Pediatrix Medical Group Inc (MD) 2008 Q4 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by.

  • Welcome to the 2008 fourth quarter earnings for Mednax, Inc.

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

  • Later, there will be an opportunity for your questions, and instructions will be given at that time.

  • If you should require further assistance, please press star then zero and we will assist you offline.

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

  • And I would now like to turn the conference over to Bob Kneeley.

  • Please go ahead, sir.

  • Bob Kneeley - Director of IR

  • Thank you, and good morning everyone.

  • Thanks for joining the call this morning.

  • I do want to read our forward-looking disclosure before opening this call to Mednax's management.

  • Certain statements and information made during this conference call may be deemed to be forward-looking statements within the meaning of a federal Private Securities Litigation Reform Act of 1995.

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

  • Any forward-looking statements made during this call are made as of today, and Mednax undertakes no duty to update or revise any such statements, whether as a result of new information, future events or otherwise.

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

  • With that, let me turn this over to our Chief Executive Officer, Roger Medel.

  • Roger Medel - CEO

  • Thank you, Bob.

  • Good morning, and thanks for joining our 2008 fourth quarter investor call.

  • This morning we reported results that reflect a continued execution of our long-term growth strategy, as well as the recent challenges presented by lower patient volume at our neonatal unit and a shift in our payer mix to a higher percentage of reimbursements from government payors.

  • We are a growth Company, and I firmly believe that the best way for us to manage through this environment is to continue to execute our long-term growth strategy as we have done through other challenging periods in the past.

  • We're a growth Company because of the opportunities that are before us.

  • Opportunities that revolve around adding value to physician groups within our specialties.

  • Opportunities that have been evidenced in many ways over many years.

  • Three years ago in this same forum I announced our intentions to develop a national group practice in anesthesia.

  • The reaction from many investors was that growth in our historical practice areas was going to stop.

  • So what happened over the past three years?

  • We spent some time studying the anesthesia practice area, we learned enough to feel comfortable and acquire our first group, now more than a year ago, we spent some time managing that practice, learning more about anesthesia before completing two transactions during the 2008 third quarter.

  • Today, our anesthesiology services consist of more than 140 anesthesiologists and more than 325 advanced practiced anesthesists in three markets.

  • We continue to move forward with anesthesia at a measured pace, managing our practice while working a full pipeline of groups interested in joining us to expand our footprint in that specialty.

  • And yet, in the three years since we announced our anesthesia initiative, we continued to find opportunities to grow our core business.

  • In fact, 2008 was an exceptional year for acquisitions in our neonatal maternal field and pediatric cardiology services.

  • Last year we acquired four neonatal practices, including large practices in Maryland and Ohio.

  • We acquired four maternal fetal groups, including large practices in Atlanta, Nashville and Tampa.

  • And we acquired three pediatric cardiology practices, including one of the nation's largest independent practices, a group that serves the Tampa Bay community.

  • In 2008, we invested $274 million in practice acquisitions.

  • This amount was weighed towards the Atlanta and Raleigh anesthesia practices which were acquired in the 2008 third quarter.

  • But we comfortably exceeded our expected range of $70 million to $75 million in acquisitions within our historical specialties.

  • We're optimistic that the factors that have led to a continuation of acquisition opportunities within our historical sub specialties in recent years will remain in place for 2009.

  • In fact, this week we announced another acquisition, the neonatal practice in Arlington, Texas.

  • We've been talking with this group on and off for more than ten years.

  • The decision to join us was driven by the frustrations associated with the business side of running that practice, and that is a recurring theme among all physicians.

  • It is safe to say that the environment that's bringing these physician groups to our Company, the environment that makes us an attractive haven will only become more difficult for independent practices with limited resources to invest in infrastructure.

  • Of course, part of that infrastructure is our robust clinical research and education platform.

  • We have created a clinical model that allows physicians to be physicians focusing on patient care, and that continues to draw them to our organization.

  • For 2009, the challenges facing our national group, as well as the small independent practices, will be the changes coming from the government, both in terms of policy and reimbursement.

  • I'm going to spend a few minutes going through several of these issues and how we see them effecting our business today.

  • And when I say today, I'm being literal.

  • A lot of what I'm going to discuss is a work in progress, and we expect the issues will change as bills work their way through the legislative process.

  • Yesterday, President Obama signed a bill that reauthorizes the state children's health insurance program.

  • This allows the state to offer SCHIP coverage to children who are living in households with income at or below 300% of the federal poverty level, which is just a little bit less than $62,000 a year for a family of four.

  • Most states have set income eligibility at 200% to 225% of federal poverty in their current SCHIP program.

  • So the expansion of SCHIP for our patients, such that there would be any, is for households who's incomes are above the current threshold and up to 300% of the federal poverty level.

  • We do expect that there will be some crowd-outs from private insurance to government program as a result of this legislation, so it's impossible to predict the magnitude of that crowd-out.

  • However, there is a practical side of SCHIP expansion that needs to be weighed, and that's the ability of the states to fund higher SCHIP eligibility at a time when they are cutting back on other programs.

  • The SCHIP bill does include premium assistance, which should make it easier for the states to identify enrollees who might have access to private insurance.

