisitions, particularly in the New York market, as well as to I think be able to demonstrate to the marketplace that our core business has a very substantial cash flow and opportunity to be a major contributor in the markets that we are in and produce financial results as we continue to grow the business and gross margin.

So, I believe 2017 will represent a similar approach to that where the focus will be perhaps on small tuck-in acquisitions that we always wind up looking at, but also to further move the Company into relationships that will be important for substantial healthcare systems (technical difficulty) market, which I believe better positions us for the long-term changes that are occurring in healthcare both from a delivery standpoint (technical difficulty). Again, I think it was important for us to demonstrate the ability of our team to perform and (technical difficulty) guidance expectations as well as better position us for future growth.

Excellent. Thank you for all the color. I appreciate it.

Alan Weber, Robotti Advisors.

Good morning. Dr. Berger, can you talk about -- you mentioned several comments about the New York City integration. Can you kind of quantify, if you look at 2016 and then a full year of 2018 integration, what that really means in terms of EBITDA or cash flow?

We don't generally report regional level participation in the EBITDA. We look at (technical difficulty) but I think the efforts that we make to consolidate in end markets (technical difficulty) the types of equipment that we have available as well as a number of facilities will get us towards the goals that we originally desired when we made the investment there. I ultimately think that New York will be, if not the largest, one of the largest contributors to the Company's overall performance. That in and of itself is quite a statement, given the enormous presence that we have primarily in California.

But get down to specifics at this time is not what we traditionally (technical difficulty). Suffice it to say that I think our growth there and the implementation of the Breastlink opportunity will continue to give us the visibility of patients, payors and health systems there that could create a significant opportunity to (technical difficulty) growth opportunity for (technical difficulty).

Okay. And then can you -- just taking a step back, can you --

Alan, can you speak up just a little bit? I'm having (multiple speakers)

Sure, I'm sorry. Taking a step back, when you look at the specific markets, I realize you don't break out the specific financials of each market, but since they are different, can you just talk, as you look out over the next few years, kind of what you see as some of the positives or even challenges within the major markets you're in?

I think the challenges are not any different today than they might have been in the past. The challenges are that, in all of our markets, our major competitors are really with the hospital systems that we don't have relationships with. All of them fashion themselves in the outpatient imaging business along with the other services that they provide. I think that's unlikely to change, because you can't dance with everybody in the market, and we have to be careful who we choose. For example, in New Jersey, where we were fortunate enough to have a joint venture with Barnabas Health System, we demonstrated both I think in terms of leverage that we (technical difficulty) in that market with Barnabas as well as the ability to grow with them, independent growth, that we've (technical difficulty) has resulted in substantial improvement in that market that we might not enjoy by ourselves.

So, I think our challenges are to find the right partners to do ventures with, and that give us the opportunity to utilize the resource and scale of RadNet along with these systems in more and more reimbursement and value-based models for population health. So, I think our challenge is to find those payors, whether they be insurance companies, self-insured, workers compensation, anybody that feels the need to have a regional strategy, that gives them access and high quality both in terms of professional as well as technical capability, and that, most importantly, are willing to pay thoroughly for the kind of services that we offer. So those challenges, if you will, will be out there, but I think that they have been opened up in different ways that none of us could have anticipated maybe three, four, five years ago with the enormous upheaval that's occurring in healthcare.

So, I think our biggest challenge is to find the right parties to do business with. And I think that could take several different forms. I mentioned we talked about healthcare systems. It could also wind up being some of the payors themselves that will look to RadNet to help them with their ambulatory outpatient strategy in terms of plan design, access, and moving more and more of the business away from (technical difficulty). I think that's a theme that I can't overemphasize enough that has now really been embraced by virtually all the healthcare companies and insurance companies which today are out there that are more and more receptive to this kind of plan design and narrowing of networks, which, in our market, really nobody else has talked about that other than (technical difficulty)

Thank you for that answer. And I guess one more question. What amount or what percent of the volume you do is actually where patients pay, where you receive payment at the time of service?

Are you talking about for the entire exam, Alan, or just a portion of the exam?

Well, you break it out however you think is more relevant.

