Pediatrix Medical Group Inc (MD) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Pediatrix Medical Group first quarter earnings call.

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

Later, we'll conduct a question-and-answer session and instructions will be given at that time.

(OPERATOR INSTRUCTIONS) I would now like to turn the conference over to our first speaker, Mr.

Bob Kneeley.

Please go ahead.

Thanks, Ryan.

Good morning, everyone.

Thanks for joining the call this morning.

I want to read our forward-looking disclosure before turning the call over to Dr.

Roger Medel and Karl Wagner, our senior management team.

Certain statements and information during this conference call may be deemed to be forward-looking statements within the meaning of the (inaudible) Private Securities Litigation Reform Act of 1995.

Forward-looking statements may include, but are not limited to, statements relating to objectives, plans and strategies and all statements other than statements of historical facts that address activities, events or developments that we intend, expect, project, believe or anticipate will or may occur in the future are forward-looking statements.

These statements are based on assumptions and assessments made by Pediatrix's management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors that they believe to be appropriate.

Any forward-looking statements made during this call are made as of today, and Pediatrix undertakes duty to update or revise any such statements, whether as a result of new information, future events, or otherwise.

Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties.

Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in Pediatrix's most recent annual report on Form 10-K, including the section entitled Risk Factors.

With that, let me turn the call over to our Chief Executive Officer, Roger Medel.

Thank you, Bob.

Good morning, and welcome to our review of this 2008 first quarter.

I'm happy to report results that include solid top line and bottom line growth.

Revenue and earnings per share both increased by 16% for the 2008 first quarter.

Revenue growth was generated from a balance of acquisitions and same unit revenue growth.

We also completed our previously announced $100 million share repurchased during this period.

Earnings per share, including income from discontinued operations were at the low end of our guided range for the first quarter only as a result of lower than expected same unit neonatal intensive care patient volume.

Overall same-unit growth was 7.8% and included improved reimbursement from commercial pairs, as well as the Texas Medicaid increase.

We also had strong volume growth from our office-based practices.

This was in line with expectations and contributed positively to overall same-unit patient volume growth of 3.2%.

Same-unit neonatal intensive care unit volume grew by 1.9%, but when you adjust for the leap year, our 2008 first quarter NICU patient volume growth was seven-tenths of 1%.

Historically, we talk about NICU patient volume growing in a range of about 3 to 5%.

That's our annual experience over many years of operations.

In fact, since 2002, our full-year NICU volume numbers have been between 3.6 and 5.5%, but there is a lot of variability quarter-to-quarter within that range.

For example, the year we saw 5.5% same-unit NICU patient volume growth, we had one reporting quarter with growth of one-half of 1%.

At this time, we have no reason to believe that what we're seeing this quarter is anything other than normal variability.

As the to the specifics of the first quarter, average daily census at our neonatal intensive care units was tracking two expectations for January.

In February, volume was slightly lower than our growth expectations.

And then, in March, same-unit volume levels were actually below the prior year.

This activity is not unique to a specific unit or even a geographic area, though as you would expect, some of our operating regions had good volume growth during the quarter and some were down from last year.

We're also checking our numbers against hospital numbers.

The NICU admission rate, historically about 10% to 12% of all births across the country, has remained stable.

During the 2008 first quarter, we did see a decline in the rate of growth in the number of births at hospitals where we practice.

And it's hard for us to know if that's just quarterly variability or something else.

Of course, in this environment when you start talking about lower birth rate, one wonders if what we're seeing is related to the overall U.S.

economy.

When you look historically at births in the United States relative to gross domestic product growth, it's hard for us to find a pattern that suggests there's correlation between GDP and birth rates.

Any suggestions of birth rates for the 2008 first quarter are lower because of a weakening economy, thus affecting our results, means that people were acting on any concerns six to nine months ago.

I don't know enough about consumer behavior, but I believe such a term is improbable.

As I said, at this point in time, I believe that our numbers reflect quarterly fluctuations, something that we've seen before, and I expect we'll see again in the future.

Next, I want to talk about the reimbursement environment.

It's early May, a time when most state governments are finishing their budget cycle.

And we are pleased with what we're seeing from our numerous government payers.

During last quarter's call there was some discussion about a proposed cut in California and concerns over the budget situation here in Florida, two of our top five states.

In California, the expectation is that there would be a protracted budget fight this summer.

In anticipation of that, the state has already announced that reimbursement to MediCal providers will be reduced by 10% effective July 1, 2008.

We're supporting groups like the California Medical Association in their efforts to try to reverse this cut.

You may have seen earlier this week that a coalition of providers, including California Medical Association and the California Hospital Association have filed suit seeking to block the cuts.

However, given the severity of the decline in state tax revenue and the growth of the state's deficit, we're not making any predictions about the probability of this suit or other measures to rescind the cuts scheduled in California.

In Florida, the legislature has approved a budget that does not cut reimbursement for physician services.

While reimbursement for other health care sectors will be cut, there will be no change to reimbursement for physician services.

The state seems to be recognizing that physician reimbursement through the Medicaid system is already low, and any cuts would only create an access-to-care problem.

In the end, any efforts to make it difficult for patients to be seen by physicians will only move care from a doctor's office to a hospital setting, making it far more expensive for the state.

We've always viewed our Medicaid revenues as coming from a diverse group of payers.

As you would expect, these payers do not act in unison.