  • We will watch closely to see how this pans out as CMS writes the regulations and as states build out the administrative infrastructure to support premium assistance.

  • Second, I think there's a lot of attention being placed on the healthcare provisions proposed as part of the stimulus package.

  • Of particular interest to us is the federal medical assistance percentages, or FMAP allocations, additional money the federal government will make available to the states to ensure that they preserve eligibility levels to the Medicaid program.

  • We expect that legislation to include some assurances that use of FMAP funds are limited to ensure coverage and access.

  • In addition, the stimulus bill includes some incentives for physicians to use electronic health records.

  • As many of you know, we have an established system for our neonatal business and we've rolled out electronic health record systems for our maternal, fetal and pediatric cardiology services.

  • We think we would benefit from the incentives in place, but remain cautious until we see how those incentives are included in both legislation and regulation.

  • Finally, the stimulus package provides a subsidy for the recently unemployed to participate in their former employer's COBRA benefits.

  • In the current plan, the level of subsidy is a little bit less than the out-of-pocket expenses those people were paying as part of their employer's plan.

  • The subsidies should create some incentives for the unemployed to stay on COBRA, particularly those who know they'll be using the healthcare system like women who are pregnant when they lose their jobs.

  • On government reimbursement, it's obvious that state government, one of our largest payer groups, are under considerable budgetary pressures.

  • Historically, we've looked at this as a group of more than 30 diverse payers to various states in which we provide care, and we still do.

  • We know that virtually every state is under pressure to reduce expenditures, but we are also optimistic that reimbursement for our services will be neutral for fiscal year 2010, which for most states will start in July of 2009.

  • We expect that some states will reduce reimbursement for physician services, while other states have already approved slight increases in physician fees.

  • Our optimism is rooted in the knowledge that most state Medicaid directors understand that they rarely accomplish cost savings by cutting physician reimbursement.

  • Rather, cuts to physician reimbursement result in reduced access to care, which means preventive care and early diagnosis and treatment are delayed.

  • When the patient eventually enters the healthcare system, it's often in a higher cost, higher acuity setting.

  • To give you an example of the physician access issue, the textbook Medicaid program historically had very low provider reimbursement rates.

  • A Texas Medical Association survey found that, as a direct result of the significant increase, the physician fees in fiscal 2008, 32% of physicians have or are considering expanding their participation in the Medicaid program by accepting more children enrolled in Texas Medicaid.

  • That's a clear example of improving access to care and not merely coverage.

  • So that's the environment, and we're managing our business through this unusual time.

  • I'll admit that we don't have all of the answers.

  • We can't tell you that births were down in 2008 because of the economy or just because there were so many more babies born in '06 and '07 than the previous 18 years.

  • But I can tell you is that we have a handle on those things that we can control.

  • We believe that we have the right levels of staffing for patient care, and yes we have expanded our clinical staff in recent years in anticipation of long-term volume growth.

  • We also believe that we've maintained, over an extended period of time, the right levels of staffing to deliver value added administrative services.

  • On that point, I want to remind you that as the economy was expanding, as births were increasing in recent years, we were successfully managing our business to generate leverage from our general and administrative expenses.

  • To put it another way, we manage our business efficiently regardless of economic conditions.

  • As I said at the beginning of this call, we're a growth Company making acquisitions in an environment that is very challenging for small practices with limited resources.

  • We've also been disciplined about our growth in the past, and there's every reason to expect that we will maintain that discipline in the foreseeable future.

  • With that, let me turn the call over to Karl for a review of our financial results and an outlook.

  • Karl?

  • Karl Wagner - CFO

  • Thanks, Roger.

  • Good morning.

  • I'm going to take a few minutes to discuss our fourth quarter financial results, as well as our outlook for 2009 first quarter before opening this call to your questions.

  • Our revenue grew by 19% during the fourth quarter, due largely to contributions from acquisitions.

  • same-unit revenue was essentially flat.

  • Under normal circumstances that would be disappointing, but given the issues we've been dealing with over the past year, it's somewhat encouraging.

  • Our non-GAAP, or ongoing earnings per share of $0.81 were at high end of our guided range.

  • GAAP EPS was actually $0.85, but that includes a one-time reduction of accrued malpractice expense of $2.8 million pre-tax and net of bonus accruals, or $1.7 million after tax as a result of favorable claims experience.

  • Essentially, this adjustment results from historical malpractice claims experienced that is lower than actuarial estimates, and so we're reducing our malpractice reserves.

  • Our comprehensive risk management program, which goes beyond malpractice insurance to include education and claims management, is working to generate efficiencies for us.

  • The $2.8 million net adjustment in the fourth quarter income statement is a one-time adjustment.

  • Going forward, though, we expect that accruals from malpractice expense will be slightly lower than in the past.

  • The remainder of this discussion I'll present our fourth quarter results on a non-GAAP basis that excludes this benefit.

  • This morning's press release, which is available on our website at www.mednax.com, includes a detailed GAAP reconciliation.

  • The 2008 fourth quarter revenue was $297.8 million, up 19%, and $250.4 million for the 2007 fourth quarter.

  • This growth was entirely from acquisitions completed during the past 12 months.

  • As Roger said, 2008 was a very good year for acquisitions both in our historical practice areas and with our expansion into anesthesia services.

