Pediatrix Medical Group Inc (MD) 2009 Q4 法說會逐字稿

Ladies and Gentlemen, thank you for standing by.

Welcome to the 2009 fourth quarter earnings conference call.

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

Later we will open the lines for questions and answers.

(Operator Instructions) As a reminder, this conference is being recorded.

Now I'd like to turn the conference over to your host, Mr.

Bob Kneeley.

Please go ahead.

Thanks and good morning everyone.

Thanks for joining the Mednax Investor conference call.

Before I open this this up to our Chief Executive Officer, Roger Medel, I want to read a forward-looking statement.

Certain statements and information made during this call may contain forward-looking statements.

These 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, quarter 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 companies most recent annual report on Form 10K and its quarterly reports on Form 10Q including the sections entitled Risk Factors.

During this conference call the Company will be issuing certain non-GAAP financial measures.

And detailed reconciliation of these measures to GAAP can be found in the Company's earnings release which was issued this morning and is available on our website Www.Mednax.com.

With that let me turn the call over to Roger Medel.

Thank you, Bob, good morning and thanks for joining our call this morning.

With the release of our 2009 fourth quarter results earlier this morning, we're presenting a company that continues to grow, that has built a solid foundation to manage our existing operations and that has the financial strength and flexibility to fund the future growth through internal cash generation and our revolving credit facility.

For the 2009 fourth quarter, our revenue grew by 12% from the comparable prior year period to $333.3 million after excluding the favorable impact of a legal settlement and lower tax rate on our GAAP results for the period.

Our non-GAAP operating income grew by 18% and our operating margin expanded by 128 basis points.

Earnings per share were $1 on a non-GAAP basis or $1.07 on a GAAP basis when including those items.

The growth of our business has driven our cash flow as well.

Cash flow generated from operations for all of 2009 was $241 million up significantly from 2008.

In a few minutes, I'll be turning this call over to our new Chief Financial Officer, Vivian LopezBlanco for a detailed review of our financial results.

I do want to emphasize that these results continue to demonstrate the long term viability and durability of our national group practice model.

What I want to focus on during the next few minutes is the progress we continue to make as we execute this proven long term growth strategy.

On the acquisition front, we had a great year in 2009 with a total of 11 groups decided they would be better off practicing as part of Mednax than continuing to try to manage their full time clinical load and the business and administrative sides of their practices.

Of the 11 groups, eight were traditional neonatal group practices or had a significant neonatal component.

One of those practices was a pediatric multi specialty group that we acquired in Las Vegas late in the third quarter.

In total, we acquired more than 100,000 annualized neonatal patient days during last year.

We also acquired one maternal-fetal medicine group, one pediatric cardiology group and as we had expected, one anesthesia practice.

That anesthesia practice which is in Wilmington North Carolina brings to four the number of groups that now form our American Anesthesiology division and we're looking for continued growth in this large physician specialty.

We invested more than $150 million to acquire these practices as well as to make contingent purchase price payments on previous acquisitions that continue to meet or exceed their operating targets.

In some ways we started 2010 just the way we left 2009.

We've acquired two neonatal group practices, one in Shreveport, Louisiana, the other in Spokane, Washington adding a combined 20,000 Neonatal Intensive Care unit patient days so far this year.

It's hard to pinpoint any particular reason behind the pace of acquisitions for the past several years.

And I suspect the reality is that for each practice, there are several reasons for joining.

In many ways we provide a level of certainty in an uncertain world.

In recent years physicians have been affected by economic uncertainty but is much more their concern over regulatory uncertainty as well, both real and proposed.

And there are other issues which bring them to our national group.

The catalyst for them joining us include changing expectations among hospital partners, the kind of evidence based medicine, research opportunities, CCUI initiatives, medical education programs, etc., which focus on providing the best care possible for their patients.

We're not seeing anything that would suggest that the level of activity we've experienced in the recent past will change.

We're managing a very full pipeline that includes practices within the historical neonatal maternal-fetal medicine and pediatric cardiology specialties.

In addition, we're confident that we have the right team place to grow our anesthesia operations and more importantly that we have the right infrastructure in place that will support the growth that we anticipate within this specialty.

I want to emphasize a point that we've made as we've announced each of the four practices that currently constitute American Anesthesiology.

Each of those practices has a longstanding relationship with their hospital partners.

By longstanding, I mean 35-40 years in some cases.

These are all practices that are active partners with their hospital, participating in initiatives that support the strategic direction of those facilities.

This is a characteristic of many of our neonatal practices as well.

Not 35-40 years because neonatology is a newer subspecialty than anesthesiology but the groups we acquired have decades long relationships with their hospitals working with referring physicians and coordinating care for patients in their communities.

And just as neonatology in each of these anesthesia practices and many others that we're talking about joining our group, have partnered Mednax as much because of the opportunities to identify areas to improve clinical care as to benefit from financial and administrative efficiencies.

The opportunity that exists within the anesthesia market is large.

There are more than 47,000 physicians and another 35,000 advantaged practitioners across the country providing patient care, supporting referring physicians, managing their hospital relationships, etc.

We intend to develop this opportunity in the same way that we have built our business over the past 30 years.

Our employment model which integrates physician practices into our national group have worked as we move from neonatology to maternal-fetal medicine to pediatric cardiology and it is working as we move into anesthesia.

Now, it's my observation that during the past year, most everyone in the healthcare sector will strive to understand the various healthcare reform proposals.

At this point, I don't think there's much that I can add to the healthcare reform discussion.

