Pediatrix Medical Group Inc (MD) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the MEDNAX second-quarter earnings call.

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

You will have an opportunity to ask questions during the presentation.

Instructions will be given then.

(Operator instructions).

As a reminder, this conference is being recorded.

I would like to turn the conference over to our host, David Parker, Vice President of Investor Relations.

Please go ahead.

Thank you, Cara, and good morning, everyone, thank you for joining us.

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 or 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 titled risk factors.

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

Thank you.

Good morning and thanks for joining a call today.

Earlier this morning, we again reported strong results from operations for the 2013 second quarter, which reflects the continued successful execution of our long-term growth strategy.

Our revenue for the second quarter increased by approximately 18% with growth attributable to contributions from recently acquired practices at 16% and the remainder coming from our same unit results.

We also generated solid operating income and net income growth for the second quarter and continued to leverage our infrastructure as we integrated practices into our national group model.

We had a very active quarter on the acquisition front, adding three anesthesia practices to our American Anesthesiology division and two neonatology practices to our Pediatrix Medical Group division.

As I mentioned on our fourth quarter call in early April, we acquired Neonatology Associates, a neonatal physician group practice based in Phoenix, Arizona, followed in early may by the acquisition of Gwinnett Anesthesia Service in Lawrenceville, Georgia.

In late May, we acquired Anesthesia Specialists of Houston, the third Texas-based anesthesiology practice to join our American Anesthesiology division.

In mid-June, we acquired Anesthesia Group of Onondaga, based in Syracuse, New York.

This is the first New York-based anesthesiology practice to join American Anesthesiology, which now consists of 20 practices throughout nine states.

To round out our very successful quarter of acquiring and integrating practices, in late June we acquired Neonatal Intensive Care Associates, based in Lubbock, Texas.

Also as we announced yesterday, since the end of the second quarter we have added an additional practice to our Pediatrix Medical Group division.

Sanjay Patel is a neonatology practice consisting of five physicians based in Odessa, Texas.

With this acquisition, six physician group practices have become part of MEDNAX in 2013, three as part of American Anesthesiology and three as part of Pediatrix Medical Group.

As reflected in these recent acquisitions, I want to reinforce that our pipeline is as strong as it has ever been.

There is continued escalation of interest in our American Anesthesiology and Pediatrix Medical Group divisions, representing many growth opportunities for the remainder of the year and well beyond that.

It is safe to say that the environment that brings physician groups to our Company, one that makes us an attractive haven, will only become more difficult for independent practices with limited resources to invest in infrastructure and the limited ability to address the increasing uncertainty and ever-changing regulation patient care expectations in healthcare.

I believe this is a key driver of our acquisition pipeline, and we remain very confident in our targeted acquisition spend of $400 million for 2013 across all of our physician specialties.

As I have discussed in past conference calls, a significant portion of our acquisitive growth has been in our American Anesthesiology division, which now represents over 30% of our revenue.

Given the importance of American Anesthesiology to our long-term strategy, we remain focused on methodically building the systems and infrastructure necessary to support the strategic growth of this division, and in a way that will allow us to continue to scale at a national level.

We anticipate and expect that this will be very similar in form to the pioneering model we have established in our pediatrics division over the last 30 years.

We are now at the point with our American Anesthesiology division where we are furthering the evolution of the infrastructure to better support the needs of our physicians and hospital partners and, most importantly, to continue to take great care of our patients.

So I want to take some time here to address a few specific examples of what we are doing.

As a first broad step, we have created our first regional management team for American Anesthesiology.

The initial region, which will have responsibility for practices in Florida, Georgia, Tennessee and Texas, will be led by Dr. Eric Mason.

As you may recall, Dr. Mason joined the Company through the acquisition of his practice, Critical Health Systems of North Carolina, in October 2008.

And in July 2011, Dr. Mason was appointed as Senior Vice President of American Anesthesiology.

The second region is currently being developed, and our goal is to have that structure in place within the next month.

In conjunction with the corporate medical directors and directors of operations, the regional infrastructure will be charged with helping each of their practices achieve their growth potential with specific responsibilities to include all hospital, payer and employee contracting, financial and budgeting issues, coordinating the implementation of the Quantum Clinical Navigation System, high reliability organization patient safety programs, customer service initiatives, human resource management and oversight along new personnel.

Another important step we have taken is to specifically address our focus on research, education and quality for the division.

During the third quarter, Dr. Katherine Grichnik will be joining American Anesthesiology as the Director of Anesthesia Research, Education and Quality.