  • Same-unit revenue for the fourth quarter was unchanged from the prior year period.

  • We continue to see solid volume growth from our office-based practices in growth and procedures at our Fairfax, Virginia anesthesia practice.

  • Neonatal intensive care unit volume for the fourth quarter declined by 0.4 of a percentage point while same-unit volume grew by 1.7% for all of our services combined during the fourth quarter.

  • We're still seeing positive contributions from our services reimbursed under commercial managed care contracts.

  • This is the result of periodic contract negotiations, modest annual increases built into our contracts, as well as a slight increase as a result of adjustments to our annual fee schedule.

  • Unfortunately, overall same-unit revenue from reimbursement factors declined by 1.7% because more of our physician services are being reimbursed under government programs.

  • As you'll recall, this mix shift was about 2 percentage points for the third quarter, and we started to see it in the month of August.

  • Our para-mix for the fourth quarter came in as expected relative to our comments in the third quarter call, meaning there was no further deterioration of our mix through the fourth quarter.

  • For the 2008 fourth quarter, profit after practice expense grew by 5% to $100 million from $95.3 million for the 2007 fourth quarter, and profit margin after practice expense declined to 33.6% and 38.1%.

  • The margin decline at the practice level is attributed to several factors.

  • A large portion of our practice expenses are contracted salaries, so the revenue impact of declining NICU volumes in payer mix effects practice margins.

  • We continue to see practice margin decline as a result of our acquisition mix, which is anticipated as we model these practices.

  • For reasons mostly having to do with staffing and overhead, we don't enjoy the same operating margins for office based and anesthesia practices that we do for our neonatal services.

  • We do believe however, that we can make incremental improvements to anesthesia margins over time.

  • And finally, practice supplies and other operating expenses grew to 4.5% of revenue for the fourth quarter and 3.8% for the prior year fourth quarter, largely as a result of more office-based practice acquisitions.

  • For the fourth quarter, operating income was $62.6 million, which is down 3% from $64.4 million for the prior year and operating margin declined by 471 basis points to 21%.

  • Our general administrative expense management efforts remain on track.

  • G&A expense as a percent of revenue was 11.2% for the fourth quarter, which is unchanged from the prior year period.

  • We did realize a step-up in G&A expense during the fourth quarter as compared to the third quarter.

  • A significant portion of this growth was a result of the acquisition of the Raleigh anesthesia practice, which came with a more robust administrative infrastructure than other acquisitions.

  • The administrative support structure for this practice was similar to the back office services that we have built into our regional offices.

  • We expect that we can leverage this infrastructure across all our anesthesia practices.

  • During the last few quarters, we've had amounts outstanding on our line of credit.

  • In just expense for the fourth quarter was $1.7 million or net of $1.2 million after backing out investment income.

  • This compares with net investment income of $1 million for the 2007 fourth quarter.

  • Our income from continuing operations was $37.3 million or $0.81 per share based on 45.9 million fully diluted shares outstanding for the 2008 fourth quarter.

  • This compares with income from continuing operations of $39.7 million or $0.80 per share both non-GAAP which exudes an adjustment for uncertain tax exemptions made in the 2007 fourth quarter.

  • We had 49.3 million fully diluted shares outstanding in the 2007 fourth quarter.

  • A quick review of our balance sheet.

  • We had cash and cash equivalents of $14.3 million at December 31, 2008.

  • Accounts receivable were $162.4 million and day sales declined to just over 50 days for the fourth quarter.

  • We're pleased with this number and believe that it speaks to the efficiency of our revenue cycle management efforts.

  • On a liability side, we ended the quarter with $139.5 million outstanding on our line of credit and total debt of just over $140 million.

  • As a reminder we have a $350 million line of credit, so we have adequate access to capital at this time.

  • Our capital from operations for the fourth quarter was $68.3 million and we used that primarily to complete physician acquisitions and to reduce outstanding amounts under our line of credit during the quarter.

  • For all of 2008, we exceeded the $1 billion mark in patient service revenue.

  • Revenue of $1.1 billion was up 16% from $917.6 million for 2007, which includes same-unit revenue growth of 3.2%.

  • same-unit NICU volume declined by 1% for the year, or 1.2% after excluding the extra day in the leap year.

  • Operating income was $242 million for 2008 up 10% from the prior year.

  • Income from continuing operations was $146.7 million or $3.11 per share for 2008 based on a weighted average 47.2 million shares outstanding.

  • This compares with income from continuing operations of $140 million or $2.81 per share based on a weighted average 49.9 million shares outstanding for 2009.

  • Our 2008 capital from operations was $181.4 million and we invested $274 million in practice acquisitions.

  • In our press release this morning, we announced that we expect to earn $0.63 to $0.67 per share for the first quarter of 2009.

  • This is a wide range, but it's driven by two important variables.

  • Our assumptions for same-unit NICU patient volume and estimates for payer mix.

  • For the first quarter, we expect same-unit NICU volume in a range that includes growth of up to 1% and a decline of up to 2%.

  • Our outlook assumes that para-mix will remain at the levels that are consistent with the 2008 fourth quarter.

  • These estimates are based in part on what we've experienced through January, and at this time we have better information on volume then on payer mix.