I do want to remind you of comments made during our 2009 third quarter call.

One area where the House and Senate bills were not too far apart and that was the proposed Medicaid expansion.

Last years healthcare bill calls for Medicaid expansion to either 133% or 150% of the federal poverty level.

This was an attempt to obtain coverage for older children and even childless adults through the Medicaid program.

For the most part, those are not our patients.

As a reminder, every one of our states covers children in the first year of life and in pregnant women if their household income is at or below 133% of the federal poverty level.

In fact, of the 33 states where we practice, 29 are covering those patients whose incomes are up to 150% of the federal poverty level and even higher in some states.

Again, the target population for those coverage expansions were not our patients.

Of course, like most providers, and particularly those who see Medicaid patients, the larger concern that we have is related to what will happen with reimbursement levels.

As states plan their fiscal 2011 budget, they're looking to cut services.

And I suspect you'll hear a proposed cutoff Medicaid programs in many states.

It is important to drill down beyond the headline as to where those proposed cuts are likely to occur.

Historically, states have cut facilities particularly hospitals, nursing, and long term care.

That's where the majority of Medicaid dollars go.

So it's not surprising that as states try to impact their budget that's where the cuts are likely to occur.

Physician services on the other hand are not a large part of the state budgets.

More important, states must find a way to maintain an adequate network of physicians to insure that Medicaid enrollees have access to care.

Historically we've seen that poor physician reimbursement results in fewer doctors accepting Medicaid patients.

States that preserve reimbursement at current levels are more likely to maintain an adequate network of primary care and specialist physicians to provide services.

This care is typically provided in the lower cost setting of a physicians office.

The state pays either way because the care that's delayed becomes more complicated and is often then treated in a hospital setting, emergency room, etc.

We think that very issue maintaining an adequate physician network in states across the country will cushion what could be a very difficult legislative cycle.

Through the first half of this calendar year, we have good visibility into our Medicaid reimbursement rates since most of the states fiscal years end June 30th and they're working under budgets established in early 2009.

With the release of President Obama's proposed budget earlier this week, their extension of the federal matching allocation program or FMAP, funding that was part of the stimulus bill through June 2011.

This extension coincides with most states fiscal years and should provide some relief to the state.

I'm sure that we can go through many of these points during the question and answer session so let me now turn the call over to our Chief Financial Officer, Vivian LopezBlanco.

Vivian?

Thanks Roger, and good morning.

This is my first review of the quarterly results for Mednax, the first of what I hope will be many opportunities to talk with investors about our business.

As Roger indicated, our results for the 2009 fourth quarter and full year reflect a company that continues to grow, that is achieving meaningful efficiencies across its operations, including the anesthesia platform and that is generating cash flow from operations at levels that will support our growth into the future.

Our revenue for the 2009 fourth quarter was up 12% or $35.5 million from the same period in the prior year.

Revenue growth was largely due to acquisitions completed during the previous 12 months.

Same unit revenue increased by 4.6%.

This includes reimbursement related growth of 2.7% which is a result of better reimbursement from commercial payors through contracting improvements and modest fee schedule increases.

Same unit payer mix was pretty much unchanged on a sequential basis from the 2009 third quarter.

On a year-over-year basis, the percentage of our services reimbursed under government programs on a same unit basis is up less than 1%.

Same unit volume growth was up 1.9%.

This includes year-over-year NICU volume that was relatively flat.

Profit after practice expense was up 17% or $17.2 million for the 2009 fourth quarter and the related margin improved by 150 basis points to 36%.

Practice margin improvement is related to several factors.

Our acquisitions during the past 12 months were principally hospital based neonatal practices including large practices as Roger mentioned.

The nature of these neonatal practices, specifically staffing requirements, makes them attractive in terms of margin contribution.

In addition, we've seen higher same unit revenue year-over-year which helped to improve margin on our largely fixed cost practice expense.

Our 2009 fourth quarter GAAP results include two items that we believe should be excluded before comparing these results to prior periods.

Included in general and administrative expense, are net proceeds of $1.8 million related to the favorable settlement of a legal issue.

In addition, our income tax rate was favorably impacted by a net $1.7 million due to several factors.

A reduction in certain tax reserves due to the expiration of statutes of limitations, newly implemented state tax planning strategies, and the tax impacts related to the proceeds from the legal settlement I just mentioned.

My comments related to this discussion of the 2009 fourth quarter Income Statement will be on a non-GAAP basis that adjust for these two items and will be compared to 2008 fourth quarter GAAP results.

Operating income for the 2009 fourth quarter was up 18% or $12 million to $77.4 million.

Operating margin improved by 128 basis points to 23.2%.

Similar to our gross margin, this improvement was largely driven by the composition of acquisitions completed during the previous 12 months which were principally hospital based neonatal practices as well as higher same unit revenue.

2009 fourth quarter net income was up 20% or $8 million to $47 million.

On a per share basis, Mednax earned $1 based on weighted average 47.1 million shares outstanding.

Earnings per share grew by 18% from $0.85 based on a weighted average 45.9 million shares outstanding for the 2008 fourth quarter.

Our fully diluted share count increased slightly throughout 2009 as a result of our normal equity activity as well as impact of share price appreciation on the calculation.

On a GAAP basis our net income for the 2009 fourth quarter was $50.4 million which increased by $11.4 million or 29% from the comparable prior year period.

GAAP earnings per share of $1.07 for the 2009 fourth quarter increased by $0.22 or 26% from $0.85 for the 2008 fourth quarter.