In fact, our expectation for overall Medicaid reimbursements for the remainder of 2008 and the first half of 2009 is that it will be essentially unchanged.

We anticipate that slight increases to physician reimbursement in several states will offset the anticipated decrease in California, if the 10% cut there actually goes through.

So, our experience during this legislative season serves as a reminder that our reimbursement for Medicaid should really be viewed as a portfolio of more than 30 payers in states across the country.

Turning now to the growth drivers of our business, I want to discuss the status of our acquisition efforts, as well as to provide an update on anesthesiology.

During the first quarter, we acquired a relatively large meternal fetal medicine and aesthetical practice based in Atlanta.

These doctors work closely with our neonatologist at North Side and also practice at offices and hospitals in the northern Atlanta suburbs.

So far in the second quarter, we've completed three acquisitions.

They include two pediatric cardiology practices, one in El Paso, Texas and the other in Pembroke Pines in Florida, a community that's close to our headquarters.

We've also acquired a large neonatal physician group in Rockville, Maryland, which has annual patient volume of 19,000 NICU days and 13,000 well-baby nursery patient days.

As we've seen in the past, the timing of acquisitions is not as predictable as we would like.

Our first quarter closing activity was slow, and the pace of closings has picked up thus far in the second quarter.

As of now, we've invested about $30 million in acquisitions year-to-date, so we're pleased with acquisitions so far, and we are confident that we will meet our acquisitions' spending target for this year.

Finally, I want to provide a brief update on our efforts in anesthesia.

We are extremely pleased with the Fairfax acquisition and with the (inaudible) of other groups in wanting to join us to be a part of building our national group of anesthesiologists.

As many of you know, we completed the Fairfax acquisition last September.

Operationally, we've been focused on building the systems and infrastructure needed to apply our model to this specialty, and in a way that will allow us to scale this at a national level.

At the same time, our business development efforts in anesthesia continue to move forward and we are encouraged by the number of potential opportunities, and remain confident that we will be making an additional anesthesia practice acquisition in the near future.

We remain focused on our strategy of acquiring groups across a growing range of physician specialties and increasing the efficiency of those groups under our management.

This is a good time to turn the call over to Karl Wagner, our Chief Financial Officer, for our review of the quarter's financial results.

Karl?

Thank you, Roger.

Good morning, and thank you for participating in this discussion of our 2008 first quarter results.

Before we take your questions, I want to present an overview of our financial results for this quarter, and for purposes of comparison to last year, I'm going to present some of the results on a non-GAAP basis.

This presentation excludes a gain on the sale of our metabolic screening lab during the 2008 first quarter.

And for the 2007 first quarter, I'm excluding expenses related to the stock option review and a benefit from a change in our reserves for uncertain tax positions.

Our press release this morning contains a detailed GAAP reconciliation table that's available on our website at www.Pediatrix.com.

For the three months ended March 31st, our net service patient revenue increased by 16%, operating income increased by 14%, and earnings per share grew by 16% over the 2007 first quarter.

As Roger said, our results were impacted by lower than expected same unit NICU volume growth, which led to volumes per share coming in at $0.67.

This includes $0.01from discontinued operations related to the metabolic screening laboratory, which was included in our guidance for the quarter.

For the quarter, we reported revenue of $245.6 million, up 16% from $210.9 million for the same period in 2007.

We continue to grow our business through consistent improvement in contracting from third-party commercial payers.

Our same unit revenue growth of 7.8% consists of overall volume growth of 3.2% and contributions from reimbursement-related factors of 4.6%, or a little bit higher than our annual guidance.

We continue to see the flow-through from the increase in the Texas Medicaid fee schedule that was effective in September of last year, as well as improvements from commercial payers.

Same-unit volume growth of 3.2% includes contributions from our office-based practices, maternal fetal medicine and pediatric cardiology, as well as NICU volume growth of 1.9%

When adjusted to exclude the extra day for leap year, our 2008 first quarter NICU patient volume grew by seven-tenths of 1% for the 2007 first quarter.

As Roger said, this is below our historical range of 3 to 5%.

NICU patient volume declined throughout the quarter.

Our same-unit average daily (inaudible) for February was lower than January, and for March, it was below the prior year.

Our preliminary results suggest that same unit NICU volume for April was also slightly below the prior year levels, but was better than what we saw in March.

We're looking at all the available data to to try to determine a cause for this.

Unfortunately, at this time we've been unable to pinpoint any specific reason for the same-unit NICU volume slowdown this quarter.

I'm sure there will be a lot of questions on this subject, but I'm also sure that we're not in a position today to comment much further than what we have at this point.

Anything further would be speculative.

I would expect that our next update on NICU patient volume will coincide with our second quarter results.

Getting back to our first quarter results, our profit-after-practice expense was $84.5 million for the 2008 first quarter, up 12% from $75.7 million for the same period in '07.

Profit-after-practice expense margin declined by 148 basis points due principally to practice salaries and benefits as a percent of revenue growing by approximately 125 basis points for the quarter.

Most of this increase is the result of the inclusion of our anesthesia services in this year's quarterly results, as well as lower revenue associated with the lower-than-anticipated NICU patient volume.

Overall, general and administrative expense growth was only 6%, considerably less than the rate of revenue growth.

General and administrative expenses, as a percent of revenue, declined by 122 basis points to 12.1% for the first quarter, when compared to the 2007 results.

Historically, our GA expense management has driven operating margin improvements and we're pleased that we continue to see administrative efficiencies.