Dr. Grichnik will be responsible for the division's education and continuous quality improvement programs and will work with her physician peers and other members of the team to develop our anesthesia research capabilities, including participation in clinical trials and patient safety initiatives.

Dr. Grichnik completed her residency and fellowship training at Harvard University at Brigham and Women's Hospital, following her medical training at Tufts University and internship at Baylor College of Medicine.

In addition, she holds a Masters of Science from the University of California at Berkeley.

Kathy has been at Duke University since 1991 and became a professor of anesthesiology in the division of private thoracic anesthesia and critical care medicine.

She has served in a variety of leadership and advisory roles throughout Duke, including associate dean for continuing medical education and, lately, director of the Duke Clinical Research Institute Center for Educational Excellence.

Each of these steps are critical developments needed to support the strategic long-term growth of American Anesthesiology at the same time as providing stability to our national group practice.

We are advancing our clinical model that allows physicians to be physicians while focusing on patient care.

Physicians continue to see the value in joining our national group practice and the clinical infrastructure investments we are making continue to pay dividends as we present our model to interested anesthesia practices.

This further solidifies our reputation as the physician-centric national anesthesia group.

I hope that these comments help you to appreciate the importance we place on the building blocks to long-term growth at MEDNAX.

We have a sound strategy, we are executing on our strategy and we remain focused on the attractive long-term opportunities available to us.

Before I turn the call over to Vivian, you will see that we also announced this morning that our Board of Directors has authorized a share repurchase program of an amount of shares sufficient to offset the dilutive impact from our equity programs.

Our primary use of cash will continue to be focused on the pursuit of acquisitions across all of our physician specialties.

At the same time, we believe that the combination of our ongoing cash flow from operations and our line of credit provide us sufficient access to capital to continue our acquisition growth strategy while moving forward with this share repurchase program for the long-term.

At this time, let me turn the call over to our CFO, Vivian Lopez-Blanco, for a review of our second-quarter 2013 financial results before we open the call to take your questions.

Vivian?

Good morning and thanks for joining our call.

As we highlighted in our press release this point, our results for the second quarter 2013 reflect strong revenue and earnings growth, primarily driven by acquisitions over the last year.

We reported earnings per share of $1.37 for the 2013 second quarter.

Net patient service revenue for the three months ended June 30 increased by 17.7% or $79.7 million, to $529.2 million from $449.5 million for the comparable prior-year period.

During the three months ended June 30, we started to receive parity payments from a few states that are now paying at the Medicare rate for Medicaid services.

Our second-quarter results include approximately $2.5 million in revenue from parity payments that contributed approximately $0.02 to our net income per diluted share, reflecting the impact from incentive compensation and income taxes.

Of our 17.7% revenue growth, contributions from recently acquired practices were 16% while same-unit revenue grew by 1.7% when compared to the prior-year period.

To add some detail to our acquisition-related revenue growth, American Anesthesiology practices contributed 84% with the remaining 16% coming from acquisitions in Pediatrix Medical Group.

Same-unit revenue grew by 1.7% with revenue growth attributable to net reimbursement-related factors of 2%, partially offset by a volume decrease of 0.3%.

Our same-unit revenue growth from net reimbursement-related factors was principally due to continued improvement in reimbursements received from third-party commercial payers.

As we highlighted in our release this morning, for the first time in five quarters, same-unit payer mix showed a favorable shift.

On a sequential basis, same-unit payer mix showed 100 basis points positive shift towards a higher percentage of services reimbursed from commercial payers as compared to government programs.

Same-unit growth attributable to patient volume decreased by 0.3% for the 2013 second quarter when compared to the prior-year period, driven by declines in our neonatal anesthesia office space pediatric practices, partially offset by increases in maternal fetal medicine and other pediatric physician services, primarily newborn nursery and pediatric intensive care services.

For the 2013 second quarter, same-unit neonatal intensive care patient days were down 1.3% when compared to the prior period, while births at our hospital were essentially flat.

I would like to remind everyone that we were up against a very tough comp on a same-unit growth with our second quarter 2012 same-unit growth at 3.9%.

Our profit after practice expense for the 2013 second quarter was $177.8 million, up 14.3% from $155.6 million for the prior-year period.

Profit after practice expense margin decreased by 101 basis points, which can be attributed to the variability margins due to the mix of practices acquired since April 2012, primarily driven by the impact from anesthesia acquisitions.

We generated operating income of $113.4 million for the 2013 second quarter, an increase of 13.7% from $99.7 million for the prior-year period.