Looking at our Balance Sheet, we had cash and cash equivalents of $26.5 million and Accounts Receivable were $164.4 million.

Accounts Receivable growth remains significantly below revenue growth and we continued to see year-over-year decline in DSOs largely as a result of our revenue cycle management for all of our services.

We ended the quarter with $50 million outstanding on a $350 million revolving credit facility.

On a sequential basis, we reduced our debt levels by $35.5 million and on a year-over-year basis we paid down $89.5 million even after funding our acquisitions.

Cash flow from operations for the 2009 fourth quarter was $72.9 million.

We made acquisition payments of $48 million for the quarter which includes the acquisition of two neonatal practices both in Louisiana and the Wilmington North Carolina anesthesia practice acquired late in the quarter as well as contingent purchase price payments on previously completed acquisitions.

Capital Expenditures were $4.1 million for the quarter.

Looking at our results for all of 2009 on a GAAP basis, revenue grew by 21% to $1.3 billion.

Operating income was $288.9 million up 19% from 2008 and income from continuing operations grew by 20% to $175.8 million.

2009 earnings per share from continuing operations increased by 22% to $3.78 based on a weighted average 46.5 million shares outstanding from $3.11 based on 47.2 million shares outstanding for 2008.

During 2008, we had income from discontinued operations of $22.5 million related to the sale of our metabolic screening lab.

This translates to $0.48 per share which brought net income for 2008 to $169.2 million or $3.59 per share.

Our weighted average shares outstanding for all of 2009 was lower than 2008 largely as a result of the share repurchases completed during 2008.

Cash flow from operations for 2009 was a record $241.4 million, up from $181.4 million for 2008.

We used $151.3 million to complete 11 group practice acquisitions during 2009 and to make contingent purchase price payments.

Capital Expenditures for 2009 were $14.9 million which was actually slightly below the 2008 level.

In a addition to announcing our fourth quarter results in this mornings press release, we also presented our earnings per share outlook for the 2010 first quarter.

As we said, we're expecting earnings per share to be in a range of $0.78 to $0.84 for the quarter.

This range incorporates the following assumptions.

That same unit, NICU patient volume could decline as much as 1% or increase as much as 1% for the 2010 first quarter when compared to the prior year period.

And that the percentage of our services reimbursed under government programs for the 2010 first quarter could be as much as one percentage point higher to one percentage point lower on a sequential basis which means when compared against the 2009 fourth quarter.

We are also anticipating a modest share count increase during 2010.

During 2010, we also expect to invest approximately $100 million to complete acquisitions within our historical neonatal maternal-fetal pediatric cardiology and other pediatric subspecialties.

Our acquisition guidance does not include any amounts that we expect to invest to complete anesthesia acquisitions and our first quarter outlook does not include any impact from additional anesthesia practice acquisitions.

As I talk about our outlook for 2010, I want to remind you of a couple of seasonal items that affect our business.

One that impacts revenue and the other expense.

This is nothing new but these items impacted the distribution of our revenue, operating income, net income, and earnings per share throughout the calendar year.

First is the impact to revenue from fewer calendar days in the first quarter.

Our neonatal practice is built on a per diem basis and there for revenue is impacted by the number of days in a quarter.

There are only 90 days in the first quarter.

The calendar impact has been softened somewhat in the past several years as we continue to grow our office base and anesthesia practices, but the calendar continues to compress revenues for our neonatal business in the first quarter.

On the expense side, the start of every year, we see the typical ramp up in social security or FICA payroll tax expense.

This is an employer tax up to a threshold and most of our physicians hit that threshold during the first half of each year through their salary and bonus payments.

Again, these items are not unique but they have an impact on the distribution of our results across the calendar year.

The share count increase has a pronounced impact on the first quarter earnings per share because of the normal distribution of our net income across the year.

Going forward you should expect our sequential quarterly revenue, operating income, net income, and earnings per share to increase as there are more calendar days and future quarters and at the impact of the payroll tax expense is reduced.

Finally, just as a reminder, we expect that our cash flow from operations for the 2010 first quarter will be negative as we will be making bonus payments principally to our physicians and the 401K matching contributions.

These have been accrued throughout 2009 and are paid out during the 2010 first quarter.

Again, this is not new but it's important to point this out to you at this time.

With that, I'd now like to turn the call back to Roger before we take your questions.

Thanks, Vivian.

Good job.

We've covered a lot of ground this morning and one common thread in our discussion is the presentation of an organization that continues to execute on our long term growth strategy.

We wish to be cautious making predictions about those factors that are beyond our control which are patient volumes and payer mix.

Clearly, we've seen some stabilization in both of these items relative to our experiences in 2008 but we're still seeing some variability there.

At the same time, we are effectively managing those factors that are within our control.

We're seeing volume growth of our office based practices and our anesthesia practices.

And our contracting efforts continue to yield reimbursement increases.

Additionally our business development pipeline remains full.

We are excited about the level of interest shown within our core neonatal maternal-fetal and pediatric cardiology subspecialties and we're looking forward to more of those groups joining us this year.

Finally, as we develop our anesthesia services as a national group practice, we believe that we've created an opportunity for us to accelerate our growth there as well.

At this point, let me open up the call to your questions.

Operator?

Thank you, (Operator Instructions)

Our first question comes from the line of Arthur Henderson from Jefferies & Company.

Please go ahead.

Thanks, good morning.

Nice quarter.

Vivian, thanks for the comments on the first quarter impacts of softer quarter and the revenue changes, but I was curious, is there anything else for the remainder of the year we should think about?

