Pediatrix Medical Group Inc (MD) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by.

And welcome to the 2012 first quarter earnings conference call.

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

Later, we will conduct a question and answer session.

Instructions will be given to you at that time.

(Operator Instructions)

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

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

David Parker.

Please go ahead.

Good morning.

And welcome to MEDNAX 2012 first quarter earnings call.

Certain statements and information during this conference call may be deemed to be forward-looking statements within the meaning of the federal private secures litigation reform act of 1995.

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, 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 and its quarterly reports on form 10-Q including the sections entitled risk factors.

At this time I'd like to turn the call over to Dr.

Roger Medel our CEO.

Thank you, David.

Good morning, everyone and thanks for joining our call today.

Our reported results from operations for the 2012 first quarter reflect an organization that continues to grow while at the same time pursuing a unique, durable, and proven growth strategy that attracts physicians and delivers ongoing value.

We're encouraged by the continued interest of physician groups that want to practice as part of our national medical group.

And we're excited about the progress that we're making to build our national group practice through acquisitions across all of our physician specialties.

As we reported in this morning's press release, our revenue grew by approximately 11% for the 2012 first quarter.

Our revenue growth was driven largely by contributions from acquisitions since last year as well as same unit growth.

We continue to successfully acquire and integrate physician practices within our specialties.

And we've added four pediatrics groups during the 2012 first quarter, and then added seizure group at the beginning of the second quarter.

In late March, we completed the acquisition of three practices that were formerly part of Children's Specialist Medical Group based in Sacramento, California.

These long standing practices brought 19 physicians, including nine neonatologists, four maternal fetal medicine specialists and six pediatric critical care physicians who have been serving their communities since 1995 through our pediatrics division.

These are outstanding private practices affiliated with the Sutter System and represent our first presence in the Sacramento area.

Their annual NICU patient volume now exceeds 22,000 patient days.

In addition to this, also in late March we completed the acquisition of a pediatric cardiology practice in Orange, California.

This is a well respected practice of two physicians that is affiliated with 11 hospitals in the area and has an extensive outreach program including multiple clinic locations throughout Orange County.

Focusing on American Anesthesiology in early April we completed the acquisition of Burlington Anesthesia in Burlington, North Carolina.

Burlington Anesthesia consists of six anesthesiologist who practice as part of a care team model that includes 12 full-time equivalent CRNAs providing a wide spectrum of anesthesia services.

Founded in 1978, they have long standing relationships in their community.

Many Burlington physicians serve in leadership roles at their facility and are active in their local communities.

As a practice, they felt that with the changing healthcare climate, it was the right time for them to join a national group practice like American Anesthesiology whose goals are aligned with theirs.

Each of these practices has a commitment to quality of care, customer service, and patient satisfaction that runs deep throughout their culture.

These qualities are very much aligned with MEDNAX's core values and will provide an opportunity to share best practices among our entire medical group.

We're managing a very full and robust acquisition pipeline.

Throughout all of 2012 we anticipate investing approximately $300 million to complete practice acquisitions across all of MEDNAX's physician specialties.

While our goal has not changed on the $300 million, the timing of the acquisitions may be impacted by the complexity and the size of some of these deals.

I'll ask Vivian to discuss the financial statistics in a few minutes, but first I want to spend some time discussing how we are enhancing the value proposition that I just mentioned.

We recently Completed one of our most important and largest meetings of the year, our annual medical directors meeting.

This is a meeting where our physicians and clinicians in leadership roles come together to share bench practices across all our specialties and to benefit from the resources, teamwork, collaboration and leadership that come with our successful national group model.

As a matter of fact, the theme for the meeting this year was Teamwork and Collaboration and the value that this brings to us as a national group model.

Healthcare today is creating questions for individual physicians about their survivability about what will happen next, will the patient protection act destroy my practice?

Will managed care overtake me?

Will further regulation burden my ability to effectively treat patients?

Are hospital administrators aligned with my goals, et cetera.

We all know that the business side of healthcare has imposed itself on patient came in ways that make it nearly impossible to run a practice without comprehensive systems and supporting resources to cope with the demands of contracting, government relations, credentialing, billing, compliance, collections et cetera.

Fortunately for us, our ability to execute on our group model is critical and in today's healthcare world, we believe our model leads the way.

As a national medical group, we are well positioned for the future of healthcare and how these uncertainties may manifest themselves.

I know that as a team of peers made of physicians and practitioners, our interest and goals are aligned for our success.

We are a growing team with the financial resources and the administrative infrastructure necessary to enhance our positioning as a group model.

This enables our physicians to focus on what is most important; patient care and patient outcomes.

Our model has many examples of the value associated with our group effort.

Government affairs and regulatory efforts at the Federal and state levels.

Our outcomes data warehouse drives clinical quality improvement through our continued quality improvement program and our continuing medical education and research efforts.

