Pediatrix Medical Group Inc (MD) 2002 Q3 法說會逐字稿

Ladies and gentlemen.

Thank you for standing by.

Welcome to the Pediatrix Medical Group 2002 third quarter investor conference call.

At this time, all participants are in a listen-only mode.

As a reminder, today's conference call is being recorded.

Before I open up the call to Pediatrix's senior executives, I want to read a forward looking advisory statement.

Matters discussed during this conference call include forward-looking statements.

All statements other than statements of historical fact that address activities or events that Pediatrix intends, believes, or anticipates are forward-looking statements.

Forward-looking statements are based on management's current beliefs and expectations and are subject to various risks and uncertainties that do cause actual results to differ materially from these -- from those contemplated by the forward looking statement.

Pediatrix describes these and other risk factors in on its annual form 10-K for the year ending December 31, 2001, filed with the U.S.

Securities and Exchange Commission.

Pediatrix has no obligation to update any forward-looking statements made during this call.

At this point I would like to remind you that following remarks by Dr. Medel and Mr. Wagner, Pediatrix's management will hold a brief question-and-answer session.

I would like to turn the conference call over to the host.

Dr. Medel.

Go ahead, sir.

Thank you for and thank you thank you for joining ours conference call this morning.

Our results this morning exceeded our guidance as well as the expectations of analysts that follow Pediatrix.

We earned a net income 19.4 million or 73 cents per fully diluted share.

Cash flow from operations of $35 million was far in excess of reported net income.

An important indicator of the quality of the earnings that we posted this morning.

Same unit patient volume exceeded our historical range of 3 to 5 percent.

And through nine months now is on track for our annual guidance.

Overall, this was a very solid, very impressive quarter.

Our chief financial officer, Karl Wagner will provide a detailed review of our quarterly results and will introduce earnings guidance for 2003.

Before I turn the call over to Karl, I want to talk about our optimism for continued growth and operating efficiencies at Pediatrix.

During the past two years we have reported significant improvements in our core operations.

EBITDA margins for the most recent quarter were 26.8 percent, up significantly from the mid-teens just two years ago.

I am deliberately making reference to that time period two years ago when our operations were being negatively impacted by state investigations, our cash collections were down and DSOs had spiked.

It was at that time that we decided to make an investment in regional offices and to reorganize our back office to be more closely aligned with our clinical operations.

At the time, regionalization brought with it expenses that hurt our performance short-term.

But as you know, we never operate at Pediatrix with the short-term.

Two years later, the decision to proceed with the regional presence was one of the best things that we could have done and may be directly attributable to the ongoing operating efficiencies at Pediatrix.

Today we have improved interdepartmental communications and managed care contractors are working better with collections people to ensure that we are paid according to the terms of our contracts.

For some time now, the positive results of regionalization have increased cash flows.

For the past two quarters we have seen significant income statement improvement in the form of better leverage from our general and administrative expenses.

By right-sizing our operations two years ago we're now able to grow EBITDA and net income faster than our revenue growth.

I mention all of this because we are at a point where some people are concerned about our ability to sustain our growth objectives.

In a 400 million-dollar company, the law of big numbers works differently than when we were just an 80 million-dollar company six years ago.

We're facing a lull in our pace of acquisitions.

In fact, we're meeting our 2002 earnings through accelerated same-unit growth rather than through acquisitions.

There is no particular reason for this lull, but only issues that are specific to transactions that are in our pipeline.

We are optimistic that we will resume our pace of acquisitions in the near future.

At the same time, we will start to look at new platforms for growth.

We have a very talented management team that has the capacity to take on new challenges.

We are taking a very cautious, very calculated look at new growth opportunities, but I want to assure you that any decisions will be made in the style that is consistent with the decisions made two years ago to regionalize our operations.

We will explore opportunities that build on our core competences, both clinical and administrative and are within areas where we can add value.

I want to shift gears for a minute now and provide a brief update on the request for information made by the Federal Trade Commission last June.

On the second quarter conference call, I mentioned that there was not a lot of information that I could provide.

Unfortunately, this morning's update will not be any more comprehensive.

