Pediatrix Medical Group Inc (MD) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Pediatrix Medical Group 2002 Q4 Investor Conference Call.

At this time all participant lines 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 management team, 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, expects, 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 could cause actual results to differ materially from those contemplated by the forward looking statement.

Pediatrix describes these and other risk factors in its annual report on form 10-K for the year ending December 31, 2001 filed with the US Securities and Exchange Commission.

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

At this time, I would like to remind you that following remarks by Mr. Kris Bratberg and Mr. Karl Wagner, Pediatrix Management, will host a brief question and answer session.

I would now like to turn the conference over to the host, Mr. Bratberg.

Please go ahead, sir.

Good, morning.

Thank you for joining our Investor Relations Conference Call this morning.

This is the first time that I will be hosting this conference call in my new role as Chief Executive of Pediatrix.

As announced last May, we completed a three year transition to the CEO over from Roger to me on the 1st of this year.

I am very pleased to be addressing you this morning as we report another strong quarter.

In the past two years, I have made a very deliberate effort to meet with many of you as shareholders at the formal investor conferences and in visits to your offices.

During that time, we have been executing our strategy, growing our core business and achieving significant critical and operational efficiencies.

Our Q4 results speak to the continuation of a very positive trend and we remain very optimistic about our future.

I mention all of this to provide assurance that there have been no changes to Pediatrix's strategy or in our approach to delivering value-added services to our physicians and our patients, our hospital clients, third-party payers and of course, our shareholders.

Roger is a close friend and we all look forward to continuing to work with him in his role as Chairman for many years to come.

In fact, he is sitting here in the room with us right now.

This morning, we reported results that show continued progress in the execution of our strategy to expand our national group practice and achieve significant operating leverage.

The financial results that we reported were at the high end of the guidance we provided last quarter and slightly exceeded the consensus expectations of analysts who follow Pediatrix.

We earned net income of $19m or $0.73 per fully diluted share.

Cash flow from operations was $30m for Q4 and was a record of almost $98m for the year.

As expected, patient volume was a little lighter than the high volume experienced in Q3.

As a result, our Q4 revenue declined slightly from Q3.

So, unit revenue growth exceeded our guidance, with strong contributions from both volume and pricing components.

Overall this was a very solid and very impressive quarter.

Karl Wagner, our Chief Financial Officer will discuss full year results briefly and give a detailed review of our quarterly results and will update our earnings guidance for 2003.

Today, Pediatrix is in a stronger position than it has been at any time in its history.

We believe that we are managing our business better today than at any time in the past.

As important, we are very excited about our growth prospects for both the short-term and the foreseeable future.

We have been successful because of our focus on delivering quality patient care and we have achieved that goal by maintaining an environment where physicians want to practice.

As many of you know, our physicians have the unique ability to focus their energies on patient care.

They are not distracted by the rigorous of negotiating manage-cure contracts.

They are not involved with collecting from third party payers in order to meet the group's payroll and they are not feeling the current pressures that many physicians face when they see notices from malpractice insurance renewals.

Instead, they have opportunities to be involved with efforts to learn about the causes of premature labor, how to better treat neonates, babies born before their bodies are fully developed for life outside the womb.

That has been the promise of Pediatrix and today we are doing more to deliver on that promise.

A promise made to our physicians, our patients and the communities we serve.

We are also improving physicians' quality of life in different ways.

In the past two years we have shifted physicians and centers to be in line with the financial performance of their practice.

During the current quarter we will to distribute $30m of cash to our physicians as bonuses for their contributions to increase gross profits for all of last year.

This is a very large pool that has created to a 50-50 split of the gross profit that exceeds a specific level of profitability for each individual practice.

Today, Pediatrix is more profitable as a result of this profit sharing plan, implemented in 2001.

Our national group practice is clinically, financially and operationally integrated and we are successfully executing on our strategy.

It is from the position afforded us by a very strong core business and we feel confident today in beginning to explore opportunities to diversify our operations.

We have talked briefly in the past about diversification opportunities, and I suspect this will be a recurring theme for some time to come.

Though there is nothing specific to share with you this morning, I can assure you that we will remain focused and we will expand within what we know are our core competencies.

As we explore potential opportunities, we are focused in two areas.

The first consists of businesses that are remaining clinically, much in the way that [indecipherable] is related to immunitology.

The other consists of businesses that have similar models such as other hospital based specialties.

We also know that our success is driven by our ability to add value to our physician's practices.

When we make an investment in a business it is because we are confident in our ability to add value to it.

At this point, I will just spend a few minutes discussing our views on several of the external issues that have been on the minds of many investors lately.

All health care providers are facing two significant hurdles today.

Reimbursment was from government payers, in our case for more than 30 state Medicaid programs we serve, and the current situation with medical malpractice insurance premiums.

These issues are making a lot of headlines and I believe that they have had an impact on investors' views of Pediatrix.

We have always thought that one of the attractive features of our business is that when compared to many other health care companies, we get less exposure to government payers.