I know you're not giving quarterly guidance looking ahead but anything else beyond the first quarter that we should factor into our thinking as far as the distribution of our earnings throughout the remainder of the year?

I think historically we would just like to remind you guys that the first quarter is hard hit because of the impact of the FICA ramp up and the less calendar days.

So that's really all that we wanted to remind you of in this first quarter.

Okay, good, and then Roger, I know you're reluctant to give some extended guidance in terms of what's going to happen with payer mix and volumes.

And you mentioned in your comments some variability you're still seeing.

Is it across-the-board?

Is it confined to certain regions?

Could you elaborate a little bit more on what you're seeing out there?

Yes, hi, Art.

Hi.

It's really what we said all along which is some regions are up during a month.

And then those same regions are down the following month and you're just seeing variability.

It's just very early.

We're trying to make a projection here based on the first three weeks of the year and you know how that is.

We're dealing with human nature.

And so if the volume is down during the first three weeks, everybody is you've got to just be really careful because the volume is down.

If the volume is up during the first three weeks, it's just the first three weeks.

You can't make any projections from that.

So you're just trying to be cautious and work with the information that you have but we're really working with three weeks out of the year.

Okay, thanks.

And one last one if I could toss it in while I have you, Roger.

We've obviously seen a lot more interest in the anesthesiology space from other providers that have made some acquisitions there.

Could you kind of characterize how your models slightly different than what those folks are doing or compare and contrast the two?

I'm sorry, are you asking about other--

Well, Yes.

I mean in your remarks you mentioned how you'd been buying practices that have years worth of relationships with the hospitals.

And I'm wondering if that is somehow different than some of the other strategic acquisitions that are being made in this space?

Okay, I understand.

Well, we have a model that has worked very well for us over the last 30 years.

And that is acquiring physician practices, not just the back office functions or providing services for them, incorporating them into our national group practice and providing them with opportunities to grow their practice while we manage the business side of their practices.

And I'll remind you that we have acquired over 120 physician practices as we went public in 1995.

I don't have a single practice or have ever had one that wants to undo their deal, get their practice back, or break away from pediatrics.

So I think that speaks to the strength and the correctness of our model.

The practices that we are looking for are specifically practices that have long standing relationships with their hospitals.

Practices that are in growing communities and practices where we see an opportunity to provide value for improving their business function.

Because at the end of the day if we're not providing value for our practices, what we're doing is worthless.

So we are specifically looking for these practices that have a long standing relationship, are in growing communities, and where we see an opportunity to bring value to those practices.

So I don't know how that differs from other models.

That's our model and that's what we're going to do.

We're going to acquire them for cash.

And we're going to bring them into our national practice.

Thank you.

Our next question is from Sundeep Singh from Deutsche Bank.

Please go ahead.

Hi good morning guys.

Good morning, Sudeep.

I just wanted to the first question had to do with the disclosures that you guys have around full year patient days and NICU admissions.

And I noticed that the admission rates to the NICU looked to be roughly 30 basis points higher this year.

And the length of stay also looked to be a little bit higher year-over-year.

I was just wondering if you could talk about how much did the recent acquisitions you did in 2009 play into those metrics.

And maybe if you could pars out what's happening relative to your acquired practices versus your NICU's on a same unit basis?

Yes, I think those variabilities are within the normal kind of ranges that we see fluctuating on a year to year basis.

I would not read anything into those numbers.

I think that some of the practices that we acquired because of the acuity of the patients that they're caring for may have a little longer length of stay.

Some may not depending on where they are.

I just would not read anything into that.

Okay, and then with respect to just the variability on the volumes, is there anyway to pars out whether the driver to that variability is births?

Or is it coming more from just the admit rate and the length of stay or just is it a combination of all three?

No, it's definitely births.

What drives our volume, we look and keep a pretty close eye on length of stay, admission rates and those kinds of things.

And we have not seen any difference in either of those variables.

What is driving the variability in our patient days is births.

Okay, and then just the last one for me and I'll hop off.

Maybe Vivian, if you could talk a little bit about the guidance again, especially with respect to the low end.

It would be helpful to get a sense for what really needs to happen in order for that low end of the guidance to materialize.

I noticed with respect to your neonatal business you guys are facing an easy volume comp.

And with respect to the acquisitions that you did, I would think that maybe there could be a little bit more a cushion going into the first quarter but if you could just talk about that, that would be great.

Well, I think it has to do with what Roger said is that we're still seeing some variabilities, Sundeep.

So the point being is that as we look at the beginning of this year, we still don't know what's going to happen with volume.

And even though we do appear to have an easier comp, as you saw we did see the fourth quarter soften somewhat.

And basically we just don't know what's going to happen with the visibility that we have right now and also with the payer mix.

So I think that that's something that we just need to consider.

Again, there's variability and we pretty much have to be cautious right now.

Our next question comes from Brooks O'Neil from Dougherty & Company.

Good morning this is Deepak (indiscernible) in for Brooks O'Neil How are you?

Good, how are you?

Pretty good.

I just wanted to follow-up on the Medicaid mix shift.

You give guidance where it might be 1% lower to 1% higher.

Are you seeing trend in one way or the other throughout Q4 and perhaps in a few weeks in January that you have seen?

No, I think what we said was it was flat in the fourth quarter and that's basically what we continue to see.

Okay, and in terms of your anesthesia business if you could talk about how your four practices are performing and what your outlook is for 2010?