As for the 2008 first quarter, our G&A expense management cushioned the impact of lower patient volume on operating income and operating margin.

We had operating income of $51.9 million for the first quarter, up 14% from $45.4 million for the comparable 2007 period.

Operating margin declined by 37 basis points to 21.1% for the quarter from 21.5% for the prior year.

After-tax income from continued operations grew by 12% to $32.1 million, from $28.6 million for the same period in '07.

Income from continued operations was $505,000, reflecting a net contribution of the metabolic screening lab during the two months of the quarter that we owned the business.

Net income was $32.6 million for the first quarter, up 12% from $29.2 million for '07.

Earnings per share were $0.67, and includes the net contribution of 1 cents from the metabolic screening lab, based on a weighted average of 48.9 million shares outstanding.

Our earnings per share increased by 16% from $0.58 a year ago, which also included a contribution of $0.01 from discontinued operations, and is based upon 49.9 million shares outstanding for the 2007 first quarter.

Our weighted average share count is down by approximately 1 million shares as a result of share repurchase programs that were completed in the 2007 fourth quarter and a 2008 first quarter.

During the first quarter, we used $27.3 million of our cash to fund operations, including bonuses and 401[K] matching contributions mostly to physicians.

Based on the time of accrual and payments, we typically expect negative cash flow during the first quarter of each year.

We also invested $6.6 million in physician group practice acquisitions during the quarter.

Finally, the share repurchase program that we announced in late December was completed during the first quarter.

We used $100 million of our cash to purchase approximately 1.5 million shares.

Our balance sheet remains very clean.

We had less than $1 million in debt, mostly capital leases and cash of $39.5 million at March 31st.

Accounts receivable were $144 million for the period, down slightly from December 31st.

Our day sales outstanding for the period were down slightly sequentially in year-over-year.

This completes my review of the quarter.

I want to discuss our guidance for the remainder of 2008 in light of the year-to-date NICU patient volume.

When we last provided an update on our guidance, I detailed several specific assumptions.

They include contributions from the metabolic screening lab until its sale, which occurred at the end of February, and reinvestment from the net proceeds from the transaction has occurred.

Our ability to invest $70 to $75 million in base acquisitions and same-unit revenue growth from reimbursement factors of 2 to 4% [exceeded] an NICU patient volume growth of 3 to 5%.

We're comfortable with where we are year-to-date.

We've invested a little bit less than $30 million in acquisitions [three to] four months, and our [pipe line] is solid.

Same-unit revenue growth from reimbursement was 4.6%, a little bit ahead of guidance, as was expected as we knew that Texas Medicaid increase would give us some tailwind, and that was included in our guidance.

Obviously, NICU patient volume growth is below our range for the first quarter, and at the beginning of the second quarter.

While we talk about quarter-to-quarter volume variability, we can't predict when NICU patient volume levels will return to historical growth levels.

With that, I'll turn the call back to Roger.

Thank you, Karl.

At this point, let's just open up the call for questions.

Operator?

Okay, ladies and gentlemen.

(OPERATOR INSTRUCTIONS) Our first question is going to come from the line of Bill Bonello with Wachovia.

Please go ahead.

Hey, good morning, guys.

Just a couple of questions.

I know you said you can't say much more about the volume growth but I'm going to try one, anyway, which is just simply, in prior years when you've had a quarter where the NICU volume growth was low, did you do a similar check with the hospitals?

And if so, did you find a similar correspondence that they had seen kind of a lower than normal birth rate or number of births in that quarter?

Birth is a statistics that we gather.

As you can expect, we have to get it directly from the hospital on a routine basis.

And what we've seen of lower rates, it typically will be correlated with births, but not always, so there's no specific direct correlation on that.

We have seen it before but we've seen periods where the births might have been low but we've still had strong admissions and strong growth rate for the NICU.

So, there's not any direct correlation but we have-- there have been times when it has occurred.

Okay.

So, just as though you say you've had quarters, which we're well aware of, where the volume growth has been light and then it's recovered, you've also seen quarters where the hospitals appear to have lower births and it's recovered there as well.

That's correct.

Okay.

That's helpful.

And then just, if I'm doing the math right, the acquisition revenue growth was over 8%, and that's about 300 basis points higher than it was even last quarter.

And so, I guess I'm just trying to figure out if you acquired something pretty big in Q4 or Q1.

Well, in Q1 we did acquire the Atlanta maternal-fetal medicine and obstetrical practice, which was a fairly sizable practice up there, so that clearly had an impact on our growth during the quarter.

Okay, so that was pretty meaningful in terms of total revenue.

Is that right?

Yes.

It was sizable from a revenue standpoint acquisition.

Okay.

The fourth quarter-- The fourth quarter and the first quarter, as you know, were both impacted by the anesthesia acquisition.

Obviously, but I'm just thinking of the rate Q4 relative to what it was in Q1.

Okay.

And then just the last question, and I'll get back in the queue.

Just, do you-- You talked about the various things driving reimbursement rates.

I guess, it's a two-part question on that on two things you didn't address.

One, do you have any rates that are directly pegged to the Medicare physician fee schedule?

I mean, obviously, you don't have Medicare patients but I just didn't know if any of your rates are pegged to that.

And two, any evidence of continued mix shift from -- or not continued, but accelerated mix shift from commercial to Medicaid?

As far as your first question goes, we do have contracts with manage care payers tied to Medicare.