  • The preliminary January data shows a growth of approximately 2% same-unit NICU patient volume.

  • I realize there's a desire for us to provide an outlook beyond the first quarter, but like a lot of companies there's just too much flux for us to present outlook with an appropriate level of confidence.

  • We think the prudent path, therefore, is to provide this short-term view and help you understand the factors that will ultimately drive our results.

  • As a reminder, we continue to expect that we will invest $70 to $75 million in practice acquisitions within our historical neonatal, maternal fetal and pediatric cardiology physician services, and we recently acquired a neonatal practice in Arlington, Texas.

  • We're not including estimated contributions from additional anesthesia group practice acquisitions in our outlook at this time.

  • I do want to remind investors of some important, though routine, seasonal issues that effect our business.

  • First, the calendar serves to compress revenue for our neonatal business in the first quarter.

  • There are two fewer days in Q1 than each of the third and fourth quarters, so in the first quarter we typically see a drop in revenue, operating and net income and earnings per share on a sequential basis.

  • In addition, our first quarter results this year will compare against 2008 which had an extra day for leap year.

  • As we've expanded to other services, we've become less dependent on calendar days as more of our patient services, including scheduled surgeries, are provided on weekdays.

  • We do, however, introduce a different kind of variability which is the number of weekend days that may fall into each quarter.

  • On the expense side, we see the typical ramp-up of social security, or FICO tax.

  • This is an employer/employee tax on the first $106,800 of annual payroll.

  • A significant number of our physicians are hitting that threshold during the first half of each year.

  • The combination of fewer days and higher tax expense results in lower margins at the beginning of each year and higher margins in the second half.

  • As we continue to to grow, adding more physicians to our payroll, this tax has a greater impact on the seasonality of our expenses.

  • Sequential impact from fourth quarter to first quarter becomes more pronounced as we grow.

  • Our cash from operations are also expected to be negative during the first quarter as we pay bonuses and 401K matching contributions that had accrued throughout 2008.

  • This is nothing new, but for those of you who have been new to the Company, I did want to walk you through these seasonal issues.

  • This is a good time to conclude my formal comment and turn the call back to Roger.

  • Roger Medel - CEO

  • Thanks, Karl.

  • Operator, let's just go ahead and open up the call to questions, please.

  • Operator

  • Thank you.

  • (Operator Instructions) And our first question is from the line of Art Henderson from Jefferies & Company.

  • Please go ahead.

  • Art Henderson - Analyst

  • Hi, good morning.

  • Roger, back to your comments the SCHIP legislation, I'm trying to sort of read you on this.

  • Is this -- is this a positive thing for you, a potentially negative thing for you?

  • It sounds to me like the states have to figure out whether someone has commercial insurance or to avoid crowd-out, but could you just kind of go over that again in terms of how you feel about this legislation?

  • Roger Medel - CEO

  • Yes, that's kind of where we're at.

  • The level is set at 300% and so it effects families, if it does to any degree, that are between the 200% and 225% that is the rule now, and the 300% that would be the new rule, so we don't know how many families would actually -- that are going to have babies would actually fall into that number.

  • But it is somewhat, whatever impact there may be there, we think is somewhat relieved by the abilities, as you pointed out to provide help with insurance.

  • And our understanding from the limited conversations that we have had is that states obviously would rather provide the help in paying with insurance premiums than in providing care, just because it's a lot cheaper to pay insurance premiums than is to provide care.

  • So, we're cautiously optimistic, but the devil will be in the details and there's no way for us to really make any more sense of this until we see how it actually gets written out.

  • Art Henderson - Analyst

  • Okay, that's fair.

  • Then obviously there's some budgetary issues out in California right now with Medi-Cal.

  • Could you explain how that might impact you in any way if there's a delay in payment out there for your services.

  • Roger Medel - CEO

  • Yes, I'm going to let Karl take a swing at that.

  • Karl Wagner - CFO

  • You know, California's clearly been a concern for us through the last year with their desire to try to reduce compensation to physicians, and how that moves forward.

  • Currently they have, I believe it's a 1% cut still to be going in place at the end of March that will go forward, so from a physician fee standpoint that's what we're expecting to see, not a big number there.

  • As far as the payment issue, they have come out and said they're going to defer payments for services that they're allowed to.

  • For us, that is part of the services we provide, but there are certain things they can't do.

  • They're required to pay for some of the Medicaid stuff and federally-funded items.

  • We're going to watch that closely.

  • It's something that went in place, I think, February 1st, and see how that impacts us.

  • Clearly California is a large state for us, so we're going to watch it but we, at this point, expect that we will get paid.

  • It's going to be a question of the timing the payment.

  • Art Henderson - Analyst

  • And the 1% cut goes into effect at the beginning of March or at the end of March?

  • Karl Wagner - CFO

  • I believe it's April 1st.

  • Art Henderson - Analyst

  • April 1st.

  • Okay.

  • So a second quarter issue.

  • Last question and I'll jump back in the queue.

  • No, you don't have any assumptions in your guidance for anesthesiology acquisitions.

  • What is your appetite for that right now, and where do you sort of stand on any potential prospects near term?

  • Thanks, very much.

  • Roger Medel - CEO

  • We're still looking for anesthesia.

