Pediatrix Medical Group Inc (MD) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the MEDNAX second-quarter earnings conference call.

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

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

(Operator Instructions).

And also as a reminder, this teleconference is being recorded.

At this time, we will turn the conference call over to your host, Vice President of Investor Relations, Mr. David Parker.

Please go ahead, sir.

Thank you, Tony, and as he indicated, welcome to MEDNAX's 2012 second-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 Securities 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 statement, 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 Form 10-Q included in the sections entitled Risk Factors.

With that, I would like to turn the call over to our CEO, Dr. Roger Medel.

Thank you.

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

As we indicated in our release earlier this morning, we are especially pleased with our results for the second quarter, including same-unit growth of nearly 4%.

This same-unit growth was a contributing factor in our results exceeding our guidance for the quarter.

I also believe that this quarter's results showed that we continue to make excellent progress in pursuing our clearly articulated strategy for sustainable long-term growth.

We are drawing on the strength of a company that has over 30 years of operating experience and the reputation for durability in an uncertain healthcare environment.

Our revenue growth for the second quarter was 14.3%, with growth attributable to contributions from recently acquired practices of over 10%.

Other remainder coming from the same-unit results just mentioned.

In looking at the strength of our same-unit growth, we saw net reimbursement-related growth of 2.4% and volume growth of 1.5% for the quarter.

While our strong same-unit growth was a positive story for the quarter, the larger part of our revenue growth was driven by contributions from acquisitions since last year.

What's not fully reflected in our second-quarter results are the great strides we're making with our American Anesthesiology division as we continue to build our national group practice in that important specialty.

By now, I'm sure you're aware of the acquisitions of Anesthesia Medical Alliance of East Tennessee and Loudon Anesthesia Associates.

Anesthesia Alliance of East Tennessee, the first Tennessee-based practice to join American Anesthesiology, is a 45-physician group that practices the [start] of an anesthesia care team model that includes 158 nurse anesthetists working at five hospitals, eight ambulatory surgery centers and three hospital-based pain management centers located primarily in the Knoxville, Tennessee, Metropolitan area.

The flagship facilities are Parkwest Medical Center and the Fort Sanders Regional Medical Center, with whom the group has had long-standing relationships.

The practice provides anesthesia services across a wide spectrum of such specialty areas, including cardiovascular, obstetric, neuroanesthesia regional anesthesia and pain management.

Loudon Anesthesia consists of 12 anesthesiologists and 17 an anesthetists.

This group, founded in 1994, practices within the Inova Health Systems at Loudoun Hospital.

As many of you may have recall, our first anesthesia acquisition in Virginia practices as part of the Inova Health Systems Fairfax hospital.

We also completed three additional anesthesiology group practice acquisitions during the 2012 second quarter.

We acquired Burlington Anesthesia in Burlington, North Carolina, which I mentioned in our last earnings call followed by the acquisition of Brazos Anesthesia Associates in Brian, Texas.

The Brazos practice consists of 16 anesthesiologists who practice the start of an anesthesia care team model that includes 29 anesthetists, as well as three pain-care nurses.

Serving the Brazos Valley community for more than 25 years, Brazos currently provides anesthesia services at three hospitals, as well as eight other office-based locations.

The Pediatrics division of MEDNAX is also an established provider of neonatal services in this community.

Florida Atlantic Anesthesia of Fort Lauderdale, Florida, joined us near the end of the second quarter.

The practice consists of 24 anesthesiologists and five full-time anesthetists, and they provide anesthesia services at Holy Cross Hospitals and Holy Cross HealthPlex in Fort Lauderdale.

Founded in 1998, this group is one of the leading anesthesiology practices in the area and the second Florida-based practice to join American Anesthesiology.

The Pediatrics division is also an established partner and provider of NICU services at Holy Cross Hospital.

Thereby, providing a continuum of care to our patients and our hospital partners in this important south Florida community.

Each of these groups under talented physicians joined American Anesthesiology because they believe the right choice in today's changing healthcare environment was to join a national medical group whose interests are 100% aligned with theirs.

We have acquired established groups that have developed solid relationships with their hospitals and their practice in the practice metropolitan area.

We are fostering a collaborative environment in which the best clinical and administrator practices are shared across all the American Anesthesiology groups.