Our compliance team establishes the message through which the company seeks to foster the highest level of ethical and legal conduct by our associates as they focus on patient care.

And last, though certainly not least, our administrative professionals provide support for the revenue cycle management functions through a myriad of non-clinical but vitally important functions.

The value of collaboration at all levels calls cultivates cross-fertilization of ideas so that we're continually improving upon our success, addressing the key questions and issues in our path and defining what a strong national medical group looks like.

There are many great examples of this in our company today and I want to pass along a few that stand out and demonstrate what true professional collaboration looks like.

Our neonatologist and pediatric cardiologists collaborating to identify congenital heart disease in infants, working on the screening program to determine their real impact across the country, which we do not believe has been considered as states roll out their screening programs for congenital heart disease.

Our neonatologists and maternal fetal medicine specialists collaborating on cord clamping research working together on the timing of the clamping of the cord to determine how it affects outcomes of infants, especially premature infants.

Lastly, our center for research education and quality collaborating with our anesthesia team to assist them with their efforts in outcomes research.

This value proposition has drawn groups to our model and will continue to do so for some time to come.

Based on this, we believe that the question should be posed to physician groups.

If you're not seriously considering joining MEDNAX, are you at risk of being left on the sidelines?

Why?

Because in today's environment where survivability as an independent physician practice is a real and growing concern, there are three choices for a physician group.

You can join with a hospital whose primary focus is on the facility.

You can join with a university whose primary focus is on multi-specialty research and academics or you can join with a group like MEDNAX, a group of physicians and peers whose interests are 100% aligned providing a clinical model that allows physicians to do what they do best, take great care of the patients.

Together we're adding value and reshaping the delivery of care through investments in the clinical information and management systems necessary to advance evidence based medicine.

A national group practice is better able to advocate on behalf of the physician and advanced practitioners.

I believe that our model should take center stage in leading the changes in how healthcare is delivered in communities across the country.

With this unique proven dynamic and durable growth model we are well positioned for the future of healthcare, whatever the future holds.

Now, I realize this is a financial conference call and we did report results for our recent quarter, but I also think it's important to provide you with some perspective of the valuable work being done by our group to care for patients in our communities and the value with which our model complements this effort.

So at this time, let me turn the call over to our key financial officer, Vivian Lopez-Blanco for our review of financial results before we open up the call to take your questions.

Vivian?

Thanks, Roger.

Good morning and thanks for joining our call.

With our 2012 first quarter results, we're presenting a company that continues to grow strategically through our durable and proven model with contributions both from the acquisitions completed since January 2011 as well as same unit practices.

We continue to be challenged by variability within some of the same unit drivers and our results demonstrate that we continue to meet this challenge.

As we discuss our quarterly results, we would like to remind you of something that we pointed out on our last call and that continues to impact our results this quarter.

That the growth rate in operating results for any given quarter will potentially be impacted by the variability in margins due to the mix of practice acquisitions as well as timing.

For three months ended March 31, 2012, revenue grew by 10.6% to $422.6 million.

Over 77% of our revenue growth came from acquisitions while the remainder is from same unit growth which increased by 2.4% for the 2012 first quarter from the prior year.

Of this 2.4% same unit growth, revenue attributable to volume grew by1.8% while net reimbursement related factors by 0.6%.

On the volume side, we experienced growth in each of our physician specialties and sub specialties including hospital based neonatal and anesthesia and office space, maternal fetal and pediatric cardiology services.

The number of patient days at neonatal and intensive care units included in our same unit base increased by 1.2%.

Our same unit revenue growth from net reimbursement related factors was principally due to continued modest improvements in reimbursements received from third party commercial payers as a result of our ongoing contract renewal processes and an increase in the administrative fees received from our hospital partners due to the expansion of our services as a result of internal growth initiatives, offset by a shift in payer mix to government payers from commercial payers, year over year.

The percentage of our services reimbursed under government programs increased by 90 basis points towards a higher percentage of services reimbursed under government programs during the 2012 first quarter compared to the prior year first quarter.

Sequentially, the percentage of our services reimbursed under government programs for the 2012 first quarter relative to the 2011 fourth quarter remained unchanged.

Our profit after practice expense for the 2012 first quarter was $133.4 million up 8.2% from $123.3 million for the prior year period.

Profit after practice expense margins declined by 69 basis points which can be attributed to the variability in margins due to the mix of practices acquired since January 2011 and also as a result of a slight increase in operating expenses in the 2012 first quarter as compared to the prior year period.

We generated operating income of $79.4 million for the 2012 first quarter, an increase over 4.8% from $75.7 million for the prior year period.

G&A expenses grew by 12.1% for the 2012 first quarter to $46.9 million from the prior year period.

As a percentage of revenue, G&A expenses increased slightly to 11.1% for the 2012 first quarter from 10.9% for the 2011 period.