For the most part, we tie them to a specific year Medicare, so a change in the Medicare rate will not impact that contract.

So, it basically becomes a fixed fee schedule.

We do have some that are based upon current year Medicare.

It's not a lot of our contracts, but there are a few that could be impacted by that.

On your second question, during the first quarter, you know, we saw a slight increase in the government, but it was slight, nothing we were concerned about.

We have slight quarter-to-quarter variations, but it wasn't anything of significance we were concerned about.

Okay.

Thank you.

(inaudible) There was no concern about it.

Thank you very much.

And our next question comes from the line of Dawn Brock with JPMorgan.

Please go ahead.

Good morning.

I just wanted to dig a little bit more into the integration of FAA and where you are right now, as far as merging your interfaces on the billing and collecting side, on contract negotiations, and probably even more importantly, and I'm not expecting any specific numbers on this, Karl, but directionally, are you seeing the kind of margin improvement, both through rationalization and growth that your internal projections had told you you would see?

I'll start with the infrastructure side in the systems.

We've made some good progress so far, this year in evaluating systems and really narrowing it down.

On the system question, as far as what we'll do go forward and working with FAA on what their expectations are on that and how it may impact acquisitions we're looking at in the future.

So, I think in the not too distant future, we'll have a system that we'll start the implementation project on, so we're moving forward on that.

As far as the results of FAA at this point, we're very pleased with what's going on.

We have done a contract, a manage care contract.

I would say that the negotiation went well.

We got a good increase.

It's one of those things advantage care payers get less than they want.

We got more than they wanted to give us.

So, we weren't shocked by where we end up on that.

It's kind of in line.

I wouldn't say exactly like a neonatal one, but there weren't any major surprises through that process.

Okay.

Go ahead.

As far as the operating results, I think we're happy with the way the operating results are going based upon what we had projected when we completed the acquisition.

Okay.

And then, I just wanted to make sure I understand.

As far as the billing and collecting side, do you guys -- you guys do not have that under-- under your interface right now?

That's something you're still working on?

We had, as we had begun-- When we started, we were using an outside billing company.

We continue to use them with significant oversight from our patient accounting group here being involved with them, significant weekly calls, visits.

Reports have been generated the way we want them reported.

We have a report card that we look at constantly on how they're doing from a collection standpoint.

The cash doesn't go to them, it goes to us, so we know exactly what the cash coming in, and [then] reconcile it to their cash.

So, there's a lot that we do here from an oversight standpoint on that.

But we still have to finalize the decision on the system, and we are in negotiations right now to get that done.

Okay.

Excellent.

Thank you.

And our next question comes from the line of John Ransom with Raymond James and Associates.

Please go ahead.

Hi, good morning.

Just looking at the data in '01 and '02 [and] the last recession, it did look like birth rates were down, those two years.

Are you saying that you don't think that will be the case this time, or are you still trying to figure that out?

I would say that we don't know what's going to happen.

I think if you look at that, you do see that birth rates were down in '01.

I think they started back up in '02, and were coming up in '02.

But there are other periods that they were down and there's no direct correlation to that over the last 20 years or so.

So, it's hard to say there's a direct correlation on that.

So, there's some periods they were down in line with the economy sometimes.

They were (overlapping)

Right.

We had it down, basically down 20 bits in '01, and up 1% in '02, but then running about 2% in '04.

So, those look like there's a little-- maybe a 200 basis point broad annual correlation to the economy.

My other question is, do you see anything going on with infertility?

That's a fairly expensive treatment.

Do you think there's any correlation to maybe scaling back on those expensive shots as times get tougher?

Have you seen any evidence of that?

I don't really know.

I would assume if we were to see an impact from the economy, that would be place where we would see it.

However, admissions to the NICU as percentage of births has remained stable.

So, I don't think-- I don't think we're seeing that.

I think what we're seeing is just fewer births, and so--

You think it's one of these actuarial blips that happens from time to time?

That's what it looks to us right now.

We'll have to wait a few months to see whether that's true or not true, but--

Sure.

Right now that's what it looks like.

Okay.

And my other -- I just want to make sure I understood what you said.

Are you now suggesting, looking at what's going on with the kind of state negotiations, you're looking for flat Medicaid rates in '09 versus '08.

Is that your expectation?

Based upon what we've seen in the legislative sections, a lot was already done, based upon what we saw, we expect not to see any changes in our Medicaid reimbursement that we have now.

Right.

]A net], I would say.

If California came down 10%, there are a few states where we are getting slight increases, and all that will net out.

Can you-- Thank you, that's very helpful.

Can you remind me, counting Texas, what's your net Medicaid trend this year, so we can understand the effect on same store?

I guess trend by --

If you looked at your blended Medicaid pricing trend this year compared -- let's say it's running flat next year, if Medicaid is around 27% of your revenue, is it up a couple of percent this year, if you wait for Texas, with the increase in Texas?

I don't know that increase in Texas would have that big of an impact on our overall --

Well, I understand, but just looking at your blended Medicaid pricing trend, do you have an-- if it's flat last year, do you have an idea where that's running this year?

I'm just getting some help from Texas.

I don't have that specific number.

I would expect that that would be less than 1%.

Your blended -- Okay.

Less than one.

All right.

And on the managed care side, is it-- Are you seeing any impact there from the trouble -- are you still seeing pretty consistent increases on the managed care side?

We really haven't seen any changes.

As we talked about the past, the (inaudible) move region to region or state to state in the negotiation, but there's really no change in the characterization of any of those discussions or in the nature we've been having.