We have submitted extensive documents that are consistent with their requests, and we intend to continue to cooperate with the FTC.

We expect that the commission is in the process of reviewing that material, and so there's no way that we can speculate on how and when this matter will be resolved.

Pediatrix is a national group of physicians.

We are investing significant funds in research, education, and clinical quality initiatives that improve patient care in our communities.

Our physicians are employees of Pediatrix and our affiliated professional corporations and we are fully integrated clinically, financially, and operation ally.

These will be important things for the commission to consider as they proceed with this inquiry.

What is important and born out in today's numbers is that we continue to operate our business in the ordinary course.

We have not been distracted by this inquiry and we will not be distracted.

We will continue to focus on improving the quality of care in the communities that we serve while achieving operational efficiencies.

At this time, I would like to turn our call over to the CFO, Karl Wagner for a review of what was an excellent quarter.

Karl?

Thank you.

Good morning.

As Karl mentioned we had a great quarter.

Ref ridging our back office to surpass our previous earnings guidance, generate record cash flows and maintain a very strong virtually debt free balance sheet.

I'm pleased to report that the fundamentals of Pediatrix have never been stronger and we're optimistic in our ability to maintain strong revenue and profit growth.

We successfully complete add previously announced stock repurchase plan on the open market, using $50 million of our cash reserves to purchase almost 1.7 million shares of common stock.

We continue to generate strong cash flows and have adequate access to capital to execute our business strategy.

I want to introduce our specific 2003 earnings guidance in a few minutes.

First I want to walk you through the highlights of the most recent quarter.

As a reminder, all of 2002 Pediatrix results have been positively impacted but a change in the accounting has eliminated goodwill amortization.

For purposes of comparison during this call, I will refer to the 2001 results as corresponding change to our effective tax rate had been in effect during 2001.

This will provide an accurate comparison of the improvements we made to our fundamental operations.

For the 2002 third quarter net patient service revenue was $122.5 million, an increase of 19.2 percent from a year ago.

Revenue growth was due to a number of factors.

Many of which can be attributed to the investments we made several years ago to streamline our contracting, billing and collections accounts.

This morning's earnings report includes contributions from continued strong revenue growth.

Same unit revenue grew 14.7 percent for the 2002 third quarter.

This consists of 5.8 percent from same-unit NATAL U patient volume and 9 percent from improved reimbursement for patient services provided.

The improved reimbursement has come from better managed care contracting, improved collections on commercial pairs and the impact of the increase in the second half of last year.

This strong, same-unit revenue growth contribution is sourced from across our organization and is not concentrated in any markets or geographic regions.

As important, for the first time, units that were part of MAGELLA Healthcare corporation are now included in our same-unit calculations.

Same-unit growth without the MAGELLA practices would have been the same to slightly higher than we reported this morning.

Continuing with an income statement discussion, profit after practices was $53.3 million up 17 percent from the prior year.

Margin was 41 percent, down 78 basis points from the third quarter of 2001.

This decline is directly attributable to our increased physician bonus expense as we share our growth with our physicians.

In 2001 we instituted a new physician bonus plan under which practices meeting certain criteria could share in the future growth of the practice.

This plan has been very successful in driving practices to look for growth opportunities.

In addition, we have seen a significant increase in our malpractice insurance expense as we continue to contend with the hardened insurance market.

EBITDA for the most recent quarter was 32.8 million, up $25.-- 25.7 percent from 26.1 million a year ago.

EBITDA was 26.8 percent for the most recent period, up 138 basis points from the 2001 third quarter.

The improved margin reflects our ability to hold down G&A costs as we continue to grow.

For the quarter, G&A expenses as a percent of revenue were down 217 basis points when compared to the third quarter of 2001.

The 2002 third quarter operating income was 31.3 million up approximately 26 percent from an adjusted 24.7 million for the 2001 third quarter.

Operating margin was 25.5 percent for the third quarter of 2002, up 150 basis points, MAGELLA operating margins for the third quarter of 2001.

We saw a reduction on the marginal tax rate of 100 basis points, for the quarter the effective tax rate was 38 percent.