Primarily due to a one time charge for separation costs related to organizational structure changes.

Depreciation and amortization expense for the 2012 first quarter increased to 1.7% of revenue from 1.5% for the prior year period primarily due to the amortization of intangible assets related to acquisitions.

Net income for the 2012 first quarter was $48.4 million up 6.4% from $45.5 million for the 2011 period.

We reported diluted earnings per share of $0.98 based on a weighted average 49.4 million shares outstanding which compares with diluted earnings per share of $0.94 based on a weighted average 48.4 million shares outstanding for the 2011 first quarter.

Looking at our balance sheet, we had cash and cash equivalents of $22.4 million at March 31, 2012.

Accounts receivable at March 31, 2012, were $236.7 million, an increase of approximately $6 million as compared to the December 31, 2011.

Day of sales outstanding decreased by approximately one day for the 2012 first quarter from the 2011 fourth quarter as we continue to integrate our recent acquisitions.

The total amount outstanding on our $500 million revolving credit facility was $83.5 million at March 31, 2012.

An increase of $54.5 million from the $29 million outstanding at December 31, 2011.

During the 2012 first quarter we used $32.1 million of cash to fund our operations.

We used cash to fund our operations during the first quarter as we do every year as we make performance based incentive compensation payments principally to our physicians.

We also have our normal 401K matching contribution payments in the first quarter.

In addition to using our cash to fund operations, we invested approximately $28.5 million to acquire four physician group practices during the first quarter as well as to make contingent purchase price payments for acquisitions completed in prior periods.

Maintenance capital expenditures were $2.9 million for the 2012 first quarter as compared to CapEx of $20.3 million in the 2011 first quarter.

During the 2011 first quarter we bought an office building, so our 2012 spend for maintenance capital expenditures is back in line with our historical levels.

Moving on to our outlook for the 2012 second quarter as we announced in this morning's press release we expect that our earnings per share for the three months ending June 30, 2012, will be in the range of $1.15 to $1.21.

The range for our 2012 second quarter outlook is determined by anticipated same unit growth for the period which we estimate to be 1.5% higher to 3.5% higher year over year on a total same unit basis.

This same unit growth range assumes combined volume across all of our physician specialties.

In addition, this range anticipates variability in the mix of our services reimbursed under commercial and government payer programs as well as improvement from commercial payer contracts.

Our second quarter forecast anticipates that same unit growth will be one-third volume growth and two-thirds net reimbursement growth.

As a reminder for the remainder of 2012, the growth rate and operating results for any given quarter will be potentially be impacted by the variability in margins due to the mix of practice acquisitions as well as the timing.

Now I'll turn the call back over to Roger.

Thank you, Vivian.

With that, let's just open up the call for questions please.

(Operator Instructions) Our first question comes from the line of Darren Lehrich with Deutsche Bank.

Please go ahead.

All right.

Thanks and good morning.

This is Brian Zimmerman in for Darren.

My first question is can you frame the 100 basis points year-over-year decline in operating margin in the context of payer mix and practice mix?

And how should we think about these margins and these components going forward?

I think that if your guys go back to the fourth quarter we kind of introduced that concept when we talked about the lapping effect with the significant acquisitions that were flowing through all of 2011 for some of the larger anesthesia practices that we acquired at the end of 2010.

And so there, basically, Brian, you saw some of that gross margin impact and also the operating income impact.

Most of it is related to, as I said, the mix of these practices and as we talked about as I visited some of you guys, I always talk about what impacts this and on the anesthesia side it's related to the anesthesia care team model that these practices have and that would be whether the CRNAs are employed by the practice or whether they're employed by the hospitals.

And so that would be the biggest impact as I mentioned we do have a slight increase in operating expenses but pretty much that's the bigger impact.

Obviously, on the operating income line as we talked about there was that one time charge that we talked about in G&A which is not a recurring charge.

Okay, thanks.

That's helpful.

My next question is I know you're limited in what you can say regarding upcoming acquisitions, but I was hoping you could provide some additional commentary around the pacing of acquisitions.

It seems that the pace has been different than you've been characterizing in the last couple of years.

And I was just wondering if I could get your updated thoughts on what you're seeing to complete these deals.

Hi, it's Roger.

We're still very bullish on our projection to complete the $300 million in acquisitions that we talked about this year.

Not this quarter, but this year, meaning we got eight months left to get our goal in place and I'm very comfortable that we'll get that done.

The acquisitions are more complicated as we have stated in the past.

And so that means that there's more contracts to be done.

More signatures that we have to get from different hospitals and other providers.

Just more work to be done in getting the acquisitions completed.

The more physicians and nurse anesthetists that there are, the more employment contracts that need to be negotiated, often on an individual basis, et cetera, et cetera.

The timing is the variable here, but from my standpoint, the pipeline is very full, very robust.