General and administrative expenses grew by 13.3% to $54.6 million for the 2013 second quarter, a growth rate that is considerably lower than the rate of revenue growth.

As a percentage of revenue, G&A expenses improved by 40 basis points during the 2013 second quarter to 10.3% from 10.7% for the prior-year period.

Depreciation and amortization expense for the 2013 second quarter increased to 1.9% of revenue from 1.7% for the prior year, primarily due to the amortization of intangible assets related to acquisition, primarily driven by the impact from anesthesia acquisitions.

Net income for the 2013 second quarter was $69.2 million, up 14.3% from $60.5 million for the 2012 period.

Our diluted earnings per share increased by 12.3% for the 2013 second quarter to $1.37, based on a weighted average 50.5 million shares outstanding, which compares with diluted earnings per share of $1.22 based on a weighted average 49.5 million shares outstanding for the 2012 second quarter.

Revenue for the six months ended June 30 was $1.03 billion, an increase of $159.7 million or 18.3% from the prior-year six-month revenue of $872.1 million.

Of this $159.7 million increase, over 89%, or approximately $142 million of the revenue growth, came from acquisitions while the remainder was from same-unit growth.

Again, to add some additional detail to our acquisition-related revenue growth, American Anesthesiology practices contributed 84% with the remaining 16% coming from acquisitions in the Pediatrix Medical Group.

Same-unit revenue for the first half of 2013 grew by 2%, driven entirely by growth from reimbursement-related factors, which was up 2.1% net through the first six months of 2013.

We continued to see reimbursement from third-party commercial payers while the shift in payer mix from commercial payers to government payers was up year-over-year.

Same-unit volume for the first half of 2013 declined by 0.1%, driven by declines in our neonatal, pediatric cardiology and anesthesia practices, partially offset by increases in other pediatric physician services, primarily newborn nursery and pediatric intensive care services as well as our maternal fetal medicine practices.

Operating income grew to $204.9 million for the first half of 2013, up 14.4% from $179.1 million for the first six months of 2012.

For the first half of 2013, net income grew by 14.4% to $124.6 million, up from $108.9 million for the same period last year.

We earned $2.47 per share based on a weighted average 50.5 million shares outstanding for the first half of 2013, up from $2.20 for the first half of 2012 based on 49.5 million shares outstanding.

Looking at our balance sheet, we had cash and cash equivalents of $13.2 million at June 30.

Accounts receivable at June 30 were $269.8 million, an increase of about $22 million as compared to December 31.

The growth of our AR is related to recently acquired practices.

Days sales outstanding improved by two days to approximately 46 days for the 2013 second quarter as compared to the fourth quarter of 2012, primarily as a result of improvement at existing units as well as the continued integration of recent acquisitions.

The total amount outstanding on our $800 million revolving credit facility was $153.8 million at June 30.

During the 2013 second quarter, we generated strong cash flow from operations of $127.2 million.

This is an improvement from last year, when we generated approximately $117.1 million from operations.

The increase in cash flow from operations for the three months ended June 30 is primarily due to improved operating results.

As Roger mentioned, as part of our capital structure planning, the Board has authorized the repurchase of our shares of common stock up to an amount sufficient to offset the dilutive impact from the issuance of shares under our equity programs.

The share repurchase program is effective immediately and permits us to make open market purchases from time to time, based upon general economic and market condition and trading restrictions.

The authorization of this share repurchase program reflects our confidence in the national group practice business model and our ongoing commitment to enhance shareholder value.

We continue to achieve solid financial results, have a strong balance sheet with very low debt, ample cash flow and plenty of access to capital, which provides us the flexibility to simultaneously invest in our business and initiate a share repurchase program, and we remain very optimistic about our prospects for continued growth.

Moving on to our outlook for the 2013 third quarter, as we announced in this morning's press release, we expect that our earnings per share for the three months ending September 30, 2013 will be in a range of $1.46 to $1.51.

The range for our 2013 third-quarter outlook assumes anticipated same-unit revenue growth for the period of approximately 1.5% higher to 3.5% higher year-over-year on a total same-unit basis.

The same-unit revenue growth will be driven primarily by net reimbursement growth, including the impact from parity.

The forecast estimates volume to be essentially flat for the 2013 third quarter.

With regard to patient volumes, last year our third-quarter same-unit neonatal intensive care patient days were strong at 3.75% when compared to the prior year.

Regarding the Medicaid parity rule, we continue to expect this rule to have a positive impact on our practices.