I know you gave guidance of $100 million for your core business but if you can give us some more color on what you expect in 2010, that would be helpful.

Okay, our practices are actually performing very well.

They are growing, they've demonstrated same unit growth in all practices we've had for more than a year.

And we're very happy with our ability to bring some of the efficiencies to those practices that we are able to bring to our neonatology practice.

Which is why I said we expect that we will accelerate our acquisition pace as we are able to demonstrate that we bring value to these practices.

I would expect that we're going to make a couple of anesthesiology practice acquisitions this year, perhaps one during the first half, maybe late in the first half of the year and the second one during the second half.

So that's kind of what we are targeting on the anesthesiology side.

That's very helpful.

If I may just ask one last question.

Sure.

And I'll hop back in the queue.

In terms of your acquisitions for when you look towards 2010 for the core business, are you seeing valuations there staying similar to 2009?

Are you seeing change in valuation one way or the other?

Yes, thanks.

Actually historically we talk about paying multiples for these practices that are in the four to five EBITDA range.

And so what we do when we value a practice is we say, if we were managing this practice with the kinds of efficiencies that we know we can bring to the table, what kind of contribution for pro forma EBITDA could we expect to generate from these practices.

And then we'll put four and five times multiple on that.

And that's historically been what our payments have been for the practices.

We ended up 2009 below the four on an average basis, below that four multiple and closer to three and a half.

So we seen multiples that have come down over the last year or so.

Our next question comes from the line of John Ransom from Raymond James.

Please go ahead.

Hi, good morning.

Good morning.

Roger?

Is there a state or two from a Medicaid standpoint that you're watching especially closely?

And I wondered also if you could update us on your thoughts on the lawsuit in South Florida over Medicaid rates, thanks.

Okay, well the states that we're looking at are our largest states of course which are Texas and then Florida, California, etc.

Texas, as you remember gave us that increase as a result of their lawsuit a couple of years ago.

Their legislature meets every other year and this is not a year when they meet.

So we are not expecting anything to change in Texas.

California, as you know has instituted, announced a 5% cut in physician reimbursement.

That got tied up in court, the California Medical Association sued them and the court has put a hold on that cut.

And so we'll see what happens with that.

We have in the past indicated that Medical, which is the California Medicaid arm pace is very little and we had said that 5% cut to us would not be material in any way since we get paid so little to begin with.

Florida, which is the other one that we're watching pretty closely as you know has recently, the governor has put in this budget.

And he is not asking the legislation for any Medicaid cuts.

So we are encouraged by that.

The lawsuit going on here in Florida is similar to the one that happened in Texas.

It was put together by the American Academy of Pediatrics and a number of other individuals.

And I really don't have an update on what's happened lately there.

I think it's just moving through the courts but I haven't seen anything from the American Academy indicating any kind of update on how that's moving along.

I mean this may be too picky and to comment on but we were not clear, let's assume the state loses that suit.

Are you aware, they tied us up in appeals for years and years and years or would that be closer to a final determination?

I know it's been going on since 2003 but I didn't know the other steps if they happen to lose that case.

Fortunately I'm not a lawyer.

So I suppose, like anything else they could appeal it and tie it up but who knows.

Okay, and my other question, I know Q1 guidance is a favorite topic.

Maybe it would help to understand that.

Is there something different about this year either in terms of FICA or the number of days or bonuses paid that was different than last year that will put more kind of one-time pressure on the first quarter?

Well, usually as you know, John, we would have more physicians so you're going to have more dollars of FICA there every year as we continue to grow.

And then the bonuses are also go up incrementally.

So we do have more bonus dollars in there than we had last year.

But the bonuses are accrued over the year, so that may affect more of the cash flow.

The cash flow and just the FICA, because it's all related to just salaries as well as the bonus expense.

The only other thing I'd say is the share count is up so that does play a role.

If you look at net income versus EPS, you'll get a different picture.

Thank you.

Our next question comes from the line of Ryan Daniels from William Blair.

Please go ahead.

Yes, thank you.

Good morning guys.

Just a real quick follow-up to John's question.

Isn't it also safe to assume this first quarter could be a little bit more exacerbated than the last year or so just given the strength in your NICU acquisitions over the last year?

I know it's probably become arguably a bigger piece of the business going into 2010 that maybe NICU was going into 2009.

Is that fair to assume?

I'm sorry, I missed the word.

It could be a little more what?

Well just more impact full, kind of the Q1 impact that John was just talking about.

Doesn't the fact that you acquired over 100,000 NICU days kind of drive the impact of Q1 being more impacted potentially more in 2010 than it would be in 2009 just given the big addition of new NICU days?

I mean, we did have acquisitions that we had in 2008 that were less neonatal but we still have a good activity there.

So I don't believe that that would--

We started, I'm not sure, we started off 2010 pretty good here.

We've acquired 20% of the patient days that we acquired in all of 2009.

So the acquisitions are hard to predict.

They just get spread out.

Well as you saw for example, we've been working on these two practices for months and all of a sudden they both close on the same day.

I mean, so we ended up announcing both of those practices on the same day last week.

So the variability on when they close was just really hard to predict.

Sure, that makes sense and I guess a lot of the bigger questions have been answered.

A bit of a different one.

I'm curious if you've got anymore thoughts on the HEIT stimulus payments.

It looks like some of the rules preclude physicians who spend a majority of their time working in hospitals from collecting payments but there may be some exclusions to that.

So I'm curious if you think your systems and baby steps might be eligible for that?