For 2002, about 22.6% of our net revenue came from more than 30 state Medicaid programs.

That represents care providers to about 45% of all our patients-- So clearly, Medicaid reimbursement for a physician's services.

Services are already significantly lower than rates paid by commercial payers.

Of the balance of our revenue, approximately 75.8% comes from commercial payers.

While we believe there is risk that some Medicaid programs will reduce physician reimbursement, we believe the risk to Pediatrix is mitigated for several reasons.

First, we don't care for any for any Medicare patients.

Second, the 23% of our revenue generated from caring for Medicaid patients is paid by more than 30 different Medicaid programs.

Each of these programs has its own budget cycle, its own lengthy legislative process.

We pay close attention to that process, particularly in higher volume states and get involved with widening efforts when we think it is appropriate.

As all public health officials know, that money spent on pre-adult and neo-natal care is money saved in the future.

Our physicians' sub-specialties are focused on reducing [indecipherable], discharging healthier babies who have fewer long term health care and special education needs.

Reduction in reimbursement for pre-natal and neo-natal care, care for the sickest and tiniest infants is generally a last resort.

On medical malpractice, it is clear to us that this problem has gotten out of hand.

I would rather not contribute to any of the clinical debate under way, but since we last spoke in this forum there has been a ground swell of support for reasoned, rational approach to our nation's medical malpractice situation, particularly from President Bush.

As you know, our physicians practice in California and we are aware of the caps on non-economic damages that have been in place in California for some time.

Many of the proposals for medical malpractice relief, follow the California model and have emerged multi-state buyer of medical malpractice insurance, we are advocates of advancing the Californian model to the rest of the nation.

As it relates to our business, medical malpractice has been a growing percent of revenues, offsetting some of the operating efficiencies we have achieved.

We are anticipating additional increases when we seek new coverage effective May 1 and those numbers are already in our guidance.

Also, we announced this morning that last night we received an additional request for information from the FTC in connection with the previously announced investigation of the [indecipherable] merger.

We have been co-operating with the FTC and have complied with the initial request for information and of course we will continue to cooperate with the FTC in its investigation.

I have spent a lot of time outlining the state of our business, as well as some of the important issues affecting health care providers and I hope that I have shed some clarity to each of these issues.

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

Thanks Kris.

Good morning everyone.

As Kris mentioned in the operations review, we had another great quarter with strong year over year revenue and net income growth and continued expansion of our EBITDA operating margins.

During my remarks this morning, I am going to provide an overview of this quarter and will provide expanded details on our 2003 earnings guidance.

Before I begin the comparison of the 2002 Q4 results for the prior year, I want to remind you that due to a change in accounting that has eliminated goodwill amortization, for purposes of making a true comparison during this call, I will refer to the 2001 results as if the accounting change and the corresponding change to our effective tax rate had that effect during 2001.

For the 2002 Q4, net patient service revenue was $119.5m, an increase of 14.1% from a year ago.

Revenues growth included contributions from acquisitions made during the year as well as strong same unit revenue growth.

Same unit revenue grew 10.7% for Q4.

This consists of 7.6% from same unit volume, and the remainder from improved reimbursement for services provided.

The improved reimbursement has come from better [indecipherable] contracting, improved collections from commercial payers and slight impact from the fee increase we put in place in 2001.

Actual practice expenses were $47.9m, up 9.4% from the prior year.

Our margin was 40.1%, down 172 basis points from Q4 of 2001.

This margin decline is directly attributed to our increased physicians' bonus expense, and increases in medical malpractice expense.

EBITDA for the most recent quarter was $32.4m up 26.4%, $25.6m a year ago.

The EBITDA margin was 27.1% for the most recent period, up 264 basis points for EBITDA for the 2001 fourth quarter.

The improved margin is directly attributed to G&A expense reductions and on-going efficiencies as we continue to grow.

The G&A reduction includes significantly lower legal expenses.

During Q4 of 2001 the company reported $900,000 in legal expenses related to the settlement of the securities litigation.

In addition, we are seeing a reduction of legal expenses since the settlement with Colorado’s Medicaid program earlier this year and the legal activities related to the Federal Trade Commission was somewhat limited during the past quarter.

This resulted in a reduction of approximately $1.6m in legal costs in Q4 2002 as compared to the same period in 2001.

We have also seen reduced costs as we integrated in the [indecipherable] structure in the Pediatrix operations over the last year, which accounts for a reduction of approximately $600,000 to $700,000 for the quarter.

For the 2002 Q4, operating income was $30.7m up approximately 26.7% from an adjusted $24.7m for 2001 Q4.

Operating margins were 25.6% for Q4 of 2002, up 257 basis points from adjusted operating margins of Q4 2001.

Excluding the $900,000 expenses granted to the securities litigation in 2001, the operating margins grew by 171 basis points.

Our effective CAP rate was lowered by 100 basis points last quarter, 38% and we believe this rate is sustainable.