As I mentioned, we have started to receive parity monies from a few states.

As a result, we are including approximately $0.05 from parity in our outlook for the 2013 third quarter for payments we expect to receive from those states that are currently paying.

We will continue to keep you updated on parity as it applies to MEDNAX.

We expect our share repurchase programs to positively impact our earnings per share in future periods.

The impact on the 2013 third quarter will depend upon the timing of purchases based upon market condition and trading restrictions.

Now I will turn the call back over to Roger.

Thank you, Vivian.

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

(Operator instructions) Ryan Daniels, William Blair.

Let me start with a quick one on the parity.

I just want to get a better feel for the impact in both the second and third quarters.

Does that include both the payments you'll receive during the period as well as some catch-up, dating back to the start of the year?

Any way you can break that down for us, Vivian?

Yes.

So, basically, Ryan, we only have one state that has included the retro payment, which basically was not during the quarter.

So the estimate for the third quarter does include some of that retro payment, but we haven't seen much of that yet.

But I do anticipate that the third-quarter activity will start getting much better.

Okay, that's helpful.

And then, Roger and Vivian, I guess, a question for both of you -- you discussed a lot of the investments you are making on the anesthesia side, and that's helpful color.

I'm curious if that will show a noticeable uptick in SG&A, given the R&D and management expenses that you anticipate going into Q3 and Q4.

Will that be noticeable to us in the financial line?

Well, we will have a little bit of an uptick, but I do think that there still will be some favorability.

Obviously, that does get infected by top-line growth as we leverage some of the infrastructure even with us doing some of this build.

So we had roughly about 40 basis points, so we think that that potentially could be good going forward here.

I would also add to that, Ryan, that we have been making investments all along.

This is not the first time that we -- we just wanted to highlight the fact that we, in fact, have decided to go with a model similar to our pediatrics model, where we are splitting the country into different regions.

And that was mostly the intent here.

Okay, that's helpful.

And then last one and I'll hop off into the queue -- just any color on the Medicaid front as we look forward?

I know all the state budgets are done, and last time we spoke indicated it looked pretty good, no rate reductions in the large states.

But, what's that look overall for the entire book of business?

Thanks.

Yes.

So, Ryan, we still believe that to be the case, as we had our call last week.

And right now, we are faring quite well on that, similar to last year.

Okay, thanks again.

Kevin Ellich, Piper Jaffray.

Roger, I guess first I wanted to start off with the volumes, the negative 1.3% same NICU patient day growth.

And I understand you guys had a tougher comp this quarter and next quarter, but what are you seeing in terms of birth trends?

And then how do you split out the volume between anesthesia and NICU?

The birth volumes I think have been kind of flat, actually, in most of our hospitals.

So we haven't really seen any significant uptick in birth volumes, at least in our facilities.

And speaking with some of my partners and peers across the country, I think they are experiencing the same thing.

We did have somewhat of a downtick as well in anesthesia, and it's -- maybe Karl can address that a little bit better.

I have Karl sitting here.

Yes, for the quarter, we saw a slight downward trend in total cases.

Part of that, actually, in our facilities, we did see a slight decrease in OB volume.

So the epidurals and the C-sections that we're doing were actually down.

We did see a trend towards higher inpatient volume for inpatient surgeries, and the offset that we got was lower outpatient volume at both the hospitals and the surgery centers, which is where you are going to see more of your elective-type volume.

So we did see it, but it was very slight as far as the change for the quarter.

Thanks, Karl.

That's actually kind of counterintuitive from what we have been hearing from the hospitals in terms of weaker inpatient trends.

So do you have any explanation as to what is behind the uptick in inpatient?

Yes.

Well, I think, one, we are not necessarily a cross-section of the country, of what is going on there.

So we are in 20 practices, about 50 to 60 hospitals, which is a small picture as to what's going on across the country, as far as that goes.

And when you speak to the hospitals, and I'm certainly not hospital expert.

I don't know if you speak to hospital inpatient services overall versus hospital surgical volumes.

I can't really comment if there is a reduction in any of their medical volumes at all.

Okay, no, that's helpful.

And then just switching back over to the parity, have you confirmed with all of your states that you will be receiving the payments?

What sort of visibility do you have at this point?

Yes, so even though I know that CMS has said that pretty much all the state plans have been approved, I guess with the exception of California, from our parity work group, we have about 18 states that have confirmed that they have gotten their applications approved.

And so we still have a little bit of road to go.