In the current healthcare environment we have consistently talked about the heightened interest among groups to join us.

As these recent acquisitions demonstrate, we are managing and acquisitions pipeline that is as full and robust as it has ever been.

With continued interest among a variety of groups with different sizes at various stages in the pipeline.

We believe the reason for this is a unique value proposition that we offer to prospective physician practices and the proven success of our model.

To these prospective practices, we are a group of physicians and peers providing a clinical model that allows physicians to do what they do best.

Take great care of their patients.

We remain confident in our ability to deliver continued growth by attracting physician group practices to our national medical group model, and we are well on our way towards our 2012 goal of investing approximately $300 million to complete practice acquisitions across all MEDNAX physician specialties.

I also want to briefly address some of the recent headlines in the healthcare environment since our last earnings call.

In early May, shortly after our first-quarter earnings call, CMS announced that eligibility for Medicaid primary care bonus payments under the Affordable Care Act would include all American Board of Medical specialties recognized sub-specialty of pediatrics.

This includes our neonatologists, our pediatric hospitalists, our pediatric intensive and our pediatric cardiology physicians.

At background, section 1202 of the Affordable Care Act, requires payment for Medicaid services of at least the Medicare payment rate in effect for the years 2013 and 2014 for primary care services delivered by a physician with a designation of pediatric medicine.

The proposed rule would bring the lower Medicaid primary care services in line with those paid by Medicare.

The increase in payment for primary care is paid entirely by the federal government with no matching payments required of states.

That is scheduled to be implemented on January 1, 2013.

We are also at a time of the year when we have good visibility in government reimbursement.

In fact, although there was still some uncertainty during last quarter's conference call because states face a challenging state budget cycle and several state budgets hadn't been finalized, I'm pleased to report favorable outcomes in several of our key states as they set physician reimbursement rates for the FY2013 state Medicaid budgets.

In summary of our top five states we expect no cuts to Medicaid physician reimbursement for the 2013 fiscal year.

State after state sought to maintain their physician net worth preserve active to care for Medicaid enrollees.

The states understand that the best way to achieve this is by protecting reimbursement for physicians.

Needless to say we are pleased with that result.

At this time, I'd like to turn the call over to our CFO, Vivian Lopez-Blanco, for a review of our second-quarter financial results before we open up the call to take some of your questions.

Thanks, Roger.

Good morning, and thanks for joining our call.

As Roger mentioned, we are very pleased with our results for the second quarter and the first half of 2012.

And we believe they reflect the long-term stability and growth prospects associated with our model.

Net patient service revenue for the three months ended June 30, 2012 increased by 14.3% to $449.5 million from $393.4 million for the comparable prior year period.

Our revenue growth attributable to contributions from recently acquired practices where 10.4%, while same-unit revenue grew by 3.9% for the 2012 second quarter when compared to the prior-year period.

Of the 3.9% same-unit growth, net reimbursement-related factors grew by 2.4% while revenue attributable to volume grew by 1.5%.

Our same-unit revenue growth from net reimbursement-related factors was principally due to continued modest improvements in reimbursement received from third-party commercial payers as a result of the Company's 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.

Partially offset by a shift impairment to government payors from commercial payors year over year.

The percentage of services reimbursed under government programs increase by approximately 130 basis points during the 2012 second quarter compared to the prior year's second quarter.

Sequentially, however, our same-unit payor mix has remained relatively stable since the third quarter of 2011.

Same-unit growth attributable to patient volume includes growth in our hospital-based neonatal and anesthesia practices, as well as other pediatric physician services, primarily newborn nursery services, partially offset by a slight declines in our office-based maternal fetal and pediatric cardiology practices.

For the 2012 second quarter, same-unit neonatal intensive care patient stays increased by 1.4% when compared to the prior-year period.

Our profit-after-practice expense of the 2012 second quarter was $155.6 million, up 9.7% from $141.9 million for the prior-year period.

Profit-after-practice expense margin declined by 144 basis points, which can be attributed to increase in practice expenses primarily due to practice salary increases and increase in incentive compensation based on practice operational results along with the variability in margins due to the mix of practices acquired since April 2011.