There are a number of larger practices in that pipeline with 50, 70, 100 physicians and more than that in the nurse anesthetist side.

And we won't complete all of those, but it makes me very comfortable in telling you that I think we will complete our $300 million goal before the end of the year.

Okay.

And then my last question is regarding the same unit revenue to be down a little bit.

I was wondering what was influencing this view?

We're hearing from the hospitals that they're seeing a slight rebound in births, which would imply directionally that it would be stable to up.

What's influencing this view?

Well, as far as -- we did see a slight flavor-ability in the births in our same units versus some of the quarters last year.

I just have to keep telling you guys what I've been saying over the last year is that some of these things I don't think we're out of the woods on as it relates to continued variability in it, so basically, we did have positive volume in all of our specialties in the first quarter.

And certainly seeing within some of our specialties, very good volume.

And so I think that some of that is still going to be variable.

Okay.

Thanks a lot.

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

Please go ahead.

Good morning, guys.

Thanks for taking my question.

Roger, quick follow-up question for you on the M&A front.

You had a lot of color in your prepared remarks on why doctors should consider choosing MEDNAX over some of the other alternatives.

Is that just helping shareholders understand your value proposition or should we read into that, that maybe there's a little bit more competition in the market with hospitals and other entities buying physician groups today than perhaps a year ago.

That's a good question.

No, I mean, I'm trying to get our shareholders to understand why we think we're winning and we're going to win this game.

We think that we have a long term proven strategy that brings physicians together that adds value to what they're doing and that in this era where everybody is shooting at you; the lawyers want to sue, the government wants to investigate you, the payers don't want to pay you.

Being a part of a team of your own peers that has the infrastructure to fight back against some of these pressures is the reason why we believe that we'll continue to be successful.

So no, is there more competition?

Yes.

We said from the beginning that we thought that there'd be private equity money and we've seen that.

There is private equity money snooping around.

And we believe they will get some deals done.

We haven't really seen too many hospitals getting involved in acquiring anesthesiology practices.

I don't think we've seen that, but there is competition.

And fortunately, it's a big market.

There's 40,000 anesthesiologists.

But to me, it's an easy decision, do you want to join a private equity firm where you know you're going to get flipped in three or four years.

You don't know who you're going to be working for.

You're not talking about building research and quality assurance and education and having compliance forums and all that stuff or do you want to join a group of your own peers that has a proven track record of what we do and how we do it.

That's helpful color and definitely sounds like a good sales pitch for the physicians you're working with.

That's well rehearsed.

Maybe I said that a couple times.

A couple more quick ones.

I don't know if Karl is in the room, but I'm curious-- there's been a lot of debate recently in several states going to the Supreme Courts about the ability of CRNAs to administer anesthesia without the supervision of physicians.

I'm curious if you have any thoughts on that and if that would impact your business positively or negatively depending on how that trends throughout the various markets.

You caught me, I'm in the room.

We didn't let him off the hook, Brian, you were right.

Yes, there is some talk.

I think there are two states right now that are in court challenges in California and in Colorado from states making the decision to opt out of the requirement for supervision of nurse anesthetists by a physician.

I guess a few comments on that.

And clearly, I'm not going to get into the clinical components of it, but from talking to our physicians and people here, I truly believe that the best model is having a physician involved with the care of the patient.

There's no question from our standpoint that that's the model that provides the highest level of care in the situations that requires the full scale training of a physician that doesn't necessarily be there if it's a CRNA only model.

As far as the dynamics of that, there are several states that had opted out, so California and Colorado are not new.

There really hasn't been a big change in the dynamic in those states, those places where CRNAs have been moving to take over the care in hospitals.

Clearly this will require hospital credentialing changes and bylaw changes to allow that to happen in a lot of places and that really hasn't happened in those states.

It really would be more likely to impact rural locations where it's harder to find the full scale of providers whether that be even nurse anesthetists but as well as physicians on the surgical specialty and anesthesiologist and that's the places that they seen some impact.

But even without it, I don't think there's been a huge impact in the change in the states that have opted out.

So we don't see that changing our dynamic in our practices.

Okay.

Super helpful color.

And the last one, I guess for Roger.

In the past around this time of year, you've given us forward-looking thoughts on the state budgets as we go to the new fiscal year in July and October.

Any broader thoughts on the outlook on the Medicaid front as we go forward?

Thanks a lot.

Yes, thanks a lot.

You know, we're not really seeing too much activity right now.

We know from Florida that they have talked about having an impact on the hospital side of the business but none on the physician side.

What we know right now is that Florida is not talking about any kind of cut to physician reimbursement.

We've had some conversations with our Medicaid directors and it looks right now like Nevada is saying no cuts to physicians, as you know last year South Carolina carved out OB and neonatology.

Georgia has said no cut.

And of the remaining top five, Texas, Washington, North Carolina, they've all said no cuts to physician services.