Net income of $19m for the 2002 Q4 increased by 30.4% from an adjusted net income of $14.6m for 2001 Q4.

Earnings per share were $0.73 based on a weight average of 26.1m shares outstanding.

This was positively impacted by a 2002 Q3 share repurchase program.

This benefit has been included in our most recent guidance.

EPS is $0.73 compared with the adjusted EPS of $0.56 based on the 26m shares outstanding in 2001 Q4.

Our income statement for the three months ended December 31, 2002 shows continued progress in our ongoing efforts to manage our business more efficiently.

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

We continue to generate significant cash during Q4, ending the year with approximately $73.2m in cash.

We had announced an additional $50m share repurchase program during the fourth quarter.

We are now beginning to buy back shares under that plan until late January.

You will see on the balance sheet that cash receivables were virtually unchanged at $75.4m and our days sales outstanding remain below 60 days.

On the liability side the increase in accounts payable is primarily attributed to accruals for physician bonuses.

These bonuses are expected during the year and will be paid up in Q1 of this year.

The bonus program provides a real incentive for our physicians to participate in the growth of their practices.

In addition the accounts payable liability include significant accruals for our 401K funding of employer match and our liabilities incurred but not reported malpractice claims.

We continue to be un-levered with total debt in capital lease obligations of less than $2.5m.

This is another strong cash generating quarter with capital from operations of approximately $30m in Q4.

As Kris mentioned, capital from operations was in excess of $98m for the year.

Beginning last month we used our cash to repurchase shares in the open market.

As at the close of trading yesterday, we purchased approximately 620,000 shares of Pediatrix.com stock, spending $22.4m for an average price of $36.06.

This is part of the $50m share re-purchase program that our Board authorized and which we announced in November of last year.

At this time, I will spend a few minutes on earnings and capital guidance for 2003.

I should remind you that these statements should be considered forward looking.

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

The assumption kind of guidance is 3% - 5% same unit with revenue growth from increased patient volume;

Another 3% to 5% same unit revenue growth from better reimbursements, including better contracts and better collections.

Included in this is the slight impact from a modest priced increase that was implemented on January 1, 2003.

In addition to saving and growth of 6% - 10%, we expect to do that approximately $40m - $50m in physician group practice acquisitions throughout the course of the year.

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

First the revenues;

Since a large portion of our patient services revenues consists of bundle state charges for patients in the NICU, revenue was lower in Q1 each year.

There are only 90 days in the first quarter, 91 in the second and 92 in each of the third and fourth quarters.

As most of our expenses are incurred monthly and are not tied to the number of calendar days, fewer billing days has a seasonable negative impact on our earnings per share.

On the expense side, our employer [indecipherable] contributions for the spike of payroll cash is weighted towards the first half of each year and particularly the first quarter.

This year, with the significant cash bonuses that are paid out in the first quarter, many of our physicians will meet that tax requirement during this quarter, lowering the delivering effect of this tax that flows into the second quarter.

The result of these revenue expense time issues is that our CAP margins and EPS are usually compressed and expand in the second half of the year.

Confidently, we expect the following quarterly progression for 2003 earnings per share.

First quarter EPS will be in the range of $0.63 to $0.65, second quarter EPS of $0.75 to $0.77 and third and fourth quarter EPS at $0.86 to $0.89.

Capital for operations should be approximately $100m and this too will be affected by a number of issues.

First, we expect the 2003 first quarter cash flow will actually be negative.

As we pay out approximately $30m in the physician bonuses that were approved during 2002, as well as the company's forward pay planning contribution.

Secondly tax will significantly reduce the first quarter's cash flow.

In total, we expect the cash flow from operations for the first quarter will be negative.

We are confident in $100m operating cash flow expectations for the full year.

Additionally, we expect that the changes in CVT coding will have a short term impact on our collections and will result in an increase in DSOs during the first half of 2003.

Though the new code will add more clarity to the [indecipherable] coding, it will take a period of time for payers to react to these changes.

As I said last quarter, our 2003 guidance includes an increase in our total medical malpractices expense, although we are clearly hearing the rumblings of tort reform of better levels in many states, we are still in an environment where a number of carriers who are willing to underwrite these policies is declining.

We are moving forward with our capital insurance company to make it easier for us to accept more malpractice risks, principally by increasing our deductibles.

We expect to maintain a primary insurance policy to cover significant claims.

We are scheduled to renew our policy on May 1, 2003 and we have already begun the process of reviewing our options and working with our broker on evaluation of reinsurance options.

At this point, I will turn back the call to Kris.

Thanks Karl.

As you can see this was another very fast quarter.

We continue to grow our business to operate more efficiently and with the clarification of our 2003 earnings guidance should create better visibility for investors seeking comfort in our ability to continue to generate solid revenue and earnings growth.

Operator, if you would please open up the floor to questions from analysts and our shareholders.

Certainly.

If you would like to queue up with a question, please press the number '1' on your touch-tone phone.

You will hear a tone indicating your line has been placed in queue.

You may remove your line from the queue at any time by pressing the '#' key.