We generated operating income of $99.7 million for the 2012 second quarter, an increase of 7.1% from $93.1 million for the prior-year period.

As a percentage of revenue G&A expenses decreased to 10.7% for the 2012 second quarter from 10.9% for the 2011 period.

Depreciation and amortization expense for the 2012 second 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 second quarter were $60.5 million, up 8.2% from $55.9 million for the 2011 period.

We reported diluted earnings per share of $1.22 based on a weighted average 49.5 million shares outstanding, which compares with diluted earnings per share of $1.15 based on a weighted average 48.7 million shares outstanding for the 2011 second quarter.

Revenue for the six months ended June 30, 2012, was $872.1 million, an increase of $96.4 million from the prior year six-months' revenue of $775.7 million.

Of this $96.4 million increase, over 73%, or approximately $71 million of the revenue growth, came from acquisitions.

The remainder is from same-unit growth, which increased by more than $25 million for the first half of 2012.

Same-unit revenues for the first half of 2012 grew by 3.3% with approximately one-half of that coming from same-unit volume, which was up 1.7% with volume growth in each of our physician specialties and sub-specialties, including hospital-based anesthesia and neonatals, other pediatric physician services, primarily newborn nursery services, as well as office-based maternal, fetal and pediatric cardiology services.

The other half came from same-unit revenue growth from reimbursement-related factors, which was up 1.6% net.

For the first six months of 2012, we continue to see modest improvement in reimbursement from third-party commercial payors.

Operating income grew by $179.1 million for the first half of 2012, up 6.1% from $168.8 million for the first six months of 2011.

For the first half of 2012, net income grew by 7.4% to $108.9 million, up from $101.4 million for the same period last year.

We earned $2.20 based on a weighted average 49.5 million shares outstanding for the first half of 2012, up from $2.09 for the first half of 2011 based on 48.5 million shares outstanding.

Looking at our balance sheet, we had cash and cash equivalents of $12.1 million at June 30, 2012.

Accounts receivable at June 30, 2012 were $240.9 million, an increase of approximately $10 million as compared to the December 31, 2011.

Day sales outstanding improved by over two days for the 2012 second quarter from the 2012 first quarter, as we show improvements at our existing units as well as continue to integrate our recent acquisitions.

We had no outstanding balance on our $500 million revolving credit facility at June 30, 2012.

Through the 2012 second quarter, we generated strong cash flow from operations of $117.1 million.

This is an improvement from the prior year when we generated approximately [$95] million from operations.

This increase in cash flow from operations for the three months ended June 30, 2012, is primarily due to improved operating results and an increase in cash flow related to changes in our accounts payable and accrued expenses.

We invested $41.3 million during the 2012 second quarter to fund three anesthesia group practice acquisitions and to make continued purchase price payments for previously completed acquisitions Moving on to our Outlook for the 2012 third quarter, as we announced this morning's press release, we expect that our earnings per share for the three months ended September 30, 2012, will be in the range of $1.25 to $1.30.

This range includes estimated contribution from practices acquired since the end of the 2012 second quarter.

The range for our 2012 third-quarter outlook is determined by anticipated same-unit revenue growth for the period, which we estimate to be 1% higher to 3% higher year over year on a same-unit basis.

The same-unit growth rate assumes combined value across all of our physician specialties.

In addition, this range anticipate variability in the mix of our services reimbursed under commercial and government care programs, as well as improvements from commercial payor contracts.

Lastly, our third-quarter forecast anticipates that same-unit growth will be approximately one-half volume and one-half net reimbursement growth.

Now, I will turn the call back over to Roger.

Good job.

Thanks, Vivian.

With that, open up the call for your questions.

Tony?

Thank you very much.

(Operator Instructions)

Ryan Daniels, William Blair.

Good morning, guys.

Thanks for taking the question and congrats on the solid quarter.

Wanted to talk little bit about the pricing.

It looked very strong in the period, especially given that negative mix shift you saw, so I am curious if you can discuss what portion of that came from pure commercial price increases versus the administrative fees you are doing -- I should say receiving given the services you are providing to some of your host hospitals.

Yes, Ryan, this is Vivian.

Good morning.

Well, typically as you know we don't break that out specifically, but I do want to give you some directional on that.