We expect the lower tax rate to remain in effect for the foreseeable future.

Net income of 19.3 million for the 2002 3rd increased by 30 percent from adjusted income of 14.6 million in the 2001, third quarter.

Earnings per share was 73 cent based on a weighted average of 26.4 million shares outstanding.

This was positively impacted by approximately 2 cent per share due to our share-repurchase program which we had included in our guidance for the quarter.

This 73 cent EPS compares with adjusted EPS of 57 cent based on the 25.7 million shares outstanding in the 2001 third quarter.

Our income statement for the three-month ended September 30, 2002 reflects continued operating improvements that we have been discussing for some time.

We are achieving our stated goals of growth with margin expansion.

At this time, I would like to touch on the highlights of our balance sheet which remain very strong.

We continue to generate significant cash during the third quarter.

Ending the period with approximately 31.4 million in cash even after completing the $50 million share repurchase program.

During the quarter we bought slightly less than 1.7 million shares in the open market at an average price were share of $29.55.

Even following this repurchase, we are confident that we have sufficient capital to execute our growth plane.

In addition to our remaining cash, we have a 100 million line of credit facility with no outstanding balance.

To continue on the balance sheet discussion, accounts receivable were 75.6 million, which increased slightly during the quarter primarily due to the significant growth in revenue.

Our day sales outstanding remains below 60 days.

On the liability side, the increase in the accounts payable is primarily attributed to accruals in our physician bonus program.

These bonuses are paid out in the first quarter of the following year.

This bonus program provided a real incentive for physicians at many of our practices to participate in the growth of their practices.

In addition, this liability includes significant accruals for 401-K pay matching costs and our liability for incurred but not reported malpractice claims.

As we mentioned before, we're going to be virtually debt free with long-term debt of approximately $2 million.

Cash flow from operations reached a new quarterly record of $35.7 million.

This compared with capital from operations of approximately $30 million for the 2001 third quarter.

As we have discussed in the past, cash flow accelerates in the second half of the year, once physician bonuses and significant payroll taxes are paid.

Year to date cash flow exceeds $66 million and we're on target to hit the $80 million target for the entire year.

During this quarter, we sent $6.7 million to purchase a physician group practice and had capital expenditures of $2.3 million .

At this time I want to spend a few minutes on earnings guidance for the fourth quarter and for all of 2003.

I need to remind you these statements should be considered forward looking.

For the fourth quarter 2002, we expect earnings per share between 71 and 73 cents.

We expect the fourth quarter volume will drop slightly from the levels in the third quarter which would be consistent with prior years.

For 2003, we expect earnings per share between 3.10 and $3.20.

The assumptions behind the guidelines are unchanged from last year.

We expect 3-5 percent same unit revenue growth from increased patient volume and another 3 to 5 percent same unit revenue growth for better reimbursement including better contracting and better collections.

Included in this is a slight impact from a modest price increase, which will be implemented on January 1, 2003.

We believe that we should have a process where we evaluate our fees on an annual basis and make appropriate changes.

In addition to the same unit growth, we are budgeting for investments of 40 to $50 million in physician group practice acquisitions spread throughout the year.

While we have only completed approximately $26 million in acquisitions year to date, we believe we can improve upon these levels going into 2003.

I'm sure some of you have noticed we have not including any growth from coding changes.

We have done a significant analysis of the January 1, 2003 coding changes implemented by the American Medical Association through their CPT book.

While the AMA, the American Academy of Pediatrics has simplified the new natal critical care coverage it intensified the level of critical care services which had not previously been established.

Based upon our analysis we do not anticipate any significant impact, positive or negative from this coding change.

In other words, we believe we will reach our financial targets without any benefit from changes in coding for our physician services.

As I provide this guidance, I want to remind you of the seasonality to our revenues and expenses.

First the revenues.

It's a large portion of our patient's services, revenues consist of bundle day charges for patients in the NATAL U. Revenue is lower in the first part of the year.

There are only 90 calendar days in the first quarter. 91 in the second.

And 92 for the third and fourth quarters.