One moment for our first question.

Our first question is from the line of Matthew Ripperger with J P Morgan.

Please go ahead.

Thanks.

A couple of questions.

First of all, you mentioned that your medical malpractice trend is built into your guidance of $310m to $320m for next year.

Can you just give some color as to what exactly the trend assumption you will have in that guidance for next year?

For 2003 we have built in, and I am looking at the premium dollars we expect to spend, for what we would have expected for the same policies last year of a 20% increase in that region.

We think that is sufficient on what we would expect to see go forward.

Okay.

The second question is related to the FTC request for information, realizing that you probably are limited in what you can say.

But I just wanted to see if you could help flush out some differences in the nature of the request, whether it will be different information at a more in depth level, this time, versus the primary request a few months back.

The request did come as a different form, as we announced the first time.

It was a request for us to voluntarily give the FTC information, which we did do.

It was an extensive request and it took us some time to pull together.

We completed responding on that initial request in early-mid November and the FTC has been working through that since then.

Last night, we received an additional request from the FTC.

It came in a different form; it was in the form of a subpoena.

I don't know how significant that is.

I mean clearly if I had a preference I would rather receive a voluntary request, but either way we are going to comply and cooperate fully, so it really doesn't have an impact on how we respond to the FTC.

It is another broad request for information.

It is a dozen or so pages and we are going to study it carefully and comply fully with the request.

Is the request still confined to a limited number of markets or has it expanded to other markets?

As in the first request some of them speak to general pediatrics in Majella (ph.) issues and requests for information and others are specific to individual markets and there are additional markets that they are asking information on now in the second request.

Okay.

The next question is related to your commercial pricing.

It was up roughly 3.5% or so in the quarter.

Is your ability to get managed care price increases at all been impacted by this outstanding FTC inquiry?

Yes, it is difficult to say.

We don't have any evidence that we are having a tougher time because of the FTC enquiry.

We are still working to identify contracts that we feel need to be renegotiated and we are doing that successfully, and that will continue through 2003.

As we said in the past, we are operating our business in the ordinary course and this has not been disruptive to our operations and we expect that that will continue as we comply with their information request.

And generally you manage your contracts, your annual contracts that renew pro rata through the course of the year?

Yes.

They renew at all different dates throughout the year and they are essentially, with 90 day termination provisions from either side, so either the payer or we can pick up the phone and we have to give termination notification to get payers to come to the table to negotiate with us.

Okay.

Thanks very much.

Stephanie Shaw, Piper Jaffray.

Hi, actually this is Angela Samfilippo of Piper.

Just a couple of questions.

One, do you expect to use the full ability to repurchase $50m of shares, and if so, what is your timeline?

Do you expect that sooner rather than later?

Secondly, you spoke earlier about lower patient volumes in the third quarter and I am wondering given that the third and fourth quarter's had the same number of days, if there is something that happens in the fourth quarter with volumes that we had not maybe been aware of?

We can't really comment to how many shares and when we are going to buy them back.

The $50m program that we announced in the fourth quarter is one that we are going to work to complete, although we can't say when we will complete it.

Karl gave you the numbers that we bought so far in the first quarter and it is really going to depend on market conditions.

In terms of the lower volume, on our third quarter call, we did say that we had an especially strong volume in the third quarter.

That is not unusual in a quarter to quarter; volume in units goes up and down.

The third quarter happened to be a very strong one.

The fourth quarter was not a weak one.

We had same unit volume growth over the prior year in the fourth quarter, but it just wasn't as strong as the third and since we didn't get any deals in the third or in the fourth quarter, we didn't have the benefit of that increased volume, so volume was down a little sequentially and that equates to slightly lower revenue.

So one last question on the acquisition front.

There weren't any acquisitions that were completed in the fourth quarter.

What is your outlook going forward?

How does the pipeline look?

We actually remain very optimistic about our pipeline for 2003.

Some of you may know that we hired a new person to run business development.

It had previously been run by Brian Gillon, who remains an extremely valuable member of our team.

But he realized he couldn't be General Counsel and run Business Development and I take full responsibility for keeping him in that dual role for a period of time.

We are very pleased with the individual that we have in place running it now.

We see an increase in activity in the pipeline.

There are a significant number of independent groups that are interested in discussing becoming part of Pediatrix.

It is difficult to predict when we are going to get those closed, but we remain very optimistic, especially given the activity in the pipeline that we are going to be able to do what we have set out in our guidance, which is $40m to $50m in acquisition spending in this calendar year.

Thank you very much.

Next question from the line of Daniel Katz, Apex Capital.

How much leverage would you be willing to take on to enter your new venture as it may be?

Well, that is a very difficult question to answer since we don't have any particular venture identified in there.

Of course we don't know what the investment would require.

So that is going to be driven largely by the quality of investment and what we decide to do.

We do believe that we would benefit from increasing the leverage from current levels because we are not leveraged at all, and we would like to pursue that internal generated cash which is significant, and then take on debt to drive returns on equity.