So we have been talking that some of that administrative services fees is related to some of the newer programs that we started, some of the OBGYN hospitalist programs.

But, certainly, the other piece of it is the commercial pricing, which as I've mentioned to a lot of you guys in the past, that does kind of vary from quarter to quarter depending on when the -- not only we're negotiating new contracts but also the escalators kick in.

So, with the combination of all of that.

Is there a lot of room to still grow those services in your hospital base or have you rolled that out pretty broadly at this point?

As I think Roger's mentioned in the past, we are seeing some of our hospital partners wanting to engage in these other services with us, so I do think there is still opportunity for growth there.

Okay, great, and maybe one bigger picture one for Roger.

There has been clearly some noise, a bit of a hot button issue, regarding NICU utilization from mother's who have pre-39 week elective C-sections, and I'm curious if you have any data you can share on that.

How big of a piece of your business that is given you focus more Level III NICUs, and maybe more broadly, any thoughts on how this could impact your or has impacted you?

Thanks.

Hey, Ryan.

Thanks, good morning.

We take a look at that, and obviously spent a lot of time after that report came back going back and reviewing where we fit.

We are not able to find anything that makes us feel any different than what we have said in the past.

We believe that the babies should be born at 39 weeks.

We have our own maternal fetal medicine specialists who do a lot of work and spent a lot of time trying to preserve these babies in utero until they are due, and so we're 100% behind that.

Unfortunately there are some small cases across the country where we do see that that happens, but it has a minimal, insignificant impact on our business.

We look back at -- I went back and -- first of all, the article that was published or that was mentioned in the publication was from 2008, so it's a four-year-old article.

It mentions one hospital -- it mentioned a couple hospitals, one of which we happen to be in [Aseo] Hospital.

We went back and looked at the C-section rates from that hospital, and effective rates are up in 2012.

There were down just a little bit in 2010, but they're up prior to the 2008 numbers higher.

So, again, it isn't anything that's keeping us up at night.

We believe it should be done that way, but it's an insignificant numbers price we can tell.

These are initiatives the been a place for a long time.

This isn't anything new.

If you go back and look at the March of Dimes initiatives, back in the 1960s, they started to put out their first program.

They repeated it in the '70s and in the '90s, so this is something that's been going on for a long time.

Okay, great.

Thanks again for all the color.

Kevin Ellich, Piper Jaffray.

Good morning.

Thanks for taking the question.

Just wanted to focus on the anesthesia acquisitions.

Obviously, we've seen some really good activity out of you guys.

Wondering, Roger, if you could provide any color on these deals.

With the deal announced yesterday, since it was larger, is it safe to assume you paid a higher multiple for that?

Then could you also tell us how much you had to pull on the line of credit to pay for these deals?

Yes.

Hey, Kevin.

We are not paying higher multiples.

We're sticking to our game plan.

We have said from the beginning that we have a game plan.

There is some competition, and I think it's a fair question to ask, but we are not buckling to that.

We have our plan in place, and that is what we're doing for now.

As far as our line of credit, we did borrow a bunch of money to pay it off.

We're not going to tell you how much, but you're smart, you'll be able to figure that out pretty quickly.

And we think we have a lot of cash to pay for these practices.

We think we have access to cash.

We're not worried about the access to the dollars to be able to pay for these practices.

One of the things that we always talk about is the practices not only come with a lot of earnings, but they also come with a lot of cash flow.

So every time we buy one of these practices, we're also including the cash flow numbers.

So, I think we have plenty of [solvate] to pay for this.

Sounds good.

Okay.

The second question I had was going back to your comments on the Medicare rule that became out in early May.

Could you give us what is the average rate differential in the Pediatrics division between Medicare and Medicaid?

I know years ago it's always been like 30%, but I believe Texas bumped up their rate in 2007 and just wondering what type of impact that's had?

Kevin, this is Vivian.

So the 30% average is really the national average.

I think, as we've talked about before, with pediatrics that will be south of that.

We're not going to give any specifics into any one of our states.

Obviously that will impact our overall average, which I've said to many of you guys will be south of that, but other than that, we don't want to get into the specifics.

Okay.

Do you have any color, information on the timing of when we will see the final rule come out for Medicare?

Yes.