  • We're happy with the practices that we have.

  • We do have a lot of opportunities in our core business.

  • We're seeing some practices that we have never really had an opportunity to look at in the past and we believe that the prudent thing to do is to try and get as many of those done as we can.

  • I still think we'll see one, maybe two, perhaps smaller anesthesia acquisitions this year, but it's not because we've lost our appetite for them.

  • It's because we believe that the better opportunities for us this year are to take advantage of the core business opportunities that are in our pipeline.

  • Art Henderson - Analyst

  • Okay, thanks very much.

  • Operator

  • Next we go to the line of Sudeep Singh of Deutsche Bank.

  • Sudeep Singh - Analyst

  • Hi, good morning guys.

  • Roger Medel - CEO

  • Good morning.

  • Sudeep Singh - Analyst

  • I guess my first question has to do with mix, and I apologize if about I missed this earlier, but could you maybe comment on some of the mixed trends that you saw in January, because presumably something is giving you confidence that the mix will remain flat, I guess, for the first quarter?

  • Karl Wagner - CFO

  • Yes, the data we have for January is very preliminary on mix.

  • Until we get all of the final revenue numbers completed its tough to be accurate on it, but based on what we've seen on a preliminary basis it appears to be maintaining at the same levels that we've seen in the fourth quarter.

  • Sudeep Singh - Analyst

  • Okay, great.

  • Then the follow-up would be on SCHIP, I realize that it's just passed and there's a lot of moving parts, but as you guys go forward and report your first quarter as well as your second quarter, and presumably you'll be giving us guidance for the subsequent quarter, do you think you'll be prepared to talk a little bit more about the impact from SCHIP as you guys do some more internal budgeting and assess what the real impact of what that would be to your business?

  • Karl Wagner - CFO

  • As we go forward, as we get more clarity we'll give you what we're seeing as far as markets.

  • The real issue, as you said, it just got signed yesterday.

  • That's the first step, and then it's going to be the state's taking a look at it and see how they're going to fund this and how they're going to come up with their piece of the money for this funding, and then it's got to flow through the system.

  • So, we're not -- it's going to take a little time for us to be able to figure out exactly what is going on in the state.

  • As we get more clarity on that, we will comment on that as we go forward, but right now it's hard for us to get clarity.

  • As Roger said, there's also premium assistance that's in that bill.

  • We were disappointed that all of the language that were in the bills that were proposed in 2007 regarding a requirement to try and make sure that crowd-out wasn't happening was taken out of these bills.

  • We do have some concern that that may occur, but until we get better clarity on how these states approach this specifically, it's going to be hard for us to know what the impact is going to be to us.

  • Sudeep Singh - Analyst

  • Karl, could you just remind me about how care as, specifically in the NICU, works for the uninsured?

  • Is that something where you just go back to the hospital and try to get it from a subsidy payment, or is that treated as charity care where it doesn't show up in your financials?

  • Because I know there's a lot of language written in some of these bills around greater systems to some that are uninsured and just wanted to get your thoughts on that.

  • Karl Wagner - CFO

  • Just to be clear, historically, the uninsured population of our patients has been very minimal.

  • Usually there's some type of program available if they didn't have commercial insurance.

  • So it's been small, haven't seen anything lately that says there's been an uptick in that, clearly not anything significant in that area.

  • So I don't know that we're going to see that.

  • As far as how we deal with that, to the extent it gets significant we may have to talk to our hospitals about how that impacts our units and our profitability in those units, but I think it's going to take some time for us to see that and and have that filter through.

  • That's usually -- we start seeing it, it impacts our results and then we talk to the hospital.

  • We don't want to be running to the hospital for something that might be a short-term situation, because maybe the SCHIP starts kicking in later in the year and those patients will get covered.

  • We'll weigh that on a location by location basis.

  • Sudeep Singh - Analyst

  • Great, thanks a lot.

  • Operator

  • Next we move on the line of Brooks O'Neil from Dougherty and Company.

  • Please go ahead.

  • Brooks O'Neil - Analyst

  • Hi, a couple of questions guys.

  • I know you're not providing guidance for the full year, but could you comment at all on your outlook for the Medicaid mix this year?

  • Do you expect it to remain stable as we move into the middle part of the year?

  • Roger Medel - CEO

  • That's the reason we're not going for full year guidance is because it's just really become difficult.

  • We continue to see the variability on a month-to-month basis.

  • As Karl told you on the call, January volume was up 2%.

  • Brooks O'Neil - Analyst

  • Yes.

  • Roger Medel - CEO

  • That's not anything that anybody in this room predicted was going to happen, and January of '08 was really a pretty good month for us.

  • It wasn't until February that we started to see declines in volume, and it didn't turn negative until March.

  • So, when we saw that, and we saw that volume in January was at that level, we just decided that it just didn't make any sense for us to be making predictions when we couldn't really say anything with any certainty.

  • Brooks O'Neil - Analyst

  • Sure.

  • That makes sense.

  • Second question.

  • I'm just curious, in the data you provided at the end of the release it looked like the NICU patient days were relatively flat '08 over '07 despite what I sense was pretty active acquisition activity, and I'm just curious if you would be willing to comment on the factors that you think are contributing to that, and then any comment you might make about what you think the outlook might be for '09 as a result?