I think the environment is a lot better for the Medicaid reimbursement for physicians this year than a year ago.

Perfect.

Thanks again, guys.

Our next question comes from the line of Kevin Fischbeck with BofA Merrill Lynch.

Please go ahead.

Good morning.

Actually, this is Joanna (unintelligible) for Kevin.

A quick follow-up in terms of the charge for the separation costs.

Would you be able to share the size of the charge in the quarter?

No.

All right, just checking.

Basically, we felt that we did want to mention it as a variance because again I think more importantly for you guys, you want to understand what you can expect from the G&A margin going forward.

And so I think that we'll be back at relatively in the 11% range to high 10%s remember like it was last year.

Low 11 So I think that was more relevant for you guys to understand going forward, what to expect there.

Let me just add that, that wasn't at a corporate level.

That was at a divisional level.

What was the change that was made that required that separation charge?

Yes, there's just changes in personnel that we made.

Okay.

That's helpful.

And in terms of your commentary for second quarter guidance, for the sense to revenue guidance, it sort of implies that the pricing would be better than this quarter.

So should we read into it and say that you might have some better visibility into a payer mix getting better going forward?

Is that the right way to think about it?

Okay, so payer mix is one of the variables that as you guys know, we always talk about one of the ones that we feel have been volatile over the last couple of years.

But as seasonality goes though, we do typically see less movement in the P mix from the first quarter to the second quarter.

So yes, some of that is reflected there.

Obviously, we had a 90 basis increase in the first quarter of this year which basically last year was favorable versus negative.

But the year before that we had a very big shift towards government.

And so, we kind of look at these trends when we pull out what we think is happening currently.

But the seasonality of it is a factor in our decision, Joanna, so no question.

And obviously, we continue to be optimistic in our discussion with our commercial payers, and we've seen favorable results from that and so that's continued in there as well.

All right.

And then in terms of your guidance for the $300 million of deals this year, so is it still same split $100 Million for your (unintelligible) deals and the rest for anesthesia?

More or less.

More or less, yes.

200 or more for anesthesia.

And maybe 100 for base.

Or less.

All right, and then so are you seeing increased competition in anesthesia deals?

And can you comment on multiples?

I guess it depends on the size and you indicated that there are a couple of larger deals there in the pipeline But if you can just make some maybe general comments also if you can.

Our multiples haven't changed.

We're very disciplined about how we're going about forming this national group practice.

There's no change in multiples.

Because of the competition, we don't really talk about what multiples we're paying for these practices.

That hasn't changed.

There is private equity money that has come into the market as we expected and we said all along that we would expect that.

We know there's at least one deal of a group of anesthesiologist supposedly has a handshake with a private equity firm.

That's all I know right now, but I expect that there will be-- if that doesn't happen, there'll be others.

We clearly have spoken to the attractiveness of the market, and it's drawing people to this area.

Great, that's helpful.

And just a last question to follow-up on something we asked I believe last quarter.

In terms of the proposal from CMS or rather the regulations that is expected to come out soon.

In terms of the Medicaid primary care payment increase under the reform, seems like you might be coming out fairly quickly.

So is there an update you can provide in terms of what your expectation is for your physicians to qualify and also for the services that your physicians provide to qualify under these provisions.

Our government affairs team which is who we look to for this question remains very hopeful and very optimistic.

We believe that we comply with the letter and the provision of the proposed rule.

And there really has been no specific reason for the delay.

They supposedly had 90 days to get the answer.

Those 90 days expired June 1st -- I mean May 1st.

So the 90 days now have passed and we haven't heard from the government.

But, you know, it's the government.

If they want to take another 30 days or whatever, they can.

The gist of it is our position has not changed.

Our government relations team in Washington says there's no reason to think anything has changed and they remain optimistic.

So we'll see.

That's all for me.

Thank you very much.

Our next question comes from the line of Matt Wright with Felton & Company.

Please go ahead.

Just a question here of in terms of the variability in practice mixes.

Is it safe to assume as we go forward, you do more anesthesia deals, why won't we see lower margins company wide?

I think that's kind of the point that we're making if you look, like I said before, in the fourth quarter, we started to see some of that, so it just has to do with whether we're buying practices on the anesthesia side that the CRNAs are employed the hospital or by the practice.

And you know there's also a piece related to the core, obviously, anesthesia was a bigger driver in the lapping effect in the fourth quarter.

But, depending on what's happening with the revenue growth.

But yes, on the anesthesia side, it just depends on the anesthesia care team model.

So we have kind of tried to drive home that point.

Again, one of the things I want to remind all of you, as I speak to your individually, I do this, the Company is rather insensitive to margins as it relates to that, basically included in how we price any deal because we're basically paying a multiple on the contribution of that practice.

And so, from our perspective, the pricing accounts for that.

Okay.

And then this may be a coincidental, but looking back, the anesthesia deals seems like over the last couple of years have fallen in the last part of the year.