Please queue up with any additional questions by pressing the number'1' now.

One moment please.

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

Thanks.

Good morning.

I just wanted to understand the volume comments that you made, Kris.

I think you said that volume had declined sequentially, but in the press release you had, you had it being up 7.6% which is above what you are looking at on 2003 to 2005 forward guidance.

So I am trying to understand whether was there is something unusual in the fourth quarter on volume?

Did that affect how it goes out the rest of the year?

As you know, the same year number applies to the prior year's quarter, so that was that 7.6% increase is versus the fourth quarter of last year.

So we didn't have weak volume in the fourth quarter, it just wasn't as strong as the third quarter, which was particularly strong.

So the sequential comparison wasn't positive.

If I may add to that.

This has been a new phenomenon for Pediatrix.

As you can see, the growth the impact has been more significant since we have been doing acquisitions in the third and fourth quarter, so maybe it hasn't been as highlighted in the past, seeing the trend on a same year basis with the fourth quarter just a little bit lighter for whatever reason.

It seems that the third quarter is a stronger volume quarter for us than the units that we’re in.

So it wasn't a big surprise to us that we would see a decline had we gotten larger, impact of that has created a much bigger impact on the bottom line numbers, not for just revenue but the EPS side of things.

So I think it is just the lack of acquisitions in the third, fourth quarter of this year, compared to other periods and the size that we have got into creating just a bigger impact.

It just makes it show up more.

Okay.

Is it fair to say that this is the first quarter where you are getting a full comparison versus some of the price increases you get to put in after the Majella (ph.) transaction or would that have really been more up against the third quarter?

Really it was in the fourth quarter.

In the third quarter we weren't sure what we were going to get.

So the fourth quarter of 2001 we really began to see the impact of the price increase, so you are right, this is really the first quarter to show that.

Okay.

Then just one more thing on the numbers.

Can you just help me understand the sequential decline in the general administrative expenses from $17.5m to $15.5m.

Was most of that in legal, or was there anything else that related to that?

I guess it was all a little bit surprising?

Yes, a big piece of that was legal expense in the third quarter and the fourth quarter.

As we wound up some of the expenses related to the Colorado settlement and others during some of that went into the third quarter and we also had a significant increase in legal costs related to the FTC.

We began the process of having attorneys down here reviewing documents, going through stats and stuff, so there was a significant cost in the third quarter.

Most of that was pretty much pulled together during the third quarter.

We had only minimal expenses in the fourth quarter, very low related to that or any other things going on, so it is primarily a cost reduction quarter to quarter.

Did your guidance contemplate a re-acceleration of legal expenses given the subpoena, or have you not had a chance to look through that?

We haven't gone through the subpoena in detail.

We have anticipated that we would have a fair amount of legal expenses this year knowing that we would be going through the FTC, not knowing what the end date was, we did build in something for that, so I believe it is included in our guidance.

It may swing quarter to quarter based upon what the activity is, but we think on the year, it is enough.

Just one last question and I will get back in the queue.

Can you give us a timeline or some kind of better understanding of the processes to how this FTC review may unfold?

Is this something that is going to take a year, six months?

Can you give us a little bit of an idea there?

John, no, we can't.

We have no way of knowing what their intentions are or how they are going to proceed.

We are just complying with their request and we believe that we operate our business appropriately and that will be the conclusion in the end.

But it is impossible for us to guess the timing of it.

Okay.

Thanks.

As a reminder, please press '1' with any questions you may have at this time.

We have a question from the line of William Bonello with Wachovia Securities.

Yes.

Thanks a lot.

I have a handful of follow up questions.

The first thing is, I apologize, I don't thing someone has asked this, is that is the Sheri (ph.) purchase factored into your guidance for 2003?

There was a minimal impact in there, but not very much from the Sheri purchase.

We put all our numbers together.

We hadn't been that far down with the Sheri purchase.

Minimal, meaning?

There is probably a few cents in there but not much.

Okay.

And then secondly on the Medmall (ph.), I am just trying to understand.

You said a 20% increase is what you are expecting.

We have certainly seen other physician providers with significantly higher increases in medical malpractice, some as high as 100%.

Can you give us a sense of why you are thinking that you guys will only have a 20% increase?

Well I think a big piece of that is that last year we saw a dramatic increase in our account premiums in and around anywhere between, we have several policies but 60% in some places and some up to 100% in our premiums.

Based upon on what our losses looked like this year, our ability is probably better evaluated and take on some more risk that may be out there.

To our actual analysis, I think we will be able to sustain that premium growth at a lower rate.

This is based upon discussion with people and what our losses have been over the last year.

Okay.

That's helpful.

And then just to understand the pricing and the pricing outlook a little bit better.

Was the 3% or so this quarter actually rate increases, or was most of that just your adjustments to contractual allowances?

The impact during the quarter year to year from pricing would be more related to the fact because we had the prices this year flowing through the fourth quarter 2001 through better contracting and it is a better collection overall.