  • Karl Wagner - CFO

  • Well, it really just comes out that the acquisitions that we've completed offset what we lost on a same-unit basis from a patient based standpoint.

  • Brooks O'Neil - Analyst

  • There's no big change in length of stay or any of that stuff?

  • Karl Wagner - CFO

  • When we look at those numbers for the year and for the quarter, they're right in the range of what we would expect.

  • There's nothing there that was unusual on that.

  • There's nothing that says there's a trend that's going to change, we should expect to see in the business itself.

  • So, it's not that we're seeing a trend towards lower patient length of stay or lower admit rates, those are all pretty rock solid.

  • Brooks O'Neil - Analyst

  • Okay, great.

  • Last question.

  • I'm just curious if you could comment a little further on opportunities you see for cost savings or margin improvement in 2009.

  • Karl Wagner - CFO

  • Going into 2009, like we've talked about on the past calls, from our practice standpoint we're not looking for a reduction.

  • The biggest part of our cost structure is the physician and the nursing staff and the clinical services that are provided, and we don't look in any way to be doing anything to reduce those.

  • Now clearly, the physician compensation, which has a significant incentive comp component to it, is being impacted to some extent because of these revenue issues that we've had in the last year with declining same-unit volume and para mix issues that we've had.

  • That will continue, but we don't anticipate making any changes or making sure the staff is adequate to provide the services.

  • This level of dropoff, while it has a revenue impact, isn't significant in these practices on a practice-by-practice basis that says -- they are overstaffed from a clinical standpoint.

  • Brooks O'Neil - Analyst

  • Sure.

  • Karl Wagner - CFO

  • That's not something we're seeing.

  • In our office-based practices we're actually seeing growth, we're looking to add physicians in those to continue growth in those areas.

  • We see opportunity, so we have -- we're not really looking for the largest cost item that we have to see anything from that standpoint, from a cost reduction.

  • On the G&A side, we've always staffed pretty tight.

  • We make sure that we have the appropriate staffing to provide the services.

  • I expect G&A will continue to grow as we continue to do acquisitions.

  • We'll be very deliberate in what we do.

  • Right now we're just managing our business through this to build for the long-term growth, knowing that as this economic period works its way through we think we'll get to that base and we'll start moving back to what we've seen historically from a growth standpoint.

  • We're also going to continue to invest in the administrative side and administrative infrastructure on the anesthesia side as we go forward.

  • Brooks O'Neil - Analyst

  • Great, thank you very much.

  • Good quarter.

  • Karl Wagner - CFO

  • Thanks.

  • Roger Medel - CEO

  • Thanks.

  • Operator

  • Next we go to the line of Kevin Ellich from RBC Capital Markets.

  • Please go ahead.

  • Kevin Ellich - Analyst

  • Thanks.

  • Good morning, guys.

  • Kind of following up on this last discussion.

  • Karl, could you help us maybe break out the margin differential between the office-based practices and the NICU business, and also the anesthesia business, and you mentioned in your prepared remarks that you should be able to improve the anesthesia margins over time.

  • Just wondering over what time frame we should look at, and by how many basis points?

  • Karl Wagner - CFO

  • We don't break out the margins for all these different services, all of these physician services that we provide.

  • So, I really can't break that out for you.

  • The anesthesia business, it's going to be incremental.

  • We would be expecting to see that improve incrementally each year on a practice-by-practice basis.

  • Saying that, it's going to depend upon what our acquisition mix, because right now the anesthesia business is susceptible to significant changes in that margin number based upon acquisitions.

  • So, if we acquire a practice that has a better margin than what we have in our business it will have an impact, depending upon the size of it, or if the margin isn't quite as good based upon the payer mix in that market and market dynamics.

  • It's really hard to say from a global standpoint what happens there, but when we look on a practice-by-practice basis we expect to continue to look to improve those margins incrementally each year.

  • Kevin Ellich - Analyst

  • Okay, now that's helpful.

  • Then, have you guys -- how is the integration on the anesthesia business going?

  • Have you contemplated or thought about when you're going to bring in the in-house billing and collections process?

  • Karl Wagner - CFO

  • The integration is going well.

  • As I said, the infrastructure that came in with the Raleigh acquisition, and the back-office services that they can provide is going to be something that we leverage in the other practices.

  • We're putting together the plan and moving forward.

  • We're starting to move the other practices onto that platform and the system that they're using is actually the system that we had selected to use for our anesthesia business, so that works out great.

  • We're getting that set up.

  • I think we'll start to see movement in the first half of this year, of the other practices into that billing system and infrastructure.

  • Kevin Ellich - Analyst

  • Okay.

  • Karl Wagner - CFO

  • So, we're looking forward to moving forward on that in the first half of this year.

  • Kevin Ellich - Analyst

  • Okay.

  • And then lastly, is there any detail you can provide us on Fairfax since this was the -- and correct me if I'm wrong, but this was the first full quarter that it contributed to same-store growth, is that right?

  • Karl Wagner - CFO

  • Yes, it was the first quarter that contributed to same-store growth.

  • It had a slight contribution.

  • It wasn't huge, but it was -- they had positive growth year-over-year, volume growth in their practice.

  • We also saw a little bit on the pricing side from them.