Since most of our expenses are allocated monthly, fewer billing days has a seasonably negative impact on earnings per share.

On the expense side, our employer-matching contributions to the FICA payroll withholding tax is weighted to the first half of each year and particularly the first quarter.

Most of our physicians meet that tax requirements by the middle of the year.

So second half margins and EPS is always higher in the first half.

These items are simply -- and people who followed the company over time, this is not new.

When we provided our earnings guidance, we are including certain assumptions for expenses.

Last year, we predicted an increase in our total medical malpractice expense.

This year we're also forecasting a significant increase in medical malpractice, we are seeing nothing on the horizon in terms of legislative or regulatory relief.

And a number of carriers willing to underwrite these policies is declining.

I want to spend a few minutes discussing the shift and how we will go forward with risk management.

As I discussed last quarter, we established a captive insurance company to self-insure a portion of our medical malpractice claims.

At this point we have own taken a low risk in capital and maintained a primary insurance policy to cover any significant claims.

As we look forward, we are resuming several alternatives, which may include a significant increase in the level of claims that we are willing to insure through our captive and maintain at an appropriate level of aggregate loss coverage.

While, we're not scheduled to renew our policy until May 1, 2003, we have already begun the process of reviewing our options and working with our broker on the evaluation of reinsurance options.

As we move forward, we will keep you informed as to the direction we take on malpractice insurance.

At this point I would like to turn the call back to Roger.

Thanks, Karl.

As you can see, this was another very solid quarter.

We continued to grow our business and operate it more efficiently.

And the introduction of 2003 earnings guidance should create better visibility for investors seeking comfort in our ability to continue to generate solid revenue and earnings growth.

Let's now open up the call to questions from analysts and shareholders.

In addition, Kristen Bratberg is available to answer your questions.

Operator, if you would please open up the call.

Ladies and gentlemen, if you wish to absence the question, please press 1 on your touchtone phone.

You will hear a tone indicating you have been placed in cue.

You may remove yourself from cue by depressing the pound key.

If you are using a speaker phone, please pick up your hand set before pressing the numbers.

One moment please for the first question.

Our first question comes from the line of Matt Ripperger of J.P. Morgan.

Go ahead

Just a few questions.

First of all, I wanted to see if you could give some color as to any initiatives that you have to increase the number of new neonatalists coming out of school entering into your program.

Secondly, I wanted to see if you would give more color on the price increase you're getting from commercial pairs for 2003 in January and how you arrived at that price increase.

Well on the neonatal side, Mark, we do have some initiatives that we have put in place to try to recruit more neonatalists.

Their basically consistent with providing the neonatologist in training with some financial health while they train.

Once you finish medical school and go into your residency and fellowship training, you do get paid fort training but it's in the range of $20- to maybe $30,000 a year.

We are helping some of the fellows financially in exchange for a commitment from them ahead of time to join Pediatrix, and that program has been, I'll say, very successful in the short period of time that we have had it in place.

Chris, do you want to talk about that?

This is Karl.

As far as the price increase, it's not a price increase just for commercial pairs.

It's a price increase we will establish through our fee schedule.

Some of it will be based upon the changes in services provided by the new coding but primarily we're leaking at our fees for all of our services, what we're seeing as cost increases and putting in a modest price increase.

The expectation is, for the most part, we will only see any flow through on the commercial -- what we call non-contracted payers.

And we've been very conservative on anything we've built in on that, going forward in 2003.

Is hat a nationwide increase you're building or specific regions

It will be across the country is our expectation

Is the 3 percent included in the better pricing for 2003

A minimal expected flow through is expected for that.

The last question, if Chris can talk about acquisition multiples and if you're seeing any change in the multiples that you have paid?

No, we're not seeing any expansion in the multiples.

As you know, No one else is out there competing for acquisitions and trying to roll up neonatology nationally, so we're not -- we have always been very disappointed in our pricing and we will continue to be.

Our sense is that, you know, while we haven't done as many deals this year as we would have liked and set out to do, it's not a function of price.

So, you know, that's not what -- we're not going to be just throwing more money at these practices.