But again, the timing of these payments is still the more challenging thing.

and, frankly, the consistency of the payments as well.

So I do think, as I mentioned to Ryan, Kevin, that we are making a lot of progress with that even from the second quarter, when we closed the activity that we are seeing in the third quarter.

That's why we bumped our estimates up in the third quarter.

So I just think, as I've mentioned to you guys before, it's kind of a slow process.

But it sounds like we are making some pretty good progress here.

Just to finish up on that thought, we are going to remain cautious and conservative.

Just to give you an example, the state of Texas told us the other day we are not going to see any payments from them until January of 2014.

So, although we expect that we are going to get paid from Texas and we absolutely think that Texas's word will be good, we are not sure exactly how we are going to account for that.

So we've got a lot of work to do, and there are still a lot of questions, on these payments.

Did they give you a reason why they are not going to pay until January 2014?

Yes.

Texas, as you guys know, is a pretty high managed Medicaid state.

And with some of those states, they have to basically do the negotiations on that and the practicalities of getting that implemented.

So again, as Roger says, I don't think that it's not that we are going to get the payment, although we are trying to speak to them to get something more affirmative on that because, obviously, from year to year we would like to have more clarity on that.

But I do think part of it is, when they have a lot of managed Medicaid, they do have to then negotiate that as well.

Got it.

And then just switching over to pricing, Vivian, 2% growth in net reimbursement-related factors is pretty good.

And obviously, the sequential parity mix shift was a positive as well.

How does that split between pricing on the neonatal business versus anesthesia?

Are you seeing positive commercial pricing growth in both businesses?

Yes.

Yes, we are seeing commercial pricing growth in both of those, yes, absolutely.

As you said, Kevin, one of the biggest positives on the net pricing side is that year-over-year, the P mix was only slightly negative.

Again, it was positive on a sequential basis, but year-over-year it was only slightly negative, the best improvement that we've seen in a long time.

When you say slightly negative, are we talking like 20 basis points or 30 basis points?

About 30, yes.

Okay, sounds good, thanks.

Ralph Giacobbe, Credit Suisse.

Going back to the volume, I think in the past you have discussed how you didn't think some of the macro factors in terms of hospital volumes generally would affect you, given smaller number of practices versus larger numbers.

Does your opinion change at all, just given anesthesiology becomes a bigger component of the business?

And maybe specifically in the context of what we saw this quarter, which was slightly negative volume and guidance even for next quarter that assumes flat, given the volume environment that we are hearing from many of the hospitals?

Well, Ralph, good morning -- it's hard to guess, right?

We continue to see variability.

It isn't any region specifically that we are looking at where we are seeing lower volumes.

If we look again on a month-by-month basis, you will see some regions are up and then the following month that region will be down.

So I'm not seeing anything, still, five years into this conversation consistently across the country where I feel like maybe because there are fewer immigrants coming into Texas that's having an impact.

It just isn't playing out that way.

So what we are trying to do is remain conservative and give you our best guess for where the volume is going to be.

And, A, we are looking at the quarter comparison; and, B, we are looking at just what has happened over the last couple of quarters and trying to come up with our best guess.

All right, that's fair.

Vivian, do you actually have the payer mix numbers for the quarter and what it was last year?

We just talk about that generally, about how it has gone up or down.

We don't give the absolute number.

We do disclose that once a year.

But as I mentioned to Kevin, basically quarter-over-quarter it was positive, and then year-over-year on a quarterly basis, it was slightly negative at about 30 basis points.

And then on a year-to-date basis it was slightly -- it was a little bit more negative because of the first quarter, so basically roughly about 75 basis points or so negative on a year-to-date basis, year-over-year.

Okay, and then maybe, is there any way you could breakout or give us what same unit margin was and how that compares to a year ago, right?

So I understand that margin is going to be compressed as you change your mix, but I'm just wondering and trying to get a sense of what the underlying margin did for the quarter.

Yes.

Well, we did give some direction on that because I did talk about the margin being primarily driven by the mix of practices that we acquired.

So it was not related to same unit, but we haven't specifically broken them out.

But that's my idea of giving you guys direction on where it's coming from.

I guess, so directly, would you expect -- if you stripped those out, do you think same-unit margin was up on a year-over-year basis?

Well, again, what I've said before, that fluctuates from quarter to quarter because you have to look at where the same-unit growth is coming from.

This quarter, as we said, it wasn't -- the volume was lighter and the pricing was better.

And then, sometimes, it has to do with the bonus accruals and expense accruals related to where you are at with malpractice, etc.