  • Kevin Ellich - Analyst

  • And are the anesthesia businesses seeing any impact from the economy?

  • People going to the doctor less or going to the hospital less?

  • Karl Wagner - CFO

  • They're seeing some impact in mostly the elective areas.

  • The outpatient surgery centers where they're doing more elective procedures, especially in the plastic surgery side.

  • They're clearing seeing it there.

  • We do some level of dental -- cosmetic dental stuff we're seeing a real slowdown in those areas.

  • All three of these practices have a large component of their practices being the high acuity tertiary-care hospitals, and that really is not seeing any real changes in that dynamic of that business.

  • Kevin Ellich - Analyst

  • Thanks, guys.

  • Operator

  • (Operator Instructions) Next we go to the line of Rob Mains from Morgan Keegan.

  • Please go ahead.

  • Robert Mains - Analyst

  • Thanks, good morning.

  • Keeping on the topic of anesthesiology there, about economic impact.

  • Are seeing in anesthesiology or any of the non NICU businesses any kind of mix issues the way that you have with -- in the NICU.

  • Karl Wagner - CFO

  • On the anesthesia business we're not seeing any significant changes.

  • We have seen some slight mix changes here and there, but nothing dramatic.

  • At this point it's something we're watching.

  • You know, most of our change is in the NICU but we're seeing from a para-mix standpoint, not in the other areas.

  • Robert Mains - Analyst

  • Okay.

  • When you've done these anesthesiology deals and you've given us guidance, your guidance has been based on in-place operating income without any kind of enhancements to collections, contracting, etcetera.

  • You mentioned the billing -- or the back office will come on board this year.

  • Are there any other things that you can point to in anesthesiology where you think that you will be able to enhance the existing practices kind of beyond what your initial guidance when you acquired all three of them was?

  • Karl Wagner - CFO

  • Yes, the back office is one area we think that some efficiencies there on the collections side, improving the process for billing and collection.

  • We do think that there's opportunity to improve results there.

  • We also do believe that managed care contracting, and we've been doing that with Fairfax and moving into it in the other practices.

  • There's some opportunity to do that there as well.

  • I think the magnitude of that is different than what we've seen in our smaller neonatal practices because of the infrastructure that's there, but I do believe that there is some opportunity to do that.

  • Robert Mains - Analyst

  • Okay.

  • Tha's all I had, thank you.

  • Operator

  • Next we go to the line of Bob Bridges from Sterling Capital Management.

  • Please go ahead.

  • Bob Bridges - Analyst

  • Good morning.

  • Karl Wagner - CFO

  • Good morning, Bob.

  • Bob Bridges - Analyst

  • I know it's still early since you've made these anesthesiology acquisitions, but are you seeing any benefit accruing to the profitability on them based on the run rate average?

  • The prior 12 months prior to closing them?

  • I understand just based on the last caller that there are going to be some more incremental changes, but are these holding up to what your preliminary expectations would have been?

  • Karl Wagner - CFO

  • Yes, we're happy with performance of the practices at this point.

  • We think we're going to continue to see incremental improvements, and we're looking at the model that we had expected from the practices versus how they're performing.

  • We're very happy with that performance across all of the anesthesia practices.

  • Bob Bridges - Analyst

  • And Roger said earlier in the call, and you've been telling investors for some time, that the long-term expectation is that the margins you can see in these anesthesiology practices could one day perhaps rival the core.

  • Could you give anymore granularity as to what lines on the P&L you foresee as being the bigger contributors, based on what you know now having operated some of these close to a year?

  • Karl Wagner - CFO

  • I think that our expectation is much like we see in our core business, the biggest growth is driving revenue growth, whether that's financial contractings, improving billing and collection functions.

  • I would think there are opportunities for growth and working with the practices and looking at growth opportunities, which is different than our neonatal business for opportunities that may be outside of the hospital.

  • We think there are opportunities there as well that they're going to look to and grow from an anesthesia standpoint.

  • Bob Bridges - Analyst

  • One last one.

  • If you could just comment on the remark you made on prioritizing your M&A focus this year that there seem to be good attractive opportunities within the core business.

  • Unpack your thinking a little bit more for us.

  • Thanks.

  • Karl Wagner - CFO

  • In the core business we're really happy with the way the pipeline looks and the way we ended last year with some nice deals.

  • As Roger went through the types of deals that we saw last year, we are finding that there's a lot of interest out there in the core business.

  • Several years ago, when we started looking at other opportunities to continue our growth, there was a thought, as Roger had mentioned, that we would slow down in the core business, and that hasn't been happening at this point.

  • We're real happy with the pipeline.

  • We think there's opportunity without any concern to do what we've put out there, the $70 million to $75 million in potential opportunity to do more than that based on how we looked at the pipeline.

  • Bob Bridges - Analyst

  • Would the catalyst --

  • Karl Wagner - CFO

  • Excuse me?

  • Bob Bridges - Analyst

  • Would the catalyst for that be better EBITDA multiples, greater number of strategic opportunities within the core versus the strategic opportunities in anesthesia?

  • I just want to understand what the motivating factor is.

  • Karl Wagner - CFO

  • On the core business we basically in the past done what we could get done.

  • So it's not that we've limited that at all.