And the multiple range we're talking about?

It's the same as it has always been.

We will pay up to four times a proforma EBITDA number.

We will try to get them for less than that if we can.

But that's kind of the cap that we will pay.

Great.

Thanks very much.

Our next question comes from the line of John Szabo of CIBC World Markets.

Go ahead:

Amy Mulberry (ph): This is Amy Mulberry on for John.

If you can repeat what the same store unit revenue gross was for the quarter?

Same store was 14.7 percent.

Amy Mulberry (ph): And the volume and the increase reimbursement.

5.8 percent was from volume.

Amy Mulberry (ph): Great.

On the acquisition a little bit, can you comment on what hat caused that?

I mean, the FTC situation caused a delay and when do you see that recovering?

Amy, we really don't believe the FTC inquiry is a cause of the slower pace of acquisitions.

I mean, that's something that we have given a fair amount of thought to.

Because, as you know, when we first announced the Medicaid billing investigations, that really did shut the acquisition program down.

But it also had the potential of putting our physicians at risk.

And the FTC inquiry really doesn't do that at all.

We pay cash for acquisitions.

And, you know, once a deal is closed, the physicians have that cash.

And, really, it's hard to envision a scenario where, you know, that those physicians who joined Pediatrix are -- we really don't think that has been a cause for it slowing down.

We had really expected that once Colorado was settled successfully that the pace of our acquisitions was going to pick back up a lot faster than it has.

And that has not occurred.

We don't really have an answer -- a specific answer to your questioning, you know, a specific reason in why we haven't been able to ramp up the pace of our acquisitions.

Just that we can assure you that it will get a lot of attention internally.

We do want acquisitions to be a driver of our growth going forward.

And we're going to work hard to make that happen.

Amy Mulberry (ph): And then you wouldn't -- so you wouldn't say that internally that you made a decision to back off in acquisitions given the FTC inquiry?

No.

Absolutely not.

We're operating our business in the ordinary course, and that includes pursuing acquisitions.

Amy Mulberry (ph): Great.

Thank you very much.

Four next question comes from the line of Ken Weakley of UBS Warburg

Justin Lake (ph): Good morning.

This is Justin Lake for Ken Weakly.

Can you give us break down in the increase of revenue growth that is coming outside of obviously the volume increases between, let's say, pricing, improved collections, and better coding?

As far as the growth, none of it came out of coding.

It has been consistent over the last couple of years and we haven't seen any change in the coding practices of our physicians.

And I would say the rest of it really comes from, you know, better contracting.

It's probably close to half of it comes from the price increase from a year ago, and the others is just more attention on our collection process and better managed contracting.

Justin Lake (ph): Great.

Any comment on the revenue growth you're seeing from your hearing screenings and the well-baby programs?

We have not historically broken out those revenues, those numbers, Justin.

We are very pleased with the growth, especially of the hearing screen program.

At some point, we probably will consider breaking the numbers out for that program, but we haven't done that yet.

Justin Lake (ph): Great.

And two more quick questions.

One, is there any report on any headway you might have made to gain presence in the academic centers?

No, nothing to report.

We have had discussions with academic groups.

That's actually been going on for years.

And with the exception of the one program that we manage for Texas Tech in Lubbock, we have not been successful in working with academic centers.

One thing we talked about internally and we may consider doing at some point in the future is unbundling our services and changing our model for the academic centers.

But we're not -- we are not poised to do that at this time.

Justin Lake (ph): One last question on just kind of a housekeeping matter.

Are all of the practices, are all of your practices right now participating in the bonus plan or do any still have to be transferred on that?

Karl can give you the exact number.

It's important to understand we will never be in the position where all of our practices are on the new bonus plan because they have to be with us for a period of time before they qualify.

Justin Lake (ph): Okay.

So the percentage will increase over time, and it has been increasing.

But it will never have all of our practices on it at once.

Under the bonus program -- there is a bonus program for practices that aren't under our profit-split program based on the threshold.

There's an incentive for them to do some things but not above a 50/50 threshold.

Close to three-quarters of our practices are actually on the 50/50 bonus program at this point in time.