Right.

And my last question, as you -- You obviously paid a big price for Fairfax.

I think that's [deservingly] so.

It was a great practice.

That was your first [forte].

As you negotiate future anesthesiology deals, can give us a sense of where the price talk is on an an EBITDA standpoint, 'cause I would think it might be, maybe somewhere between what you paid for Fairfax, and maybe a little higher than what you've been unable to pay on the neonate side.

Thanks.

Yes, just to follow up on that.

We don't -- we're not going to give a specific range of what we're paying on the practices at this point.

It's going to vary based upon a lot of the dynamics of the specific practice and what they come with.

From an infrastructure standpoint or from an opportunity standpoint for future growth, that will vary in where we are in our development.

Now, remember what we talked about with Fairfax and we're starting to see some improvements from the things we're doing, and it will be slower on anesthesia than in neonatology.

When we say we pay four times or so on neonatology, that's based upon the improvements that we're pretty comfortable that we're going to get based upon our historical improvements in neonatal practices.

When we're looking at anesthesia practices, we're not building in things like the increases we got from the payer we just completed with Fairfax, or growth that we expect in the practice.

So, the multiple would be higher on that basis, and I would expect it will take us longer to bring those multiples down at this point as we're learning and getting through some of the infrastructure built in that specialty.

Sure.

Thank you very much.

And our next question comes from the line of Rob Mains with Morgan Keegan.

Please go ahead.

Good morning.

I'll try asking a couple of John's questions in a slightly different way.

The Medicaid pricing you're getting-- that you're anticipating for this year, Karl, are you saying that that is in line with what you would have got-- what you've gotten in other years?

It's sort of like, 0% is sort of the norm?

Exclude Texas --

Right.

Okay.

I would say we might have been a slight positive in the last few years but it was slight.

It varied state to state.

We really in the last several years hadn't seen reductions in Medicaid pricing.

There are some states that had improvements.

So, I would say we have seen a slight improvement over the years.

I think what we see going forward is basically it's going to be flat.

If Texas-- If California were not to get cut based upon the activity that's going on, we might see a slight positive out of that.

Slight positive's less than 1%?

Yes.

Okay.

And on a similar [vein], managed care pricing, you said you're getting some reasonably good pricing increases.

What neighborhood are those in?

Typically when we renegotiate managed care contract we said in the past, high single digit, low double-digit increases with a multiyear with some level of mid-to-low single-digit increases year over year in the out years.

That's typically what we see.

Okay.

So, (inaudible) So, you're saying that you get a big increase in, say, this year and that's the rate you're going to have for the next couple three or whatever.

We might get a big increase 9, 10% year one, and then we might get 4, 5% year two, three.

It really depends.

Each contract generally depends on where we are, how long it's been since that contract's been renegotiated, where we are in that marketplace, where this payer is related to other payers in the marketplace.

So, there are a lot of dynamics.

So, it's not consistent, but it averages something like that.

Okay, so on a blended basis are a mid-single digit?

I'd say that's about right.

Okay.

And I just want to make sure I heard this right, that the percentage of births at your hospitals that you're getting hasn't changed?

That's right.

The percentage of admissions-- The percentage of admissions to the NICU has not changed.

Okay.

It's just the underlying-- the whole underlying birth rate that's been the driver.

That's right.

Okay.

And then, you said that you've had two months in a row in which the same-unit volumes are down year over year.

When you look back at some other kind of lean quarters you've had like that second quarter in '02, is that something that's happened before?

As we said, year-over-year we were negative in March, and April was below prior year, it was better than March.

I just want to be sure it's clear on that.

In the past, I guess we have seen some months that were negative, and probably we haven't seen consecutive negative months but basically zero growth one month and negative another we've seen.

Okay.

And obviously in all of those cases, things have come back.

Yes.

Okay.

That's all I have.

Thank you.

Great.

And our next question comes from the line of Art Henderson with Jefferies & Company.

Please go ahead.

Hi, good morning.

Assuming that the, say, the volumes stay weak as we go into May and June, are there things you can do ongoing with cost savings either on the SG&A line or in one of the other cost categories that you could work with to cushion it some more than what you've, maybe you've done this quarter?

Well, on the G&A line, clearly we watch that very closely and that's something that we look at.

As we move forward, we will continue to look at that very closely, probably even more closely, considering where we're at, if volume were to remain weak.

We don't have any anticipation to do anything at a practice level from reducing doctors, the number of physicians at a practice or anything like that.

When we go forward, looking at a practice and discussion about new physicians, clearly we'll want to be comfortable with the volume on that specific location and what's been going on and what the future looks like on that volume.

But there's -- There's no discussion about our staffing levels or anything along that line that we would expect to see any change.

Now, this is impacting the physicians from the bonus standpoint.

As we look year-over-year growth not being as strong as it was in the past.

So there is some impact on it from that standpoint.

Okay.

And then the SG&A that you worked with this quarter to control, what areas are you -- are there certain areas you're focused on there?

I know it's across the board, but were there certain areas that stood out this quarter?

Predominantly on the G&A side, it's staffing, it's employees.

We try not to do it in the areas like patient accounts (inaudible) because the volume of accounts is there.

They get another collector, [so if] acquisitions are coming in and we need that.

But in other areas where there's more discretion, we're not adding people without a clear and absolute need.

We' been pretty strict on that in the past but even more so now with where we are from a volume standpoint.