What we hear from our folks, obviously, is that some time this fall because as Roger said in his prepared comments that it's supposed to go effective in January of 2013, so all of our folks are telling us that it should be sometime this fall.

We don't have any more specifics than that.

We tried to get something more specific, but frankly, no one is willing to comment on that.

We do think it will be this fall.

We have nothing to think otherwise.

Got you.

Thanks, Vivian.

I'll hop I can you.

Kevin Fischbeck, Bank of America.

Okay, great.

Thanks.

The commentary here about the deal pipeline being robust, and how do we think about that setting up for 2013?

Is there a initial viewing into that?

You provided guidance for the first time on anesthesiology deals this year.

Given pipeline is do think that $200 million of anesthesiology is a decent way to think about it, or any thoughts there?

Hey, Kevin.

Nice headline this morning, by the way.

Thank you, we try.

(Inaudible) We are going to beat our to $200 million number for this year, I believe It's like -- I have people who are having heart attacks as I said that.

But, I think it's too early to give you any kind of guidance for '13.

Clearly, there's a lot of interest.

There are a lot of groups out there that are talking to us, but we will convert all of those deals.

But, I think it's a very exciting time.

I think there's just a lot of interest, and as we get closer to the end of the year, we will be able to maybe give you a little more of what we're thinking for '13.

Okay.

And then as far as, you mentioned the Medicaid rate boost, I know that some people are talking about it more in terms of a one-time item, if you will, and that it's in place for 2013 and 2014, and then expires.

How do you guys think about that rate boost and how that will be treated on a go-forward basis?

Well, obviously, that's with the law says.

The question becomes are they going to want to take that away at the end of 2014?

Obviously, I don't know.

We think it's difficult because once, as you see with [SGR] and everything else, once you put something like that in place people get used to it, and if you take it away, then our experience has been that people drop out of the Medicaid program.

So, we think -- we don't know, but, we think there is some possibility that that will become longer term.

If I could just sneak one last one in.

The mix shift going on in the quarter.

How do we think about that between the two different business lines that you have?

Is there a big difference between how mix shift has trended there?

Is one driving it versus the other?

Good morning, Kevin, it's Vivian.

Yes, so really as you guys know, there's not a lot of -- in our anesthesia practices so far, there's not a lot of government payors, period.

Obviously, as we expand into that, I'm sure that won't be the case, but basically, for the most part, when we talk about the government mix, it's primarily related to the pediatrics units.

And so, as I said, it's been relatively stable since the 2011 third quarter, and we will see what happens with 2012 third quarter.

We do have some variability built into our guidance there because it hasn't performed like within the historical variability.

It's just kind of stayed stable since the 2011 third quarter, so we will see.

But it the way to think about it then is that if anesthesiology is relatively low government, and I guess relatively more stable, that if you look at it just a NICU, that we would see a larger year over year change in government services there?

Because you are saying because of the expansion into anesthesia?

In anesthesia, it sounds like anesthesia has been more stable of the two businesses, so if that's been relatively stable but the entire number is up 130, then does that mean that NICU is up more than 130?

It's just basically the weighting of that, but like I said, we just don't think that -- we will see what happens with NICU.

Is not only NICU, because I've I tried to tell you guys in the past, there is maternal fetal services, there's pediatric cardiology, there's all of those services that either slightly go up or down.

But, pervasively when we talk about our government mix, you're talking about Medicaid.

Okay.

Thanks.

John Ransom, Raymond James.

Hi.

We've seen a couple deals get done in anesthesia with financial buyers.

Could you just compare and contrast what they're willing to pay and what kind of competing vision they offer these anesthesiologists versus MD?

Thanks.

Hey, John.

As you know, it's a different proposition.

If you are taking money from private equity firms, first of all, you're not getting all of the money up front, so you are getting a percentage of your equity.

And then, you're taking the risk that there will be more deals that they will be able to do.

That at some point, depending upon their window, whether it's five or six years, you are going to get flipped.

So, you don't know where you will end up working, or if there is a market availability, I suppose you could do the IPO.

There is no built-in research, education, government relations.

You have got to build all of your human resources infrastructure.

You have to build the whole thing.

With the hope that you will be able to roll up some practices, and in the future, end up working for somebody that you like and get a higher revenue, a higher multiple for whatever remaining stock you have left.