Justin Lake (ph): Okay.

And can you give us an idea of how many are likely to be transferred onto it in 2003?

Actually, I haven't looked at it from that standpoint.

I would say close to half of the remaining would probably do that.

Now, we have given some the option to switch or stay with their own program, and some of them have opted to stay with their old program, so they wouldn't switch.

But I would say half of what is left would go so we might get up to 80 percent, 85 percent.

And as a matter of course as we provide practices, that will work the percentage the other way.

Justin Lake (ph): Absolutely.

Thank you very much, gentlemen.

Thanks, Justin.

Our next question comes from the line of Bill Bonello of Wachovia Securities

I actually have a handful of questions, if that's okay.

I want to clarify so I understand your disclosure on the income statement correctly.

EPS would have been .76 cent without the nonrecurring expense item, is that right?

I'm sorry, Bill.

I don't understand your question.

You said that the income -- maybe I read that incorrectly.

But on the income statement there's a footnote that says, 'September 30, 2002, G&A for September 30, 2002 includes a $1.3 million settlement expenses.'

Was that supposed to be 2001?

No.

That was 2002.

That was That was the first quarter where we took the charge for the settlement in Colorado.

I wondered where that was coming from.

Okay.

And secondly, the share count was down by about $1.1 million sequentially.

Based on what you bought, should we assume that it kicks down another 600,000 or so next quarter, or are there other factors that offset that?

There are will be factors to offset it, as you know.

When you go into it the share price factors into it.

Right now, our estimate is at -- we will be probably right about 26 million shares outstanding for the fourth quarter, so roughly in that area.

Can you give us any sense of how much incremental revenue you will get in 2003 from acquisitions from the revenue from acquisitions that were done in 2002 but that revenue was not booked in 2003, so how much rollover revenue?

We probably expect $6- to $8 million in revenue to come in from those acquisitions.

And I get this might be a question for more Chris, but your confidence in the acquisition outlook going forward; that based on visibility into acquisitions that you're working on and you sort of know are you going to be closing sometime soon?

Or is that more a reflection of your confidence that you can just do a better job on the acquisition front next year?

It's a combination of both those things.

Bill, I would also say another factor that important is just our understanding of the marketplace.

You know, there are about 50 percent or so of the market is represented by local practices that would be acquisition candidates for Pediatrix.

We know who they are.

We have worked hard over the years to develop relationships with these people.

We maintain a database on all of these practices, and we try to meet with them, market to them.

And most of those practices were formed in the late 1970s and early 1980s when neonatology emerged from the university setting and most of those practices are still owned by the physicians that founded those practices.

So you can do the math.

They're in their late 50s and early 60s.

And we believe when those people think about any type of exit strategy or slowing down or retiring, you know, they really have two choices but only two choices.

One is to retire, and to hand their practice over to their junior associates.

You know, they typically don't even receive the value of the receivables.

They just retire.

The other alternative is to sell to and join Pediatrix.

And we -- we believe and continue to believe that that is just such an obvious choice for a lot of these groups.

So that is -- that also an important factor, and, you know, we think that with a little bit more focus internally on it that we will -- that we will get it moving again.

All right.

Thanks a lot.

Our next question comes from the line of Mark Aliancy (ph) of Alliance Capital.

Please go ahead.

Mark Aliancy (ph): Hi.

A question on the coding changes.

Starting at the beginning of the year, I was under the impression 99297 was being eliminated in place of either a new code, 294 or using 99296, which carried almost $200 higher reimbursement.

And you mentioned prior that you didn't expect any positive effect of the new coding.

Could you explain why there wouldn't be a positive incrementally effect from the coding changes?

Sure.

Our comment that we didn't expect a significant swing one way or the another was because really we're commenting on the net effect of all of the changes.

Several changes will be effective on January 1.

The one that has gotten the most attention is one that we think will positively increase our revenue and that is the 9-7 being folded into 9-6 and there's a higher level of reimbursement for the 9-6.

That standing alone is a very positive change for all neonatalists.

Unfortunately, there are other changes that will be effective on the 2003.