Or if you're under the impression because doctors are working in an acute care setting, you may not be eligible and you may have to pursue a bonus from the hospital?

Any color there?

Yes, well, first of all, we are pretty confident that we can get our systems certified which is the first step.

We've attended a number of meetings and conferences, etc.

And from what we're hearing it does appear that the first step which is getting your system certified, we can accomplish that.

The second step is harder to predict.

We have a lot of time and effort that we have spent with our lobbyists in trying to make those points with the different specialty societies as well, the anesthesia and the hospital based specialties.

So I don't have an update but we'll have to wait and see.

The devil will be in the details.

And when those are known, we'll know.

But we are aware of that and we are lobbying the correct organizations to make sure that they are aware that hospital based physicians are different from office based physicians and not necessarily employed by or part of the hospital.

Okay, great.

And then maybe final question here and I can hop back in the queue.

But I think this is the first quarter that both Atlanta and Raleigh are also in the same-store growth and I know you don't want to break anesthesia out specifically but I'm curious if you could talk a little bit about the contribution to growth.

Did those augmenting your overall same-store growth?

Were they slightly below?

Just any feel in how that impacted the quarter would be helpful.

No, their same-store growth is positive.

But did it skew up the overall results or did their inclusion bring it down?

I'm just trying to get a feel for how it related to the NICU business?

No, we don't give that information but I mean they're positive.

So it's not really skewing it down now.

No.

Okay, thanks guys.

Our next question came from the line of Kevin Ellich from RBC Capital Markets.

Thanks, it's Kevin Ellich.

Hi, Kevin.

Good morning.

Just had a couple questions, starting off with the margin expansion in the quarter which was pretty good.

Just wondering how sustainable that is?

And should we expect that type of expansion going forward?

Well, I mean, again, I talked about it in my comments there that a lot of it had to do with the composition of the acquisitions in 2009 which were up.

Neonatal practices and again they have fixed costs as it relates to a lot of fixed cost as it relates to the physicians.

So that certainly helps.

But I can't really predict that this year, I mean our pipeline as Roger mentioned is robust and I can't predict that it will be the same compensation of practices.

But that certainly does help.

And we did have some significant not only the number of them but we had some large neonatal practices in 2009 Kevin.

Okay, and Roger, would you say that the pipeline was roughly the same, in terms of size?

I know it's robust but we saw Mednax acquire larger practices last year.

Is that a similar pattern?

Is that pattern holding true for 2010 and beyond?

Yes, Kevin.

I'm not going to comment on what 2012 will look like but the way that we look at our pipeline, we break it up into different buckets.

And we have a bucket of people who are just interested talking.

And so they belong in one bucket and then we have another bucket of people who have moved forward and given us their information so we can make them an offer on their practice.

And then we have a third bucket of people who we've made offers to and we're negotiating.

And a four bucket of people who have accepted the offer and we're just moving forward through the due diligence process.

And when I look at those four buckets, it looks very similar, the number of deals that are in each of those buckets looks very similar to what those buckets looked like a year ago at this point in time.

Not only in terms of number of practices but quality Not only in terms of number of practices but quality of those practices as well.

So I would say yes, our pipeline this year.

If you notice we increased sort of our guidelines for what we would spend in acquisitions this year.

Historically we've talked about spending $75 million to $100 million in core acquisitions.

And this year we're saying we think we'll spend $100 million so they are pretty comparable, Yes.

Okay, that's helpful, and then this question is for Vivian.

Just going back to the fourth quarter revenue, I'm just trying to make sure that I understand this correctly.

The revenue was up, revenue growth was around 12% but that was lower than it had been in the previous three quarters, is that primarily due to the critical health acquisition now being annualizing?

No.

No?

No, I mean on a sequential basis I think we made the comment in the third quarter if I remember that correctly regarding the anesthesia being in the comp.

But we did have lower overall same unit revenue in the fourth quarter versus what we saw in the third and the second quarter.

Okay.

That's helpful and then the same unit pricing growth has been pretty strong and steady the last few quarters.

Is some of that growth and increase coming from anesthesia?

Or is it all on the newborn side of the business?

Well anesthesia would also have some pricing growth but primarily it's still on the NICU side of the business.

But there is pricing growth in anesthesia as well.

Yes, there is.

I don't want you to think that there isn't.

No, that's helpful.

And then last question is on the, when we look at the Company and what percent of the earnings comes from each quarter kind of the earnings progression throughout the year, I look at the last few years and kind of roughly 20% of earnings comes from Q1.

Would you say that trend should stay roughly the same?

Yes, I think you're right.

Thats our observation as well.

And there isn't any reason why that should not be the case.

Okay, thanks, nice quarter.

Thank you.

Our next question comes from the line of Robert Mains from Morgan Keegan.

Please go ahead.

Thanks, just a couple numbers questions.

A follow-up on Kevin's question about margins.

You said you obviously were helped by the number of neonatology deals you did.

But am I also correct that another factor was efficiencies in the anesthesiology side.

And do I assume that there's a Raleigh back office aid in that effort?

I think that's right, at least Carl would like to take credit for that.

But no, that's right, Rob.

I think that that clearly there was some contribution from our ability to now start to bring all of these back office functions in house.

In fact, the last practice that we acquired in December, anesthesiology practice we acquired in December, we were able to just automatically bring into that back office function, that back office setting.

So, yes, I think that's right.

Okay, and then based on the last current I would assume that we can expect kind of quicker accretion or whatever you get from the back office on subsequent acquisitions in anesthesiology?