What does better contracting mean?

The increases in contract with third party payers.

We are presuming the cost evaluation of new contracts, and for the most part we are seeing increases in our contracts with third party payers.

Okay.

That's helpful.

Then, just curious if you have any change in thinking at all about changing CPT codes.

The last conference call, you indicated that you thought the combination of the changes in two different guide books would be a net neutral that you weren't going to get benefit out of that, but you weren't going to get hurt by it.

Is that still what your thinking is?

Yes, that is still what our thinking is.

We have continued to pay very close attention to that, obviously.

We are very comfortable that this is not going to impact us negatively on the price increase, although there is, as Karl mentioned earlier, there is some concern that payers would either perhaps, not deliberately but use the changing codes to delay payment for services provided.

Some of the changes are fairly significant and it is tough enough to go and collect properly with consistent codes and when you throw a big change like that in, even if we expected to have a flat to slightly positive impact on our revenues.

The timings of the collections could be a little bit disruptive.

Okay.

Great.

Thank you very much.

Leo Murphy, private investor.

Good morning.

How are you?

Good morning, Neil.

First of all, let me say this.

Allowing for the nature of your business, I personally think you had good unit growth—same store unit growth during the quarter.

I have just a couple of issues.

Number one, the FTC issue - are they dealing with any markets that you currently are negotiating with in terms of making acquisitions in those markets?

Yes.

Is it slowing the process as a result?

No.

The other question I have.

Basically, when looking at the admissions and the patient days, it just strikes me, unless I have done the numbers incorrectly here that both on the admission and patient days, the improvement was more than reflective.

If I look at the reimbursement on a patient day basis, improvement was more than just price increases.

So is the acuity level improving among the patients, number one and the length of stay also seems to have improved, if I have done the numbers correctly.

Is that correct?

In the pricing equity calculation, we did see growth in our revenue in our neonatal practice that we have so in trying to calculate that, it makes it very difficult.

We did see an increase in our length of stay year over year, and a big piece of that when we evaluate it is-- a small portion of that was actual increase in length of stay.

But more so when we evaluate how much Majella (ph) and the other acquisitions that we have done over the last couple of years impacted length of stay.

We have acquired a lot of very large, very acute , which potentially have a large transports into them of the sicker babies, which has caused an increase in our length of stay.

When I talk to our research people and there is nothing they see which says we are an outlayer—we’re with the norms.

To an extent there are comparable data out there, but on our database we don't see anything that is troubling from a length of stay standpoint.

It is pretty much directly related to the acquisitions that we have done in the last couple of years.

When you are looking at length of stay, it is very important to look at it on a risk adjusted basis.

Clearly, a baby who is born at 28 weeks is going to be in a unit longer than a baby born at 36 weeks.

So if you are taking care of more premature babies, it is entirely appropriate to have a longer length of stay, than if you are caring for the less sick ones.

Yes, I guess what I am trying to understand here is basically is the acuity level changing or is there something here that basically has changed in terms of the business on a longer term basis?

We are going to see more of it I guess.

The longer term trend has been to change in the acuity has been caused as we have got acquisitions.

Not just recently but over the years we have focused on acquiring practices with larger higher acuity units and over time that does ramp up the acuity of pediatrics in general.

Majella did have an impact in that regard.

They were much more heavily weighted in a larger higher acuity unit than Pediatrix was, on average.

Thank you.

Thanks Leo.

We have a question from the line of Todd Richter, Banc of America Securities.

Hi, this is actually Robert Choon, sitting in for Todd.

Can you just remind us again, which one of the three markets that the FTC is looking at?

You said that they broadened their investigation subpoena.

Which new markets are they looking at and how much of your revenue is derived from these markets?

The number of 3 markets was mentioned was never the number of markets the FTC was looking at.

The number 3 is the number of overlap markets where both Pediatrix and Majella operated practices prior to the merger.

The FTC has always looked at those and other markets and they have expanded their request for information into additional markets as of last night.

But there have always been more than 3 markets they are looking at.

Okay.

Have you ever said which markets they are looking at, or not?

We haven't.

We talked about the overlap markets.

Those are Austin Texas, Dallas Forth Worth market, and Las Vegas Nevada.

And how much of your revenues were in those?

I don't know, off hand.

I also don't know if we had officially ever disclosed that.

But each of those markets are large markets for us.

Thank you.

The next question is from the line of [indecipherable] of Neuberger and Berman.

Hi.

Congratulations on what I thought was a pretty solid quarter.

But I think the FTC overhang, or at least the market perceives it to be a pretty big overhang in this company.

So could you just review this, going back a little bit from when the merger took place and how, I think you had early approval and kind of how this all came about?

Sure.

We closed the Majella merger on May 15, 2001 and then prior to closing the Majella merger we did file stock appropriately.

We got early clearance from the FTC and we went ahead and closed the merger appropriately.

Then over a year later in early June of 2002, we received the initial request for information from the FTC, which as I said before, was a voluntary request and it focused on the Majella merger but really the request was a very broad request for information.