And then, Karl, I just want to make sure I understood something you answered to Rob.

You said that the past you have seen -- never seen two sequential-- two consecutive declines year over year in volumes.

Did I hear that correctly?

I said we have never seen two months in a row that were below the prior year.

But we have seen periods where we had essentially no growth one month and negative the next.

Okay.

Okay.

Understood.

And then, Roger, I know you talked about that we should expect to see anesthesiology and other anesthesiology acquisitions.

I think you said, "Sometime in the near future." Are we talking about within some time this year?

Is that what you're saying?

Yes, probably earlier than that.

The we had said earlier on, and thanks for giving me the easy question and Karl the hard one -- we had said earlier on that we thought we would finish -- it would complete a second acquisition sometime during the first half, sometime over the later part of the first half of the year.

And I think we're still on track to do that.

So, sometime over the next couple months.

Okay.

And then two little quick ones back for Karl.

If the Medicare physician fee cut were to go into effect in the back half of the year, I know that you talked about some contracts tied to it.

I know the anesthesiology business Fairfax might have some impacts.

Have you calculated what a potential impact could be if that were to happen?

We have not.

The impact on our core business would not be significant.

We do have some contract, but as I said it's a very small piece of the business.

It's based on current year Medicare.

We have a lot of Medicare [based], but it's basically on a fixed Medicare year.

And then there would be some impact on Fairfax going into it on a year-over-year basis for Fairfax from what we started last year.

They have a net large increase going into this year.

Wouldn't be as large as it ultimately ended up being if this cut were not enacted.

Okay.

Okay.

And then lastly, can you remind us how much of your revenue comes out of Texas?

We're validating it, but I think it's 28% of our revenue is Texas.

Okay.

Okay, great.

Thanks very much.

And our next question comes from the line of [Gary] Taylor with Citigroup.

Please go ahead.

Hi, good morning.

I missed the first couple minutes of the call.

I didn't know if you had addressed whether any of the volume weakness had any particular geographic characteristic to it?

No.

It's Roger.

We're seeing it across the country.

Some regions are actually up and others are down.

So, there isn't any specific region we can point to.

And is there any correlation to what WellPoint was saying about California.

If it I'm not mistaken, I think they commented part of their higher medical trend cost was higher NICU and PICU days, and I know that's a significant state for you.

Is it logical that that would have been one of the areas that was trending better, perhaps, than the rest of the company?

No.

I would say the western region was not one that was trending up.

Okay.

And can you just comment on what you're seeing just in terms of uninsured volumes over the last couple quarters?

Any material change in mix there?

We're not seeing any change.

We look at our self-paid, uninsured and government payers because in our case a lot of these -- Most of these patients qualify for some type of government program, and we're not really seeing any change.

As I said earlier, we saw a slight change in our government mix in the first quarter but it was very slight.

Nothing that we were concerned about.

So, there's nothing going on that we see that's unusual in that mix.

And when you said slight -- Do you basically mean that the Medicaid mix was up a little?

We had a touch more Medicaid than the commercial insurance, but it was just a little bit.

Okay.

Thank you.

And our next question comes from the line of Kevin Ellich with RBC Capital Markets.

Go ahead.

Good morning, guys.

Good morning.

Can we get your thoughts on pricing going forward, especially with the economy?

As we see higher unemployment, do you think it's possible we could see higher Medicaid percentage?

Well, that is something that we have been concerned about, and have watched pretty closely and have said in the past that it is a concern for us.

But as Karl has said, we're not seeing it.

Okay.

And then, Karl, you mentioned office-based practices.

You saw some strong growth from that.

Could you give us a detail as to how much that contributed to the same store growth?

Yes, that's up three points --

We had total volume growth of 3.2%.

The office-based practices -- it's not just office-based practices.

Non-NICU services were 1.8% of the growth.

But it was-- The growth in those areas were much higher, over 5% in those areas, which is our expectation, and we saw strong growth in those areas last year.

So, those areas that we're expanding the business in those practices.

Same-units is probably not the right parameter, saying practice growth that we're seeing on those practices.

And so, it's an area that we clearly want to encourage the expansion, adding offices and adding physicians in both those specialties.

And than, on the pricing side of the equation, did you say how much the Texas Medicaid increase contributed?

Did not break out specifically the Texas Medicaid.

Are you willing to break that out?

Not at this point.

Okay.

And then, just on the acquisition and deal flow, are you guys seeing any changes in willingness by physicians to settle down before the election due to potential changes in capital gains tax?

I'll say no.

I don't think that that's a factor right now.

I haven't heard that from our business development team as something that people are talking about.

Okay.

Thanks.

And then, just a couple last follow-up questions here.

Karl, you mentioned that salaries was up 125 basis points mostly due to anesthesia.

Is that a good way to think about the added expense going forward?

Well, the increase in practice, salaries and benefits is a combination as a percent of revenue.

Anesthesia was a big piece of that.

A piece of that was we have the same number of physicians with lower patient day volume.

So, as a percent of the revenue, that would have gone up some during that period.

So, that had an impact on it.

And in the first quarter, as we paid higher bonuses this year than last year, our taxes and 401(k) matching accruals for payroll tax matching we had to pay in the first quarter was higher, which would have pushed that a touch.

Little things combined caused the margin for that percent of revenue, with the largest piece being anesthesia.

Salaries and benefits, 2% of revenue.

Would you say it made up over half of that increase?