Today, the vast majority of our patients pay something, either an office visit fee or a copayment related to the fact that they are not either through their deductibles or, if they are a Medicare beneficiary that doesn't have gap insurance, they are paying a 20% copay. So I don't have the numbers in front of me, but I would say probably three-quarters of our patients these days pay something, which is substantially different than it was about 10 years ago when there were far fewer co-pays and office visit fees related to these health plans, which is why we, several years ago, started focusing on creating processes and controls whereby we would be able to effectively collect this patient portion or patient responsibility portion at the site level. And so what we did was we created a national payor database that houses all of our contracts and all of the CPT codes related to those contracts and what our allowed amount is under each contract and each procedure code, and then we licensed a system that allows us to hook in electronically in real time to the individual health plan and both our schedulers at the time of scheduling and at the time of service at the site, the front-office personnel, are able to see where the patient is with respect to his or her deductible or copayment and then compare that to the allowed -- expected allowed amounts for the particular procedure that the patient is there for that day, and we are able to collect the appropriate amount at the time of service. And also there was a significant cultural change at our sites where our operations team really focused and really trained our front-office personnel to collect this amount at the time of service. And there's been a cultural shift within healthcare as it relates to that. It's hard to go to a physician office today without paying something before you leave. So it's been a successful project, and it's why our bad debt has really remained very constant at about 5.5% of our fee-for-service revenue, and we hope to continue that in the future.

Does that mean that number should actually decline over time?

We've kept it stable over the last few years on an apples-to-apples basis, and we think we've done a good job just to keep it stable because, although I can't prove this, I would surmise that, if we hadn't put these systems in place, and today we are collecting about 85% of the patient portion responsibility at the time of service, if we hadn't put these controls in place, I would surmise that our bad debt percentage would have gone up substantially over the last three years.

I was under the impression that some of these improvement on the billing was kind of totally implemented last year, so I thought, going forward, that bad debt percent might actually decline.

Well, I mean it was flat year-over-year, and these improvements were put into place last year. We continue the same procedures. And we are hovering -- we've been hovering now for over a year at about the 85% mark in terms of patient portion responsibility. So, if we can nudge that 85% mark closer to 100%, I think we do have a little bit of an opportunity there.

Okay, great. Thank you very much.

Mitch Ramgopal, Sidoti.

Good morning. Just a couple questions. Again, I know it's early regarding potential overhauling of healthcare, but I was wondering if you think it could have an impact on your -- maybe how much did you benefit on the ACA?

The benefit from ACA, at least in its current form, has primarily been for us in California where -- correct me if I'm wrong -- it's 1.2 million new enrollees have entered the California exchange for health plans. And we've seen a lot of that come through our capitation agreements as well as some fee-for-service (technical difficulty). I don't think, in the other markets that we are in, it is anywhere near as dramatic as it was in California. So, while I think it's a little too early to make any -- draw any conclusions about what changes there might be in the current Affordable Care Act, we have seen a benefit, primarily in California, and I don't see that changing very much into the future regardless of (technical difficulty)

A lot of the -- it's a little too hard to tell because there's various bills sort of and opinions floating around with regards to the Republican plan to repeal Obamacare. There are some positives I think for patients, some negatives. What they're talking about doing is putting more of the onus, the financial onus, on the state plans, specifically the Medicaid plans. California tends to be a fairly -- and this is an understatement -- fairly liberal state, so we don't see, in California, the state taking away benefits or coverage from the 1 million-plus folks who joined these either state run or privately run exchanges.

So, I think, no matter what, we are either --w e are fine regardless of what happens to Obamacare and -- but we are watching it very closely. They are now talking about tax incentives or tax rebates based upon age with respect to healthcare premiums. They're talking about expanding the cap on consumer health savings accounts, which obviously would help patients. So, there's lots of discussion out there that seems to be positive for patients, seems to be potentially harmful to patients. And I think it's going to shake out however it shakes out. Regardless, we are fairly confident and comfortable that imaging will remain a major part of the healthcare delivery system for all of the reasons why imaging has been growing over the several decades. We're talking about the aging population, the growing population, the technology advances that have driven new applications, and the medical indications in imaging where there's been a much greater acceptance from patients and from referring physicians regarding the efficacy of imaging. There's a focus on early detection and diagnostics of disease, of preventative medicine. Imaging falls squarely in line with where healthcare is going. So, I don't think -- regardless of what happens with the reform, I think we are going to be in a good situation.