I don't know what these private equity firms are willing to pay for these practices.

I will tell you that with one exception, we have gotten all of the deals that we wanted to get, and the practices that we have not obtained have been practices for one reason or another we decided to pass on.

So, there are venture capitalist out there.

They are focused on this specialty, and we do expect that somebody is going to throw stupid money at some of these practices, but that is not going to take us off of our track.

There are so many other practices out there that are desirable and that are interested in talking with us, that it's just a very large universe.

Okay.

Thanks.

We had heard something like there might be 10 or 12 deals out there right now.

Some crazy, crazy number.

I don't know if that's right.

The second question was --

I'm sorry.

10 or 12 venture capital deals?

No.

10 or 12 active M&A anesthesia practices in the marketplace being worked on.

Yes, probably more than that, I would say.

Okay.

The second question I had, just getting back to this 39-week issue, could you give us some sense of -- I think we've heard in the past that over 50% of your NICU beds are Level III.

But, can you give us some sense of, I don't how you describe it, maybe acuity versus low acuity revenue in your NICU, what the breakdown the two [months]?

I don't know that I can do that.

A child is admit to the NICU, there is going to be critical or not, and independently of what the diagnosis is.

So, it's the same revenue.

A child that gets tagged as a critical child, whether it's a repeat C-section or whether it's a child who has got an infection or a respiratory disease or whatever, the reimbursement is basically the same.

So I don't know if I answered your question.

Well, I'm just trying to understand if there continues to be a little bit of pressure on the 39-week delivery, is it just affecting a relatively small part of your business.

Wouldn't most of your revenue be generated by the high-acuity, longer lengths of stay anyway?

Where the need is not driven by an early plan delivery.

We're just trying to size the exposure.

It's actually more complicated than that John.

First of all, every child that is delivered by C-section is not going to end up in the NICU.

Most kids who are delivered by C-section, even at 37, 38 weeks, are not necessarily going to end up in the NICU.

it's only those the show some symptoms, more than anything else, early signs of prematurity that may have a little respiratory problem or something like that that are going to be admitted to NICU.

Second of all, the first thing that obstetricians elect to do when they are going to have an elective delivery is not to do a C-section.

They try to deliver the mother vaginally, so they will give her some drugs that will institute the contractions, et cetera.

Most of the time it's only the failed inductions that will end up having a C-section.

That is not the first thing they would normally try to take care of it.

But, again, the number just is not that significant, and when we go back and look at our numbers, we just think it's a non-issue.

Well, you didn't help me in my simplistic SEC grad (laughing).

I was looking for a simple little number, but you guys always make things complicated.

I will call you later.

(Laughing) thanks so much.

Gary Taylor, Citigroup.

Hi, good morning.

I have a few questions.

The first is the same-store revenue, the 3.9% that beat your guidance for the quarter of 1.5% to 3.5%, so my question is what was better than you guys were looking for?

We were happy with just the volume, and certainly the volume as I mentioned in the NICU was pretty good, Gary, so that was certainly a piece of it, and just the net pricing was good, as well.

So, frankly, overall, it was just good on the high end and obviously beating our expectations, but overall, it was just a really good quarter as it was the same unit both on the volume as well as the net pricing side.

Obviously, the p-mix as somebody else had mentioned, we were able to absorb that with all of the other factors in there, mainly, as I said earlier, the timing of some of the pricing that does vary from quarter to quarter.

But, we are just happy overall with the volume in all of our specialties, and certainly, very happy with the NICU patient days.

Okay, good.

You beat our numbers.

So, no complaints there.

It's kind of a technical question, maybe also a strategy question, but we were looking at it CRNA count from the 10-K of 536 CRNAs, and I think your June deal added about five, but the reported count jumped to about 580.

So I guess the question is there was just some technical issue in that count, or is there any active strategy by your practices to grow and expand productivity by hiring CRNAs?

Hey, Gary, it's probably a combination of both.

We do always have openings, and we're always hiring anesthetists, and it's probably more a reflection of that, but I would have to go back and re-inspect the numbers, but off the top of my head it would seem that that's the right answer.

Okay.

That's all I had.

Thanks.

Thanks, Gary.

Ralph Giacobbe, Credit Suisse.