The best way to describe them is, there's a new level of care that is being established and defined by the AMA CPT book which is the coding manual that all physicians use throughout health care.

And the other is a book that the American Academy of Pediatrics puts out to help Pediatricians and Neonatalists interpret what that CPT book says.

Both books describe not critical care but intensive care services and the effect of that, which it describes, will take some of what used to be coded at 9-7 and put them into a handful of other codes, 9-9 and 9-8 code and it will reduce the overall number of critical care codes that we use.

And the net effect, we believe, after doing a fairly extensive analysis of our coding, and based on these changes, you know, there will be no significant impact one way or the other.

Mark Aliancy (ph): Thank you.

And secondly, Perinatologists, are there more opportunities in acquiring Perinatology practices than there are in Neonatology at this point?

Far more in Neonatology, Perinatology is younger and it's still emerging from the university setting.

Neonatology has been in private practice longer.

Perinatal, there are fewer private practices to acquire.

Also importantly for pediatrics, we're not necessarily interested in going into new markets by acquiring Perinatal practices.

We want to operate Perinatal practices in markets where we have neonatal practices so that limits the growth somewhat for us in perinatology.

Mark Aliancy (ph): Thank you very much.

Our next line comes from the line of Leo Murphy, private investor.

Go ahead.

Good morning, can you hear me?

Go ahead.

Good quarter.

I think the number was thrown out earlier, that if I heard it correctly, same store unit growth was the same with MAGELLA and without MAGELLA, is that correct?

Actually slightly better.

If you look at the markets where you had the peri and neo's was it very different?

Our growth was across the board.

There's nothing specific that says in the peri markets there was more growth than markets without peri.

It would be market to market.

All right.

Let me move to have somebody comment -- maybe you would like to, Roger, on the strategy issue going forward.

I'm curious.

You have had a slow down and you have talked about it in terms of your acquisitions.

Let me assume that basically the slow down in your acquisitions conditions for the next couple of years.

You have talked about how there's not a whole lot going on, I think, at the university level with that program that is new anyway that you want to talk about.

So what other areas -- ideas, strategies, do you guys have in mind to build out the organization if in fact your pace of acquisition has slowed here for an extensive period?

What do you do with that cash?

Well, first of all, let me say, this was tough year for everybody.

I think we -- I would like to think we're doing pretty well, given the overall state of the economy in general and the fact it has been a tough year.

We're optimistic that is not going to repeat itself, at least not for Pediatrix.

I think there are a lot of opportunities in neonatatology.

I look and I have a report with all of the practices out there.

There are a ton of practices out there the that we would love to bring in as part of Pediatrix.

So I would, by no stretch of the imagination, have given up on our ability to grow, you know, on the neonatetology sigh.

I'm more optimistic about the academic centers than Chris was a little while ago when he answered the question that there will be opportunities in academic centers.

It takes time to develop those relationships and to overcome some of the hurdles that have been there for a long time.

But, you know, as I look at, you know, what progress we make, and I measure progress in terms of our ability to get in and even have conversations with academics.

It will be slow to down, but we can get there.

And then there are other opportunities for us.

I don't know that we're specifically looking at anything right now.

We will, just as a matter of due course, we will look at, you know, whatever else is out there that we believe makes sense, we believe has the strategic fit, and, you know, and we believe we can add value to.

And those are opportunities that we will be looking at.

But, you know, right now today, there is -- there's nothing that we're seriously looking at outside of the field of neonatology or perinatology.

Would you say within the core multiple perameters that you stayed in for the past.

For neonatal?

Are they more expense to get into?

It's hard to answer that question without talking specifically about a situation.

We had gone above that multiple -- for example, when we acquired MAGELLA, we paid a higher multiple for that.

We proved it was very worth it.

That's a good point.

I will let it be.

Can I ask you one last question and let you go.

You all get a chance to step up to the plate again.

EBITDA projections in terms of margins, do you want to he give me some flavor as to where you think the operating margins or EBITDA are going to be a year or so down the road or what have you build into your assumptions for the 310, 320 year for next year, please, on EBITDA.