Not only with issues relating to mergers, but Pediatrix and Majella in general, from basic things down to our business follow on and down to our different market shares in different markets.

So I think recently the FTC said that they are studying a number of health care mergers across the United States and is your sense is this somewhat related to that?

What type of discussions are - as an investor what do you suggest we should think about this?

I don't suggest anything at all.

The issue of the FTC has stated publicly that they are looking at health care providers' merger transactions and that they would increase the number of retrospective reviews that they would do in this are and we believe we are part of that expanded look that they are doing.

There really is not much more for us to say other than that we received these requests and that we are complying with them and we just have no way of predicting what the timing will be, or the outcome.

Okay.

I have two more quick questions.

On the Sheri (ph.) purchase, is there a certain amount of time when you aren't in the market and by, I guess, policy or regulation?

There are strict guidelines and we’re complying with those.

So when is that?

It is pretty difficult to get through this properly.

Any securities that I can advise you of those comments are they are consistent, they are not just for Pediatrix, they’re for all companies doing these buyback programs.

Finally on the cash flow.

Last year in Q1, projected cash flow you said would dip slightly negative and you really didn't see that.

Last year, you were somewhat positive.

Is that primarily because of a higher concentration of bonuses this year?

Or is there some other reason?

No that is primarily the reason is that our bonus made us very successful with [indecipherable] for us last year, but [indecipherable] significant payment we have to make out in the first quarter.

I think it is pretty close to double what we have paid in prior years so the first quarter last year we probably paid physicians about $15m and this year we are going to pay $30m so it is a pretty dramatic impact.

Could you give us a range on where Q1 cash flow might fall?

Does it look slightly negative or negative $20m?

I don't think it will be as high as $20m.

I would say in the $10m - $15m.

Thank you.

Alan Heller from Cannell Capital.

Good morning.

Could you go over the metrics for the actual shares you repurchased again?

I think I just caught the very end of that one.

I am sorry you are cutting out.

We couldn't hear the question.

I am sorry, if you could reiterate the metrics of what you bought back already in buy back?

As a total we spent $50m in the third quarter of 2002.

But so far this year we have bought back about 620,000 shares spending about $22.4m.

Okay.

Thank you.

Jonathan Goldberg, Trafelet and Company.

You mentioned that the Majella location seemed to have higher acuity patients.

Of the markets that the FTC is looking at, are the margins significantly higher there than the average practice or how shall we think about that?

What drives margins for practice is the ratio of patient days to physicians.

The higher the ratio, the more profitable.

And also if those patient days are concentrated in a fewer number of locations, which means you can staff them because of those volumes with fewer physicians.

That is the first big component.

The second one is payer mix.

There is a big difference between commercial payers and Medicaid programs and that can drive margins pretty significantly as well.

We have large units in just about every state that we operate in, which is 30 different states and those practices will have higher margins in general than the small practices, so if we look at the margins, as we’ve always had significantly from practice to practice within our group and that could spread over the country in 30 different states, not just focused in the Majella markets.

Okay.

Thank you.

The important thing to add is in 2002 we saw very, very strong savings in growth rates.

A lot of it was being driven buy debtor reimbursement and that too came broad based across all states and markets and it was not in any way focused in just the Majella markets.

There is a question from the line of John Szabo, CIBC World Markets.

Yes, I will give this another try on the FTC.

Can you give us, as you understand it, the avenues of recourse the FTC can take, given the nature of the request for information?

Not really, John.

I can speculate but I really would prefer not to do that on this call.

The FTC, we know, has received complaints from payers and it is a common practice that payers use in trying to reduce physician and other providers reimbursement.

What they are going to do with the information that we give them and that would be pure speculation right now if we talk about it.

Well, presumably they could come back to you and request more information.

They could drop it altogether.

Would they actually have to take you to court to prove anti-competitive behavior, if that is what they believed the information showed?

Yes.

I guess the two ends of the spectrum on the [indecipherable] of Pediatrix, they take the information, they read through it and they say 'we are barking up the wrong tree - let's go look somewhere else'.

I am not suggesting that is what they are going to do, but obviously we would all like for that to be the case.

On the other end of the spectrum, they conclude that Pediatrix acts in this anti-competitive nature and they are going to try and do something about it.

And the process that they work through is an administrative law process and I don't know if it is the correct legal term, but they essentially would have to sue Pediatrix in that administrative law process to get us to change the way we do business, whatever their objective was.

Akin to what they did with Microsoft.

Who knows how long that could take.

Okay, fair enough.

I just have another couple of quick questions.

Just to make sure I understand on the medical malpractice.

Are you fully self-insured and then what you are talking about your policies, just your high reinsurance cover, is that-- or are buying some primary reinsurance in separate markets?

We are buying primary reinsurance.

We have set up a capacity that does take a retention that we have kept of that primary layer.

We are looking that we increase that retention because of some breaks on the premium and based upon losses.