Thanks, good morning.

Just wanted to go back to the top line certainly came in better.

We didn't necessarily see the margin pull through, and I just want to think about top line growing this quarter 14% but EPS growing 7%.

Can you maybe just help us bridge that GAAP and when do think you can open -- at least close that or narrow, so that your EPS more or less can grow in line, if not even better than the top-line trend?

We've talked a lot about margins over the last six months or so, and as I said, there is going to be some variability in it as we continue to expand in some of these service lines.

Then, in any given quarter there is variability, too it, depending on what the operating results of the practices are.

Like this quarter we had, as I mentioned in my comments, Ralph, we had additional bonus related to the performance of these practices, and so we will see some of that going forward.

We will have leverage, obviously, on the G&A side as it relates to expanding our platforms because these practices don't come with G&A, and so for the most part, we do have some step function.

Obviously, we have to continue to expand our infrastructure, but certainly, it won't be one for one, but I think there will be some variability in the margins there going forward.

This quarter, like I said, we did have some bonus accruals because of the performance of the specific practices.

So, as I've talked to a lot of you guys, what I tell you too is it's best to look at that on an annual basis because in any given quarter, we will have variability based on some of these items like bonus, et cetera.

Okay.

Then, going back to the admin fees.

Can you help quantify, in some of your filings you've talked about admin fee representing I think it was about 6% of total revenue.

Is that significantly higher today?

What exactly is driving that, or are you having more conversations, is that subsidy revenue that you are asking hospitals for to make up for margin differential that's not there?

Help us understand exactly what that is and sort of the sustainability of that, and if we should expect that to be significantly higher going forward as a percentage of total revenue?

So, we've looked at that in the estimate for this year.

It will be slightly higher, but it won't be significantly higher.

Where they come from all is what we have been talking about a little bit over the last couple of quarters is that we have seen some expansion in the services that we provide to these hospital partners, mainly these OBGYN hospitalist programs, et cetera.

So, it's not necessarily related to subsidies because we're in a NICU and are asking for that to be able to cover the profit, or with anesthesia.

It's more related to the expansion of the services, and so, some of these hospital programs are definitely more subsidy intensive.

Did that help pricing marginally in the quarter?

When we look at the pricing numbers was that part of the driver of the increase?

Yes.

I think Ryan was asked me that question.

Definitely, that is a component of it just like it was a component in the first quarter.

I'm not going to quantify specifically how much of it it was, but it's trending pretty much like it did in the first quarter as we kind of have expanded these services lines and these programs that some of them started in the latter part of last year.

Okay.

My last one if I could.

Just of the midpoint of guidance for the organic top line would suggest a little bit of the deceleration in trend.

Just trying to get a sense whether you are seeing anything that would give you pause, or it's just you all trying to be a little bit conservative in terms of the outlook just given the volatility we see?

There's a couple things there.

Number one is that, I don't know for you guys if you don't remember, last year in the third quarter we had a great quarter.

We have same-unit coming in at 5%.

So, some of it is related to that, and so, there is nothing that we are currently seeing that would have basically had us concerned, but it is coming up against the comp.

It was a very good quarter last year, and so part of it is that.

Okay.

Alright, that's helpful.

Thank you.

Brooks O'Neil, Dougherty & Company.

Everyone I have a couple questions, but congratulations on a terrific quarter.

I'm curious, I was pretty impressed that you were able to go into Knoxville and grab what it looks like a premier group.

So, maybe you could just give us a little color on that, and maybe you could give us -- if I understand it correctly that practice generates a considerable amount of revenue, probably reasonably profitable if you could help us to understand that that would be great, as well.

It is a great practice.

We're very fortunate to have been able to partner with them.

They are in a great location.

They just have a great model.

We think they utilize their anesthetists and have great relationships with their hospital administrators.

We are just very fortunate to have been able to partner with them, and we like to like the state of Tennessee a lot.

We have some existing neonatal and another practices there, and we are going to try to do more deals in Tennessee.

We think that that is a great state.

That's great.

And a second question.

It strikes me, if I understand it correctly and I'm thinking about it correctly, that the parity reimbursement increases that we expect will likely have a positive impact on your same-unit statistics.