Yes, I think particularly as we look at practices that have been historically outsourcing their billing and collection functions, I think that that's right.

Okay, and then I have a little archean numbers question and that's it for me.

Depreciation and amortizations kind of bounced around.

Just in terms of modeling purposes going forward, the level we saw in this quarter is that what we should be building from going forward?

Yes.

What happened with the depreciation is we did do some valuation regarding the intangibles on some of the anesthesia practices.

So we did have some one-time adjustments on that but going forward you'll see it normalized again.

Obviously with the impact of any acquisition acquisition activity that we have.

Okay, great.

That's all I had.

Thanks a lot.

Thanks, Rob.

Thank you.

(Operator Instructions) Our next question comes from the line of Gary Taylor at Citigroup.

Please go ahead.

Hi, good morning.

Hi, Gary.

A couple questions.

First, just going to mix on the Medicaid side, was flat sequentially, was better than your guidance or your anticipation.

And then the first quarter guidance you've brought down I guess risk of anticipated mix shift from 200 basis points to a hundred.

So I have two questions.

One, how much of a view on January mix have you had at this point and does that influence that Q1 guidance a little bit because I know there's a little lag.

And then just secondly, anything around your thesis on why the mix has been as stable as it has?

I think it's turned out to be better than you thought it might be this year.

Yes, well, we have very little visibility into payor mix for January at this point in time, no more than a week or two.

So we're just looking at what's going on in the economy and just trying to make a best guess analysis.

But like I said earlier, we're trying to guess what's going to happen during this year with two or three weeks worth of information and it's just hard to do.

And we would rather just be a little more conservative.

Yes.

On I agree that we have not seen anywhere near what some of the worst case scenarios were as far as payer mix shifts.

And I think this is total speculation, but there are a number of reasons.

First of all, I think that the quality of the jobs that were lost perhaps were not those in general terms that had health insurance with them.

So perhaps the quality was different meaning that maybe there were more construction kinds of jobs, etc.

that were lost.

Number two, I'll say that the impact is limited because half of my patients are already Medicaid.

So the patient population I'm talking about really only impacts half of our business.

Number three, I think that the population that we care for is a younger population by definition.

And the people who are having babies in general terms, 25-35 year olds tend to be where both mother and father have jobs.

So perhaps the possibility that both mom and dad will lose their jobs is obviously blunted because it's different from one person losing their job and losing their health insurance.

I mean, I think it's a combination of all those things but that's just speculation.

I have no hard data to back that up.

Sure.

Well I appreciate the speculation.

Second question is Aetna had made some comments this morning on their call about essentially as I interpreted trying to be more aggressive on utilization management and they didn't specifically say NICU or anything related to your business.

They were just talking about providers in general.

And I guess the question is we've seen this (indiscernible) and flow a little bit.

Is there any reason to be more concerned about that impacting your business in 2010 than has been for the last couple years?

I would say no.

We pay attention to that all the time and together with managed care contracting those are every day issues for us.

We are blessed in ICU which makes it just more difficult for those kinds of programs to take hold.

But we do our own management and we know what our own length of stay is and we've got pretty good numbers that compare our length of stay with others.

And we believe we compare very very favorably when you start to break down the cases.

And we're going to demonstrate that to the payors.

I don't foresee that's going to be a problem this year.

Great.

Thanks a lot.

Thank you.

Our next question comes from the line of Dawn Brock with Coffman Brothers.

Good morning everyone.

Hi, Dawn.

You've gotten a lot of questions on the payer mix and I think what I'd like to do is maybe ask it a little bit differently.

Which is that even though we've seen stability albeit at higher levels, is there anyway you could give us color within the specific mix on practice specialties, ie, where NICU and pediatric related subspecialties are versus anesthesiology and maybe have a balance of acquisition activity between the specialties is guiding the payer mix.

You're asking it differently, but you're going to get the same answer.

No, I wouldn't drill down that far.

We're looking at on the anesthesia side as you know, the government payor is Medicare.

So I would say that the differences between what's left is the historical and core practices are not significant.

Okay, fair enough.

And the second thing is Vivian, would you mind talking a little bit about the tax rate going forward and the break down?

How the different components in the fourth quarter be it the settlement and the new states planning strategies impact 2010 and indeed impacted the fourth quarter?

Yes, I can talk about that.

I don't want to give out specific break down on the numbers.

But I can tell you that going forward, we are going to forecast our tax rate for 2010 at the annual rate that we ended in 2009.

So it's roughly 35 basis points better than what we had historically had at 39 to 5 rate.

So we basically did some tax planning strategies as I mentioned regarding our reorganization of the Company into the divisions.

And so that will continue going forward.

So right now the best estimate we have on the 2010 tax rate like I said will be the 38.89% that we had in 2009.

Okay, that's excellent, and then just one last follow-up, I want to clarify that the guidance range you gave for the first quarter of 2010 is bracketed within the plus or minus 1% for same-store NICU volume and payor mix shift on the government side.

Correct.

Okay, excellent.

Thank you very much.

Good quarter.

Thanks, Dawn.

Thank you.

Our next question comes from a follow-up from John Ransom at Raymond James.

Please go ahead.

Hi.

Just a conceptual question.

Obviously with anesthesia competition heating up on the acquisition side and the fact that you're still buying NICU for less than four times, how do you choose if you've got an anesthesia deal at six or seven times EBITDA versus NICU deal at three, four, how would you think about doing anesthesia when the returns are going to be so much lower?