We expect to do that but at this point, we do plan on continuing with the primary layers of insurance and not being fully self-insured.

Okay.

Then on the Sheri purchase.

Is the timing of the event going to be affected by the negative cash flow on the first part of the year?

Are you allowed to borrow to buy back stock I guess is the more specific question?

There is nothing there in line of credit that would preclude this from happening.

We have $73m in cash at the end of the year.

I think we have plenty to do both.

So that would have no impact.

We don't expect it, No.

Just a follow up on the question that you had about better contracting with third party payers.

I guess what you said was three quarters of your mix is commercial.

Is that almost all in network?

Considered in network?

No.

A piece of it is in network.

We have key components in contracts in managed services business are non-contracted.

About 55% of our overall business is contracted managed care.

So when you are talking about better contractors, is that what you are talking about, you are going from non-network, in-network and maybe you are swapping rates for better collections?

Something along that line, or no?

[indecipherable] is a renewal of contract business as well as looking at non-contracted and getting it contracted.

That is something we look at very closely to make sure we are getting appropriate rates when we do contracts.

But a lot of it is also just renewals of contracts that we are turning out.

Okay.

Then just one last question about the dispersion of the profitability from market to market.

If you look at it on an EBITDA margin basis, you know, you are in the mid-upper 20s, what would be the dip, sort of spread between your worst marketing, and best market on an EBITDA basis or how do you want to define it?

If you looked at our practice level, which is probably easier for us to give you a range off the top of our heads, but we don't have that in front of us.

A very strong practice can have EBITDA margins north of 50%.

A very weak one can have EBITDA margins of 10% or 15%.

So there is a very big range.

Okay.

That's all.

Thanks.

Nick Drury, Constitution.

Does the request for information coming in a subpoena form have any implications, or is this a request for information in a voluntary form and what are the implications of that?

I am pretty sure that a lawyer would say 'yes, there is a difference'.

What the implications are, I don't know.

If you don't comply, certainly there are implications if you get a subpoena and you don't comply versus getting a voluntary request.

From our perspective, we took the voluntary request extremely seriously as if it were a subpoena, so there really isn't any difference with the way that we are going to respond to it.

I am not a lawyer, so I don't know specifically what the difference is, but I am sure that a lawyer will tell you that there is a difference between the two.

Is there a next level after a subpoena?

If you don't comply, sure.

You are ordered by a court to comply with a subpoena.

But we certainly won't wait to get to that point.

We are going to comply with it.

Okay.

Thank you.

Leo Murphy, private investor.

I just had a couple of follow up questions if I could.

Would you be so brave as to identify say on a patient day basis the Austin Dallas, Las Vegas markets and give me some idea what percent of your admissions or your patient days are coming out of those markets?

We haven't disclosed that and actually don't have those numbers here, so we are not going to disclose them on this call now Leo.

Leo Murphy.

Okay.

I will pass on that one.

One other issue.

If in fact you reach your log jam on your MNA activity because of the FTC issue, are you at a point in time, or as a company to take on some of these other avenues with the excess cash flow you guys are going to have?

Are you prepared at this point to say 'Okay, we can't do much in the way of MNA in our core business' but there are these other avenues you talked about earlier that we might as well move ahead on?

Currently, no.

But I believe that we have a pretty sophisticated management team in terms of MNA expertise.

If we felt pressure to wrap it up, we could do it comfortably.

We don't feel that pressure today so we are not wrapping it up, we are just very comfortably looking the diversification opportunities for our company and we think they are out there.

We just don't see any pressure to do it immediately.

Thank you.

Daniel Katz, Apex Capital.

I just have a few follow up questions.

I was curious to know if you had received any informal requests for information this year prior to the subpoena?

From the FTC?

Yes.

No.

We received the initial one back in June of 2002 and it was essentially one request although we certainly did have a dialogue with the FTC so trying to figure out exactly what they were looking for and do some give and take.

But no, we had the initial one in June of 2002 and then we got the other one last night.

Okay.

Then in terms of-- it took you about six months, if I recall correctly, for the first request for you to comply.

Do you anticipate taking the same amount of time or any different, this time around?

It wasn't quite six months but it was about five months.

It is too early for me to say how long it is going to take us to pull it together.

It is extensive.

We are not going to get it done in a week's time.

I just don't know.

Okay.

And then for your guidance, you gave 310 to 320 in EPS for 2003.

If you were to strip out acquisitions, what would that guidance look like-- In terms of future acquisitions?

Well, as we said we would invest $40m to $50m in acquisition spending, that is the cash purchase prices.

We are buying these practices at multiples of up to four times EBITDA, so if you assume worst case scenario and we paid a full four times multiple, that's worth $10m to $12.5m of EBITDA.

We are buying them throughout the year, not all in the first quarter or any quarter, so I think you can quite easily do the math and come to the numbers.

Okay.

Thank you.

We have no lines queued up with further questions at this time.

Well if there are no further questions, I would like to thank you all for participating and for being supportive of Pediatrix.

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