As the deals are larger, more complex, probably take longer to integrate, isn't that setting yourself up for a cycle, kind of going forward that more often than not, these are going to be back weighted in the year.

I wouldn't say that.

I think there are different deals that are at different stages in the pipeline.

I think that you'll see some deals here hopefully relatively soon and so I don't think that necessarily there'll be weighted towards the end of the year.

I think we're just going to through this cycle where now there's a private equity firm and so some people are talking with them and trying to figure out what that's about.

I think once we work through that cycle, I think we'll go back to doing deals across the year.

Again, I expect that we'll get our next deal done in the very near future.

Thanks.

And last question, Vivian, I know you're not going to disclose how much the separation charge was but given that this was first quarter since 2009 you didn't have any G&A leverage.

Would have you achieved any without that charge?

Yes, I mean basically, we would have had a slight improvement, but like I said, I wanted to set the trend for the rest of the year which we do believe will be roughly in the 10.9% to 11%.

And we'll have the normal increases that we have.

We're always looking at the infrastructure here as we continue to grow because we do need to make sure that we have adequate coverage in all of our areas that we look at that Roger talked about in his speech, which is why we have core competencies and compliance and coding and all of that, but normally, it should be in the normal run rate.

This one I wanted to identify as a one-time charge because, to your point, we didn't have any slight positive leverage.

Thank you.

Thank you.

Our next question comes from the like of Brooks O'Neil with Dougherty & Company.

Please go ahead.

Good morning.

I have a couple of questions.

Maybe Vivian, just because I'm a little bit of a simpleton and I want you to be very explicit about it.

Maybe you could just describe with anesthesia deals, I assume the revenue is the same either way, but you have more expenses if the practice employees, the nurse anesthetists, that-- Is that what your talking about?

Yes, but the revenue is not the same.

Yes, but Karl is here so I'll let him expand on that.

Thank you.

In the practices we have, we have a mix of practices where we employ the CRNAs in certain situations where the hospital employs the CRNAs.

When the hospital employs the CRNAs, they get an amount of revenue for the services the CRNA provides and we bill for the physician services.

In that model we have a situation where we have a higher margin on those practices.

A big chunk of the expense goes to the hospital.

And typically, the CRNA themselves from the reimbursement split.

The leverage on that -- the margin on that is not the same as it is for the physician services when you look at the breakout

That's very, very helpful.

I appreciate that.

Let me shift gears and ask, as related to the mix shift this quarter, I think you mentioned 90 basis points.

I understand that it didn't change any from the fourth quarter.

But did it surprise you at all.

Or was it very much within the scope of your expectation for the quarter?

Really, this is one of the variables that we talk about.

P mix over the last couple of years as well as the volume has been volatile.

What I tried to frame up her for you guys, Brooks was, so this year we have an increase of 90 basis points in the first quarter.

Last year we had a favorable impact of roughly 1.2.

And then the year before that we had 300 basis point deterioration again.

So it's been volatile.

And so we're not surprised.

Obviously, we would love to have it be more stable.

The other thing there is that it has been less acute as far as the movement goes which we're happy to see too.

In other words, the shift.

And like I said, there's better seasonality in the second quarter historically speaking.

As the shifts and pair mix goes.

And so hopefully, we'll see what happens the rest of the year.

Sure.

So I understand all that.

It makes total sense to me.

As it relates to price increases, I was just detecting a little bit, perhaps you weren't seeing the same level of commercial price increases that you've historically been able to negotiate.

And I was just hoping for a little color on that.

I don't know what I said that gave you that impression because that's not -- we've been saying in these calls that we're still pretty happy with what we've been able to negotiate with our payers, so I don't know what specifically I said that led you to believe that.

I don't know, I think it was some word in the press release that I detected, I think it said something like slight price increase or something.

I think we say modest.

But I think we've used that in the past.

It's possible.

I was just checking.

Yes.

I appreciate it.

So last question I guess maybe you could just tell us a little bit more about what we should expect in a broad sense related to anesthesia in terms of I'm kind of anticipating this year we might see a broadening of the geographic dispersion of the practices.

And then maybe, Roger, obviously, these anesthesia practices, the ones you're talking about are bigger, more complicated which suggest they're quite sophisticated and yet they clearly see enormous value in joining your company and your group.

Just share with us a little bit more about what you think is driving them to see that value even though they're big and sophisticated and have a pretty good infrastructure going.

Hi, Brooks.

First of all, we will see geographic diversity.

I think there's enough interest from the far west to the southeast that we'll see practices throughout the country.

So we're not sticking to any specific geographic area.

The practices that are joining us in my opinion are the unique practices across the country.

When you look at the kinds of practices that we have attracted, starting in Virginia and moving through the Carolinas and Texas and here in Florida.