Well the six, seven times is your number, not mine.

I understand.

We prefer to do a neonatology deal all day long.

We think that neonatology deals are less risky.

We think that we know how to integrate them.

And we know how to generate efficiencies very quickly and bring value to those practices.

We have an opportunity to acquire a number of neonatology groups that we have had our eye on for a long period of time.

And now for whatever reason we see that they're willing to talk and move to forward.

We don't believe that the anesthesiology practices that we are interested in are going away.

We think we have an opportunity to acquire the practices that we want to acquire.

And so our projections for this year are that we will do about spend about $100 million in acquiring the core practices.

And that we're going to acquire one, possibly two anesthesiology practices.

Okay, thanks.

Yes.

Thank you.

Our next question comes from Alan Fishman with Weisel Partners.

Please go ahead.

Hi, thanks for taking the question.

I guess I wanted to drill down on the healthcare IT portion of what we could see coming in the fourth quarter of 2010.

Looking at it another way, is there any reason why Mednax physician working in a NICU would not be considered an eligible professional to get the reimbursement if baby steps is certified?

Well certification is only the first step.

The second step is how the Fed's are going to determine how they are going to spread the money around.

And that has not been determined yet.

So one of the questions that comes up is if you are a hospital based physician meaning emergency room, radiology, neonatology, an else these a or pathology, do you double dip if the hospital is already getting something from the Fed's for having provided an electronic medical record for the hospital?

That is the question that's on the table that has not been answered.

Our point of course is we've made our own investments.

We have had our own medical record for over a decade, and our record to the NICU is specific and one that most hospitals if not all of them don't have.

So we should be entitled to our own separate reimbursement.

And the anesthesiologist and the radiologist and emergency room physicians and everything else that's hospital based is making the same argument.

So we don't know yet and so I wouldn't project anything until we can get those questions answered.

I see and when do you expect the final rule?

Let me ask around the table to see if anybody has a clue.

Anybody want to guess when?

I'm getting a lot of head shaking here.

Okay, thank you.

It doesn't look like we know, Alan.

Okay.

Thank you.

(Operator Instructions) Our next question is a reprompt from Kevin Ellich from RBC Capital Markets.

Please go ahead.

Thanks, just a quick follow-up going back to anesthesia.

Roger I was wondering if you could provide more color, any information on multiples, valuations.

And I guess one thing I was always curious about is anesthetics was taken out by Team Health.

Just wondering if you guys looked at them and any reason why you passed on that.

Well, we looked at a lot of different practices that are out there.

When I said that we were looking at practices that have long standing relationships, etc., that sort of differentiated what our target market was.

I don't know anything.

I mean I don't want to put anybody down or anything.

I think that anesthetics just didn't fit our mold of the practices that we were looking for.

They're multi-state and etc.

, smaller groups, etc.

So as far as our multiples, they keep coming down and that's all I'm going to say about it.

As we are able to negotiate and bring more efficiencies either pro forma multiples that we're talking about.

So they have come down from our first

Okay, and then safe to assume you've been able to drive the operating margin higher through integration process?

Yes.

Okay, thanks.

Thanks, Kevin.

Thank you.

We have a follow-up from Brooks O'Neil from Dougherty & Company.

Hi good morning guys and I apologize.

I jumped on late.

But Roger maybe you could just talk a little bit more about what differentiates your approach to these anesthesia practice acquisitions from the other guys we all know are looking at it?

And it sounds like you probably are looking at completely different things and you're positioned quite differently than they are.

But your perspective would be great.

Okay, thanks Brooks.

Well, we're trying to build in anesthesia what we have already built in neonatology.

A national group practice that physicians would want to come together under one umbrella and remain focused on that specialty.

So we're not going to be doing emergency room medicine or radiology or anything else.

We've built our one leg which is neonatology and we'll build the second one is which is anesthesia.

We want to understand how to get the most efficiency that we can from that business.

We want to put together our own medical education department for anesthesia.

We want to hire our own individuals who are going to be able to do research in CQI and establish scientific conferences like we've done in neonatology.

We want to have our own internet of physicians discussing difficult cases.

We want to have the whole communications program that we have.

We want to have electronic medical records.

So what we have already built in neonatology is what we are trying, what we are going to build in anesthesia.

We have what I think are four of the best practices in the country.

And as I said we're looking for practices that have long standing relationships with hospitals that are in communities that are going where we see opportunities for growth.

And where we see the opportunity that we can bring the value and the efficiencies to those practices.

There is just a lot of excitement that I can tell you about in the anesthesia world for what we are trying to accomplish.

We had our meeting of anesthesiology group practice leaders a week ago in Atlanta.

And I can tell you that our four practices are thrilled and excited to be part of Mednax.

That's great.

I appreciate that, and clearly, one of the things that you mentioned up front and we've always believed differentiated you is the national physician group practice.

I know you're going to build that in anesthesiology.

And it seems to me that maybe some of the other companies have more of a hospital orientation around what they're trying to do in anesthesiology.

Well again without mentioning any names, their strategy is whatever it is.

We're not interested displacing groups that are currently providing services or just acquiring the back office or just providing services.

I mean that's not our model.

Our model is to incorporate them into our national group.

They become full time W2 employees of our Corporation and they tie their future, their financial future, their professional future to the future of Mednax.

Okay, great.

Thanks a lot.

Thank you.

Thank you.

We have no further questions at this time.

Okay, if we have no further questions then let me thank you for participating this morning.

And I'll look forward to speaking with you next quarter.

Thank you.

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