I'm curious if you think it will have any impact on your same-unit volume?

I don't know why it would impact the volume.

Clearly, the pricing would be affected.

But, I don't know why it would impact the volume.

There are no children that are going uncared for at this point in time.

So, I don't think we expect that, no.

No impact.

Okay, good.

And just the last one.

I'm curious, historically, I think you've said on average about 12% of babies born in the hospitals you serve show up in the NICU.

Have you seen any change in that statistic in the recent past or this quarter?

The numbers are pretty much the same.

But, I think they were up slightly, a couple basis points for this quarter over the last quarter, but basically within the similar limits.

Right.

Well keep up the good work.

Thanks, Brooks.

Kevin Campbell, Avondale partners.

Good morning.

Thanks for taking my questions.

Two quick ones.

I was hoping perhaps you could give us maybe a pro forma revenue number for the second quarter if you included all the acquisitions for the full period including the two that you've announced in the last two days?

Is that something you could maybe give to us to help us with modeling going forward?

Yes.

We definitely would have included the acquisitions that we've done.

Yes.

Absolutely.

What I'm asking for is can you give us a pro forma revenue number that has a full period, full quarterly run rate including the acquisitions you've done, today?

No.

Okay.

Then, any thoughts on the physician fee schedule outside of the Medicaid parity rule but just the other fee schedule that came out and any impact on pricing for anesthesia in particular?

Yes, we are still looking at that, as you know.

It's basically still in the comment period, so we're looking at that to see what the impacts would be.

We have got to look at the conversion factors and some of the geographic factors that typically don't come out right away, so we will be looking at that.

Any initial thoughts, is it a pretty much neutral or not a material change one way or the other, or still too early to say?

It's still a little too early for us to say.

I don't want to comment on it until our managed care folks are taking a look at that.

I would just say, overall, that just the overall numbers say that there will be a slight decrease for emergency room and anesthesia and an increase with (inaudible).

That's in general what we are able to read on that.

Thank you very much.

We have time for one final question.

Rob Mann, Stifel Nicolaus.

Thanks.

Glad I made in under the wire.

Vivian, a different type pricing question.

Are you seeing a difference in your pricing leverage that you've got on the NICU side versus anesthesiology?

Well, I don't want to use that word because our GC is not here at the moment, but we can't do that.

But, no, we have been able to really have some pretty good rate increases all of our specialties because, as I would say before, there's also maternal fetal, pediatric cardiology and all of that.

We've been able to continue.

I think it has to do with, obviously, as an organization, we have professional managed care folks in each one of our operating units, so we have anesthesia folks as well as pediatric folks.

To use a maybe a better noun, are you having equal type of success across the business lines?

Yes.

I would say in both business lines year to date.

We put together a plan every year on what we believe we are going to be able to do as contracts come up for negotiations, and we're hitting our plan and slightly exceeding it for these specialties, so we are very happy with the result so far this year.

Okay.

And then a question on just the top line.

Ex-acquisitions, thinking about revenue generation, I always think that third quarter seasonally is kind of best for the NICU business.

Are you far enough down the road now in anesthesiology that you wouldn't suggest that there is any particular seasonal impact on your top line?

I haven't really noticed that because as you know, there has been variability with that.

What I can say about the anesthesia volumes is that they have been very good.

I know that some of the hospitals have reported some sluggish volumes, as Dave and I have been on the road, but honestly, we haven't seen that in our practices.

The volume for anesthesia is very good, and I haven't really noticed that seasonality, no.

Okay.

And then, last question on the Medicaid parity.

Obviously, your governor has said that he is not interested in a Medicaid expansion in 2014.

Are you getting any buzz in your states of any resistance to the Medicaid parity or congressionally to the outlays?

I have not heard that.

I don't know, Roger, if you heard any of that?

I haven't.

No.

We keep pretty close tabs on that.

We've got lobbyists and people at the state level, and we have heard nothing.

Okay.

Alright, great.

That's all I have.

Thank you very much.

I will turn it back to the host for any closing comments.

Alright.

Thanks, Tony.

No.

I appreciate everyone's listening this morning, and we look forward to talking with you again in about three months.

Thank you.

Thank you.

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

Thank you for your participation and for using AT&T's executive teleconference.

You may now disconnect.