What you see are practices that have been established for a long period of time that have great relationships with their hospital administrators that are in growing areas that have multi-specialty physicians within their groups, meaning pediatric anesthesiologists, and physician (unintelligible), and cardiac anesthsiologists, OB anesthesia.

So these are very, very solid practices.

And the reason they're joining us, a lot of the reasons I think they're joining us is because they see the advantages of joining this national group practice that we're establishing.

And so, I've already addressed some of those things.

Yes.

But the basic issue here is that we're not interfering with their practice of medicine.

I absolutely respect people's medical experience and their training and so we're not going to tell anybody how to practice medicine.

We measure outcomes and if there are deviations from standards, we'll figure out why they are, et cetera.

But what we do is we remove all of those back office functions.

And provide an infrastructure of compliance and government relations that most small practices or even large practices just can't afford to make the investment because it's just erodes their profitability.

And we bring a partnership to the table.

You want to have physicians as your partners.

And we just have a long track record of bringing these practices together.

And I'm thrilled.

I can't even begin to express my satisfaction with the quality of the practices that we have been able to attract.

It's really flattering actually that we have been able to attract these practices.

I think that's great.

And I think it's going to continue so thanks a lot.

Thank you.

Our next question coming from the line of Kevin Ellich with Piper Jaffray.

Please go ahead.

Good morning.

Just a couple of questions here.

So first of all, I was wondering did you guys have any acquisition related expenses in the quarter that were related to transactions that weren't completed in the quarter?

Yes, I mean, typically, we have that all the time.

As you know, with the accounting rules you expense those as you go along.

We have those all the time.

Is that one of the reasons why G&A was also higher outside of that separation charge, Vivian?

No.

We have them all the time.

And it's not significantly different from any other quarter, from the quarter that we're comparing to either.

And then based on your comments about G&A should go back.

It should have been 10.9 to 11%.

If we use that going forward that implies gross margins should be down in Q2?

Just curious as to what's behind that.

It's basically what I've been saying.

If you go back to -- and I know I keep saying this.

I want you guys to look at it.

The fourth quarter we had about a 63 basis point decrease in the gross margin.

And this quarter is one that I really don't compare to for the rest of the year because.

Q1 has seasonality in it that we don't have in the other quarters for us.

But basically, the gross margins are impacted by what we were talking about.

which is all the mix of practices.

And specifically, the anesthesia care team models as well as some of the PDX practices, depending on what's happening with revenue growth, so yes.

Like I said, we basically price it in the deals because the contribution specifically for those anesthesia practices is less.

And we pay the multiple, the same multiple.

So we're not really impacted from a return perspective.

Okay.

I appreciate the color on that.

And then, Roger, same story NICU growth is good, I know there's a lot of variability in the business and it was down last quarter.

It was up 1.3% in Q3.

Just wondering in general what are you seeing in the environment on the pediatric side of the business.

Well, as far as volume is concerned, unfortunately, we continue to see that variability that is hard to identify where one quarter, or one month a certain region will be up and that same region will be flat or down the following.

There's no real trend forming anywhere that we can point to.

We get hopeful when we start to see things going a certain way.

And then it turns out that it's not a real trend.

So I really cannot yet point to anything that would make me feel that this month to month and quarter to quarter variability is coming to an end.

Hopefully, as the economy improves and people start feeling better about their potential and their future, that will change.

Right now, there's nothing I can point to.

Got it.

And I might have missed this.

Did you say in general that your hospitals that the births were actually up?

Same store births are up 1% year-over-year.

Okay.

Thank you.

Thanks.

Operator.

Our next question comes from the line of Nicholas Jensen with Raymond James and Associates.

Yes, both my questions have been answered, but first on the pay or mix issue, were we still a little bit weaker, was there any kind of select geographies about payer mix?

I know a lot of the publicly traded hospitals talked about having a weaker mix in the first quarter as well so I was just wondering if there's anything, any market that is you saw more deterioration?

Hi, Nick.

No, like Roger said with volumes, I mean with our mix, it's similar.

We basically see ups and downs in all of our regions.

I'll be honest with you, I don't look at it on a practice by practice, but on a regional by region basis.

We see variability within it and there's not one that I can tell you, this region was what drove the payer mix.

That we don't see.

Secondly, not a lot of comments on the Burlington acquisition, maybe, I know it's small but perspective there on what they can bring to the table.

And how many more tuck-ins in that market can you look at, I know you're looking to do some larger acquisitions in other geographies, but just kind of a kind of tuck in opportunities with anesthesia?

We're excited about Burlington.

While it's a smaller group than we've seen other places, I think there's a lot of things that work well with that.

One, that hospital is joined to the Moses Cone System which is based in Greensboro where we also provide services and have a good relationship.

That's works well with our relationship with the Moses Cone system there.

We're seeing the opportunity to work with this group.

And get them interacting with other physicians throughout North Carolina as we've built our different practices in that market.