I don't have specific projections for next year on EBITDA margins.

But as we've consistently said, if we look for the nine month EBITDA margins its 24.8 percent.

Our plan is to continue to expand that and continue to leverage our infrastructure throughout the country to improve our EBITDA margin.

We expect that will come up and we -- when we have a fourth quarter, because of third and fourth quarter, our margins will come up again for the year, at 26.8 for the third quarter, that was very strong.

We will continue to grow.

We fully expect that.

We have said in the past we like to see it get up in the next few years to the high 20s and that's still our target.

Thank you.

Ladies and gentlemen, once again, if you do have a question or a comment, please depress the 1 on your touchtone phone at this time.

We do have a follow-up question from the line of Ken Weakly.

Please go ahead.

Thank you.

My question has already been answered.

Okay.

Are we done?

Are there anymore questions, operator?

Yes, sir.

We have a question from the line of Angela Sanfilipo of Piper Jaffrey.

Please go ahead.

Good morning, guys.

I wanted to go back to the volume growth, the 5.8 percent.

I'm wondering if you saw anything unusual that was driving that in the quarter?

Obviously that's a pretty significant swing from what you reported last quarter.

And we would have probably thought that MAGELLA contributed to that, but it sounds like it really didn't.

Is there any other color you can give us there?

Well, MAGELLA did contribute.

I mean, MAGELLA had strong growth but we also had strong growth in the non-MAGELLA practices throughout the country and it wasn't that big of a difference between the two.

There's nothing specific to point to.

You know, historically we have had swings quarter to quarter, ups and downs much this is probably one of the best quarters we have seen in overall volume growth.

But there are swings, and we expect, you know, you're going to have low quarters and high quarters and we expect to end the year in the 3 to 5 range that we typically have put in the guidance and we have typically seen.

There's nothing specific that we saw in the third quarter that, you know, made the number jump up.

Okay.

And then do you have a preliminary cash flow estimate for 2003 if we wanted to start thinking about where operating cash flow might stick out?

We haven't gone into specifics on the capital side for 2003 at this point.

What we have done historically is at some point in -- in the not too distant future we have given a little more detail for the upcoming year, and we will do that again this year.

Historically we have included guidance on cash flow.

At that point.

Thank you

We have a follow-up question from the line of Leo Murphy.

Please go ahead.

Thanks again.

I was trying to understand something you said earlier.

Somebody mentioned the split at the local practice level with the doctors.

When you reach a certain level, what was -- what was the percentage split again?

For most of those practices, I don't, it's a 50/50 split above a certain level of profitability.

Here is my question.

If I'm a doctor group either within that group that's in the accrual program now or about to go into the group this year, which sounds like the majority of your practices, and the FTC comes to me, I'm trying to figure out from the doctor's end in that practice what is to my gain to leave you guys in I have somebody that is being a pain on the administrative side and I'm either in a profit pool or about to go in one and now the FTC is asking me to get out of that pool.

I mean, what am I missing?

Putting FTC aside, we provide an environment that they want to be part of.

And they stay with Pediatrix.

The FTC has not alleged that we have done anything wrong or need to change the way we operate.

I think it's important to understand that.

You know, if you wanted to just speculate and say, you know, what would happen if the FTC tried to force us to spend some practices -- to spin some practices off somehow, you would have to assume there was a buyer, and we don't know of any right now, and it would be especially difficult for someone to get comfortable to buy one of these practices for exactly the point you're making, because, you know, no one can force these doctors to work for them.

Yeah.

I mean, it just strikes me if I'm in that group why basically can't I work out another arrangement with your guys in.

Yeah, I think the basic point is that our doctors, you know, by in large stay with pediatrics.

Whether the FTC or Medicaid or whatever.

They clearly appreciate being part of a group and enjoy what they're doing and, you know, that's been our history for 23 years.

I was just thinking of the clinical background you can provide to them anyway.

The outcomes.

Anyway, I appreciate it.

Thank you very much.

Gentlemen, there are no further questions at this time.

Please continue

Thank you, operator.

If there are no further questions, then thanks to everyone for joining our investor relations conference call this morning.