Thanks, that was really helpful. And then just quickly regarding the guidance and the increase in adjusted EBITDA for fiscal 2017, are you factoring any benefits from the integration efforts, and also maybe from the IT or cost-saving initiative, or is that more a 2018 story?

Yes, we started our integration immediately. And Doshi, the Diagnostic Imaging Group which we completed in October 1, 2015, was really where our focus lied. And so we've been integrating those operations really for a year and a half now. And I think, by the end of the second quarter, most of our work in New York should be substantially done. So we might see some benefit in 2017 as it relates to that.

IT as well, we've been really involved with a three-year process to integrate the eRAD (inaudible) PACs among all of our 305 centers. So, that benefit has been ongoing and there might be a little bit of benefit in 2017 versus 2016, but there's not much of that built into our guidance.

Okay. Thanks again for taking the questions.

Keith [Rose], CCG Capital.

Thank you. Mark and Howard, thanks again for the time here. Guys, maybe you could speak a little bit about capital allocations and specifically your thoughts about your own stock. As a stockholder, it gets frustrating to see RadNet stock trading at a 15% plus free cash flow yield. And I just wonder, in terms your equity return on investment, if you think you're seeing better investments elsewhere, and really how you view using excess capital and free cash flow to buy back the stock.

Speaking as the largest shareholder, it is frustrating. I think there's a lot of noise that always goes on in the marketplace, whether it's general market conditions or specifics to healthcare, that we have no control over.

Howard, if you compare your stock price performance to Alliance's over the last five months, there's no comparison, right?

There's no comparison because the majority --

You've done much better.

(multiple speakers) shareholder has offered to buy out the rest of the shares at a premium to where it's trading. There is no longer a comparable at any level, given that they are the process of being taken (technical difficulty)

I'm just saying the multiple that they are being offered is basically the same multiple that you're trading at today. Sorry, it's above your multiple today, right?

Right.

So you would be able to acquire stock or capital (inaudible) your float today at a price cheaper than what they are taking their company privately.

Right. We keep all of our options open. Our credit facility does allow the Company to buy back shares (technical difficulty) chosen to do that at this point, but the board is always able has that as part of their consideration. If we feel that the market (technical difficulty) my goal has been to build the Company into a major healthcare provider, which I believe that we have. And whether some of the overhang we talked about or general market conditions or concerns about new healthcare initiatives or replacement and the repeal of Obamacare, these are things that we really don't have control over. I'm confident that the value to the shareholders there will be recognized as long as we continue to perform in a way that meets the expectations and the guidance (multiple speakers)

So can you share some of your thinking then? At what free cash flow yield would you consider buying stock back, would you consider sort of a no-brainer to the Company to purchase stock back at?

I don't think we've gone through that kind of an analysis. There certainly will be or can be one if we would look at it. I think it's also a function of whether it's better to deploy the cash to buy back stock or to continue to invest in our core market and be able to benefit substantially by the arbitrage, whatever our trading multiple is versus that which we require. So there's always that choice. We are in that kind of an enviable position where I believe that, even though our multiple is lower than where we'd like to see it, and has room for upside growth, we are able to acquire half of that with substantial assets that help deleverage the Company and improve our performance. At the end of the day, that decision (technical difficulty)

So when you are buying these assets, are you able to achieve returns on investment of higher than 15%?

Yes.

And by definition, if you are buying something at four times EBITDA, you should have a four-year payback or a 25% return on your investment, and we are able to do that. And while we are able to do that, we are able to deleverage the business. And obviously, every dollar theoretically of debt paydown is a dollar that inures to the benefit of the equity. So we are striking -- we are trying to strike a balance here of deleveraging, expanding the business, protecting the business from contracting or creating contracting leverage with private payors as we continue to grow the business and creating value along the way. The board has contemplated share buybacks, will continue to contemplate share buybacks, but it's a balance, as you said, of capital allocation and an arrow that we have in our quiver.

I would encourage you to consider look at purchasing your own stock as a chief asset. The benefits that could inure to your ability to buy other things, Mark, you know the benefit still. I think it's worth a deeper discussion at the board level.

Thank you. We will definitely take that under consideration. Thank you.

Ladies and gentlemen, with no further questions in queue, I'd like to turn the conference back over to management for closing remarks.

Thank you operator. Again, I'd like to take this opportunity to thank all of our shareholders for their continued support, and the employees 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 (technical difficulty). Thank you for your time today and I look forward (technical difficulty)

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