And that's an area where I think we have opportunity as we continue to grow.

We're going to look at some large groups that have well established infrastructure with them but also some smaller groups where I think we can bring some of the infrastructure that we have in place and continue to add value to those along with the hospitals there.

Ultimately, our long-term growth is really based upon adding value and keeping those hospital partners really engaged in working with us and us being a key part in the whole peri-operative process that's going on there.

And we think we can add value to practices that have had a long standing quest to do that.

We can add that in a lot of ways But to the smaller practices that haven't had the resources to do that, we think there's even more that we can do there.

So, we're excited about the opportunity and we see more of them.

Lastly, if you do end up benefiting from the Medicaid, Medicare rate shift, would you-- and if you do find out, would you quantify that on the next conference call or is that something you're just going to talk about once 2013 approaches.

Nick, hi.

I think we'll be cautious about it.

And the reason will be because we'll have to look at that and figure out the codes, the volume and all of that.

So we'll have to first of all.

I'd like to see it and then maybe we can talk about that.

Sounds great.

Thanks, guys.

Operator.

Our last question comes from the line of Ralph Giacobbe with Credit Suisse.

Please go ahead.

Thanks.

And I hopped on a little bit late so apologies if this was asked already.

I know you don't give annual guidance.

But just given where 1 Q shook out and the guidance for 2Q If I use the midpoint.

First half looks like it's $2.16.

You guys always have a stronger second half and when I just looked at the model over the last several years.

Looks like 45% of earnings on average came in the first half, 55% in the second half.

Is that a rough range of the way to think about things.

Is there something different in the second half that would cause that historical distribution to be meaningfully different this year?

The biggest difference there is going to be the acquisitions.

Because as we said here and as you saw last year.

If you look at our annual numbers.

77% of our revenue came from acquisitions this quarter.

And last year we had 75% or 74% came from acquisitions.

Basically, other than the seasonality, Ralph, that I did talk about, I wasn't sure if you were here when we talked about that and Q1 is always different for us than the rest of the quarters because of the calendar day difference.

Basically, it will be impacted by how many acquisitions we do in the second half of the year.

Okay.

And then just like taking a step back and looking at the last couple of quarters.

The overall earnings growth number has slowed a bit.

I don't know if you're willing to do this or not.

If we were to think about the business, taking a step back and assume that you don't do any more acquisitions, which I know is not the case, Just trying to get a sense of what you think the outlook is in terms of the base business growth from the top line to EBITDA and ultimately EPS perspective.

We're definitely not going to talk about EPS perspective.

But we've generally talked about where we believe that our same unit growth will be and we typically talk about anywhere in the range of 2% to 5%.

And so that's as much as we're going to say about it.

As you know, there's variability with that for everything we've been talking about today.

Which is the main drivers of that being volume and net pricing with the variability and the P mix specialty.

That does have a significant impact in any given quarter.

And that's about all.

I think it's prudent for me to say because again, The last two years have been variable on that.

Last year we ended same unit at 3.5%.

The year before that was 1.35%.

The year before that was 5%.

And so, again I think that's a relatively good range to talk about.

But other than that, I don't think I can mention anything else.

Okay.

And just my last one.

Can you talk about what you see as sort of an ideal capital structure and if you'd be willing to take leverage up to-- What you could take leverage up to if larger deals presented themselves.

I know that MEDNAX has a history of people thinking that we don't want to be levered up.

But the truth is that's not really the philosophy of the company.

The acquisitions are all accretive day one because that's why it takes us longer to get the deals done because we get our physicians credentials then we're billing day one, and so basically we expanded our credit facility last year because we do believe that there's anesthesia deals in the pipeline that could certainly make us use that.

And so we're not going to be a highly leveraged company but we'll take on some leverage, I'm not going to speculate what that would be, but.

If Carl comes to us and says he's got three big deals, we're happy to go out and get more capital.

Banks are willing to give us money.

We were very successful in our deal last year.

We have very favorable pricing.

And right now.

I do have people knocking at our door to basically give us capital at pretty respectable rates.

But we're not going to do it unless we absolutely need it.

So that's my position on that.

These deals, I also like to point out, it's not just that they're accretive.

They come with a lot of cash flow.

And when we're completing a deal we're not just counting on the profitability of the deal.

We're also counting on the cash flow that comes with the deal.

And we just have not felt the need to leverage up the company.

I'm perfectly willing to do it for the right reason.

I'm not for some financial gain, bankers in here every once in a while who want to do a double convert with our flying saucer and we're just not going to do that.

But, for the right reason to acquire the right kinds of practices, we'll absolutely leverage up as we need to.

That's helpful.

Thank you.

Operator.

and thank you, ladies and gentlemen.

That does conclude your conference for today.

Thank you very much for your participation and for using the AT&T executive teleconference.

You may now disconnect.

Thank you.

Thank you.