I really don't want to get specifically into anesthesia.

As we've talked in the past with anesthesia, competition is out there and other people in that.

We don't want to get real specific on the anesthesia numbers.

Okay.

And last, maybe I missed it or I just didn't see it.

Did you provide the actual operating cash flow and maintenance [Capex] numbers?

Cash flow from operations was [a use] of $27.8 million, I think it was.

Okay.

$27.3 million during the quarter -- sorry.

And Capex, we spent $4.9 million this quarter, which is a little higher than our typical quarter.

That mostly was for ultrasound machines at our maternal fetal medical practices and our pediatric cardiology practices.

And some of that as a function, that we had low capital expenditures last year, so we're spending a little more this year.

It's just the timing of the purchases has been pushed out [some.]

And then, do you expect that to come back to normalized levels?

Yes.

I think it will come back down.

I think for the year, we'll be somewhere in that $10 million range.

Last year we were less than $8 million for the whole year in capital expenditures.

So, I think it will be in that 10 to 12 range at a high would be my expectation at this point.

Okay, thanks, guys.

Thanks.

And our next questions comes from the line of [Sandeep] Singh with Deutsche Bank .

Please go

Hi.

Thanks for taking the call, guys.

Just a quick question on some of the things that I've been hearing from some of the issuers and reinsurers and trying to reconcile their comments in light of what you guys are seeing on the volume front.

It sounds like on the reinsurance side, they're seeing actually a spike up in NICU claims.

If you could just help me think about that more and just give me a little bit more detail as to how I should reconcile the difference.

Well, I don't know specifically what period they are looking at as far as that spike.

If you're saying the first quarter, that really is not following what we saw in the first quarter.

We're not seeing anything, saying that we have a much longer length of stay in the first quarter, which might be an indication of acuity.

So, we're not seeing anything that would say that there should be any spike.

We did talk to some units we're not in just from a volume standpoint, and there wasn't an inconsistency with what they were seeing that volume from what we've seen, though we didn't go out to anybody.

So, I don't know where that's coming from.

I don't know if it relates to rates that they're paying at hospitals.

Clearly, the hospital piece is a much bigger piece of the claim than [ours].

So, I don't know how it works through that.

But I don't know we have any other comment specifically on what the insurers are seeing.

And then, maybe a question for Roger.

If you could just give me a sense for what you're hearing or seeing about the 17 alpha hydroxy progesterone drug.

There's been some recent studies on that and a lot of discussion around how that drug could help reducing preterm births.

Any sort of color on that or what your opinions is on that drug would be?

That'd be great.

We -- I've read some of the same studies.

In fact, we are funding a study on that drug ourselves, with our maternal fetal medicine group.

And I expect we'll have those results in the not too distant future.

What I hear from the obstetricians who are the guys who use the drug and really know what the story is, is that this is something that's been tried in the past and that it's an old drug, obviously, and they've used it in the past.

The studies that I've seen are really inconclusive.

But I'm not an obstetrician.

I can get you a better read on that.

I know that, again, we're funding a study ourselves with our maternal fetal medicine specialists and we'll have results on that in the near future.

And Karl, just one last question, can you guys give me a sense for at least in terms of revenue mix, how I should be thinking about neonatal versus non-neonatal.

Traditionally that's supposed to be more like a 70 or 80 to 20.

I was just wondering if it's now 70/30.

How should I be thinking about the mix?

That's not something we've broken out on a routine basis, so I don't want to give that -- it's clearly based on our acquisitions.

We are expanding strongly in the maternal fetal medicine and the pediatric cardiology area, and something will continue to grow.

So, I'll expect we'll see more of the office-based practices being a bigger part.

But [presently], we're not going to do a lot of neonatal acquisitions, as you saw or large acquisition.

In Maryland earlier, I guess at the end of last month, which is a great addition, so we expect to see growth there, but we are seeing expansion in those areas.

Thanks very much.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of [John Randy] with [WCM].

Please go ahead.

Good morning, gentlemen.

A couple of questions for you, if I may.

First of all, I know it was mentioned earlier a couple times about the last major volume decline back in 2002 when your size was about half of what it is today.

Does that change at all your thoughts, either way about volatility in the quarterly tracking of patient volumes?

That was something that we used to talk about all the time when we used to see wild swings in volume that, as we got bigger, that that would normalize and the slings would get flatter.

That didn't happen.

As we got bigger, the swings have continued.

And now, we just see bigger swings than we saw in the past.

So, no, we -- We look at this -- at these swings, and they really are not that different from what they used to be in the past.

We talked about the 2002.

That was the largest year from a same-unit growth standpoint for the whole year and had a weak quarter.

But it wasn't the only time we've seen that happen in the past.

We've had months in the last, I guess, back in '05 that were negative.

The we've had quarters -- if you look back to our quarterly growth in the end of '05, we had 1.75% growth in the fourth quarter of 2005.

So, this doesn't go that-- It's not just back from a 2002 period that that occurred.

Okay.

And you mentioned, I believe, Roger or Karl that it was primarily in March, the month of March where you saw the steep drop-off.

Is that correct?

Yes, February.

January was on track with expectations.

February was slightly lower, but, pretty much okay.

And then March was the big drop.

And how would you characterize April at this point?

Well, like we said, April was still below, but it was better than March.

Okay.

And I guess last question, you touched on this a little bit, but I'm -- and maybe this is unanswerable on this call, correlation of economic strength versus-- or weakness versus birth rates.