  • In the anesthesia, clearly we've limited that in the past as we've talked about because we want to learn and understand the opportunity, and we're still looking at opportunities.

  • I want to be clear that we aren't putting off doing anesthesia.

  • We're excited about the opportunity.

  • We'll continue to do acquisitions there, and there are opportunities we're currently looking at, but as far as where we see the pipeline and how it's built and what we're willing to do on the core business side, the opportunities are there.

  • As far as why they're coming, I think over the last several years we've continued to prove what we do from an administrative and a research education standpoint in the core business, in the neonatal maternal fetal medicine and pediatric cardiology business, so we've had the opportunity to grow those.

  • I think the environment is getting nothing but more difficult over the last couple of years, so people are responding to that.

  • There are some, but it's a function of getting closer to that retirement age.

  • And then when you talk to Dr.

  • Tisdale in Arlington who we just required, he was just tired of the whole administrative side of it, doing it for so long.

  • He saw that as a huge opportunity to be able to focus on the day-to-day clinical stuff and take the opportunity to also get involved with things like the clinical trials we do.

  • So, there are practices we've talked to for a long time that -- they're looking at this as an opportunity that's the right time to look at.

  • Roger Medel - CEO

  • Let me just add to that Bob, I just think that because of the economy, we're seeing opportunities to acquire groups that in the past weren't as interested in joining us .

  • I think that we have an opportunity here to complete some acquisitions that we would not normally have had a chance to complete.

  • For me, personally, it's a lot less risk in acquiring one of these core practices than it is acquiring the anesthesia practices, just because we're very good at acquiring and managing and bringing out efficiencies in these core practices.

  • So, giving that we have limited resources my choice is to spend those limited resources particularly in the current environment where the risk is just not as great, but again, we haven't lost our interest in anesthesia.

  • We think that there's a lot of great anesthesia practices there.

  • We see that as being our long-term engine for growth, and it's not like we're seeing any competition for these anesthesia practices either, we believe that the anesthesia practices will still be available to us.

  • If it's not this year,

  • Bob Bridges - Analyst

  • I appreciate the explanation.

  • That's very helpful, and congratulations on the quarter.

  • Thanks.

  • Karl Wagner - CFO

  • Thank you.

  • Operator

  • And we have a follow-up from the line of Kevin Ellich with RBC Capital Markets.

  • Please go ahead.

  • Kevin Ellich - Analyst

  • Hi, guys.

  • Just wanted to see if you could answer this one.

  • On the $274 million you spent on acquisitions in 2008, how much of that was core versus anesthesia?

  • Roger Medel - CEO

  • You made Karl choke.

  • Karl Wagner - CFO

  • We're not breaking that out.

  • Kevin Ellich - Analyst

  • Okay.

  • Then, I know in the 10-K you'll provide -- you usually provide the para-mix.

  • Is there any way you guys want to provide that ahead of the K?

  • Karl Wagner - CFO

  • No, not at this point.

  • Kevin Ellich - Analyst

  • Okay.

  • Then, just the last thing, Karl.

  • On the operating expenses salaries and benefits, of course you had the impact from the captive malpractice expense.

  • How should we think about that going forward?

  • Is 61.9% margin, is that kind of where we should -- where it should be in Q1 and Q2 or is it going to come back to more normalized levels?

  • Karl Wagner - CFO

  • Well, that's going to -- in Q1 it will go up pretty dramatically because of the benefit costs in relation to the payroll taxes that we will start occurring in the first quarter.

  • We should see a significant increase in that, off-set against a lower revenue number because of the lower calendar days during the quarter.

  • So, I would expect that we're going to see that number come up.

  • As far as the malpractice standpoint, it will be lower , it won't be as low -- it will only be impacted by the same amount that it was in the fourth quarter on a quarterly basis going forward, but there will be some positive impact on an annual basis

  • Kevin Ellich - Analyst

  • Okay.

  • That's helpful.

  • Thanks.

  • Operator

  • (Operator Instructions) We have a follow-up from the line of Art Henderson with Jefferies & Company.

  • Please go ahead.

  • Art Henderson - Analyst

  • We've been hearing about some interesting opportunities in the OB hospitalist area.

  • Are you guys taking a look at that?

  • Is there anything that you guys see there?

  • Karl Wagner - CFO

  • We actually have several OB hospitalist programs as a component of our maternal fetal medicine programs that we have.

  • In several locations, as the hospitals look to provide those services.

  • It's something we've been providing in some of the hospitals that we have relationships with.

  • It's not something that we've gone out and said this is going to be the key focus and key driver in the future to be going into hospital where we don't already provide services, but it is something we've looked at and there's been a pretty good model for us in a lot of cases.

  • Art Henderson - Analyst

  • Karl, are there more hospitals coming to you asking you to help them out with that?

  • Karl Wagner - CFO

  • I say over the last couple of years we've had much more interest in that.

  • Art Henderson - Analyst

  • Okay.

  • All right, great, thanks very much.

  • Operator

  • We have no further questions, gentlemen.

  • You may continue.

  • Roger Medel - CEO

  • Thank you very much.

  • If there aren't any further questions, I thank you for listening this morning, and we'll terminate the call.

  • Operator

  • Thank you.

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