Is there a study we can pinpoint to, or is that something that varies in this area?

We looked at GDP versus growth -- birth rates.

And it was hard for us to find any correlation.

We looked all the way back to 1970.

And there were some periods of time you could point to where you could see a correlation.

And I'm looking at the charge.

In 1972, GDP was up almost 5%.

Births were down almost 8%, and yet, other times, exactly the opposite happened.

Other times they do seem to go hand in hand.

It's hard to find any correlation.

And last question, Roger, if I may, and this may be de minimis.

But is there a way of characterizing whether you lost -- or whether your hospitals lost births to other regional hospitals?

We looked at that.

And of course we don't have birth data from other hospitals.

But we did call around some of our buddies that are not part of Pediatrix who work in other units, and they were seeing similar effects to what we were seeing.

So, they -- those that we did get an opportunity to talk to confirmed that they too were low in volume.

Okay.

Thanks very much.

And we do have a follow-up question with the line of Art Henderson with Jefferies & Company.

Please go ahead.

Karl, could you tell us how much, how many shares you repurchased during the quarter and sort of the average price?

We repurchased just under 1.5 million shares and the price was about $66.50, I think, was the average price, somewhere in that range.

So, it was basically the full -- close to the full 100 million.

It was the full--

It was the full 100 million.

Okay.

And then, you had given back, I guess in early February quarterly expectations.

I assume those expectations for the second quarter $0.85, $0.87 cents haven't changed at the moment.

As we said in our guidance, we're not changing our guidance.

Clearly a key piece of that is NICU volume.

So --

Okay.

All right.

Thank you.

And our next question is also a follow-up from the line of Bill Bonello with Wachovia.

Please go ahead.

Yes.

Just to beat this volume thing a little bit more.

If I go back to 2002 and 2003 and look at the correlation, where everybody's worried about this economic impact, those were actually the two highest same-store volume growth years that you've ever had.

So, I'm just trying to recollect, is there anything unusual in those years that would have made same-store volume growth especially high, so we can't look at that as sort of evidence of how the economic downturn does or does not impact you?

I thought maybe [Majella] coming into the same store comp made a difference or something.

No, that wouldn't have had an impact on the same store comp.

And that really wouldn't have impacted 2003 because on that deal was an '01.

So, there was nothing that was out of the ordinary that would have occurred.

Okay.

So, when we look at your results, there was absolutely -- aside from what you're saying as a macro, to the best I can tell in your results there was absolutely zero correlation between volume growth and a weaker economy.

That's correct.

Okay.

And then, the second thing would be on the mix shift piece of it, it seemed to me, and this may be, I may be wrong because this is a guess, but it seemed to me that the last big mix shift that you had really wasn't a function of economics, but it was a function of states pushing Medicaid and [s-chip] enrollment in order to secure matching funds from the federal government that had become available.

And I'm just wondering if that-- if that is consistent with your assessment or would you disagree with that?

The biggest piece, and this is back in 2004 when we saw the biggest change was the function of a couple of states, one of which is Texas, which is our largest state, change the level at which people were qualified for their programs, their s-chip program, primarily.

And that made many more people eligible.

And it appears that that was one of the big drivers of the increase in the payer mix.

We're not seeing anything like that in any of the state legislatures at this point in going through their sessions in going forward this year.

Okay.

Thank you.

Okay.

And the final question in queue comes from the lines of Brooks O'Neil with Dougherty and Company.

Please go ahead.

Good morning, guys.

Good morning, Brooks.

Good morning, Brooks.

I have two questions, actually.

The first is, can you just help to us to figure what the impact on your guidance would be, say, if your same-store volumes were 1% versus what you actually assumed?

Or maybe thinking about it differently, if there was a decline of 1% in same-store volumes, how much of an impact would it have on your guidance?

Yes, we're -- I mean, I guess -- we don't want to be at a point of trying to speculate on what's going on happen with that and giving if this happens, that occurs.

One, it's a mix of where does the volume change happen.

If I have a volume change in one state versus another state, or one region.

So, it's really difficult for us to even say specifically what it's going to be at this point.

And we don't want to be speculating on what that impact's going to be.

Okay.

Secondly, can you say whether you have seen -- I know you didn't own the anesthesia business last year, but in talking with them, I assume you asked them if they were seeing the same kind of softness in same-store volumes that you're seeing in your NICU business.

And if you had that conversation, can you give us any insight into what they're seeing?

On the anesthesia business, the volumes are stronger this year in this practice.

Now, I can't speak to general anesthesia across the country.

We have one practice at a very strong hospital that's growing.

So, we did see growth in the first quarter in that anesthesia business, say, compared to what they had a year ago.

They weren't in our numbers a year ago, but we do have--

I know.

Okay, that's very helpful.

Thank you very much.

Thanks, Brooks.

Okay.

And at this time we have no further questions in queue.

Okay.

Well, if there are no further questions, we thank you for listening this morning.

We appreciate your cooperation.

Thank you.

Ladies and gentlemen, that does conclude our conference for today.

It is available for replay starting today at 12:00 Eastern through may 22nd, 2008 at midnight.

You may access the replay system by dialing 1-800-475-6701 and entering the access code 920327.

International participants may dial (320) 365-3844.

Those numbers again 1-800-475-6701.

International is (320) 365-3844 with the access code 920327.

And thank you for your participation, and for using AT&T executive teleconference.

You may now disconnect.