So it does jump around from quarter to quarter.

But this quarter specifically, the negative impact on the margin was driven by the mix of practices, and specifically anesthesia practices.

Okay, and then just the last one -- you had mentioned anesthesiology is now 30% of revenue.

Any willingness to talk about what percentage of profitability or EBITDA that piece is to the business?

That's a good try, but no, not at this point.

We are just (multiple speakers) trying to give more color.

Karl is vigorously shaking his head (laughter).

Alright, fair enough, thank you.

Kevin Fischbeck, Bank of America Merrill Lynch.

Okay, maybe just going back to one of Ralph's questions there, when you say that the same contract growth was pretty much flat from a margin perspective, and that most of the margin deterioration was because of new -- of acquisitions, are you saying inherently because of the margin profile of the acquisitions, or just because acquisitions generally come online a little bit low from a margin perspective, and that over time you would expect to ramp them back up?

So it's a combination of both.

We have said that, obviously, the anesthesia margins are slightly lower than the neonatology volumes, although -- I'm sorry -- margins.

But that, again, changes depending on what's happening with the volume of NICU, etc.

But there are improvements to the anesthesia margin after we acquire them, as we have said before, specifically on the revenue cycle management side.

As we talked about here, we are still getting positive commercial pricing on the anesthesia as well as PDX, and so there are some improvements.

But the margin profile is slightly different.

Okay, that's helpful.

And then as far as the Medicaid parity number, I guess you talk about it a lot of different ways.

I just wanted to make sure I understood.

So are you saying that the $0.05 number that you are looking for for Q3 reflects the 18 states that are currently paying you and that, if more states pay you, then the Q4 number would be higher?

Or, is it also potentially you make some assumption about more states coming back to you during the Q3 to get to the $0.05 number?

I'm just trying to understand if $0.05 is the right run rate to think about in Q4 or next year.

Yes.

No.

Well, we are hoping that in Q4 it will be higher because, as Roger said earlier, we are anticipating for more activity.

So let's just clarify what I said.

On the 18 is 18 states that we know from talking to our Medicaid folks that, basically, their plan amendments have been approved.

That does not mean that they started paying us because, basically, we had around five or six states that basically had started paying us.

And so we do anticipate that to go up, hopefully, during the third quarter, and certainly into the fourth quarter.

So, hopefully, the run rate in the fourth quarter will be higher than what we have estimated in the third quarter, and we do think in the third quarter there is some potential upside to that.

But at the moment, it's hard for me to know that because of the inconsistency of how these payments have come in.

Okay, and it sounds like you probably wouldn't even be at your run rate number until Q1 because at least Texas is not going to flow it through until then.

Well, that's true, yes.

So we are trying to get a little bit more color around that and see if they would put anything in writing as to exactly what we can expect on that.

Okay, and then last question -- as far as capital deployment goes, why not a larger share repurchase authorization?

Obviously, you are looking to do a $400 million deal, so that's obviously a good place to put money.

But you have a lot of capital flexibility.

Why stop at just offsetting dilution?

Yes, well, because I want to spend it all buying practices (laughter), so that's the real answer.

I do think that we have opportunity to maybe spend a little more if things fall in our way.

And so, until we get some clarity on that, I think my choice is always to put the money to work by acquiring more practices.

They come with not only earnings, but lots of cash flow.

To me, that's a better place to go than competing with our shareholders to buy our shares.

I think that we took a good first step in talking to our Board about making up for our equity programs, and I'm pretty happy with where we are at, actually.

Okay, alright, great, thanks.

Brooks O'Neil, Dougherty & Company.

Good morning, congratulations on the continued progress.

I just have a couple questions.

Number one, I was curious, Vivian, if you have given a lot of thought or maybe actually established a policy for how you are going to account for the retroactive collection of those parity payments, particularly as they get quite a bit bigger.

I could envision a lot of money coming in with not much expense to offset it.

Is that how we are going to see it, or are you going to do it some other way?

No.

You do see it in the net revenue line, and so that's where it should be because it's an increased reimbursement.

Right now, we are primarily doing it on a cash basis of accounting because, again, I don't have a lot of color yet.

The idea would be to try to go on an accrual basis, which is typically what you do with revenue of this size company.

But again, I haven't really had a lot of clarity on some of the states.

But that's where we would like to go to.

So right now, we are doing cash basis and it does show up on the net revenue line as a pickup.

Now, I would like to just remind everybody that for us, that does basically get bonus-affected as well as tax-affected because a lot of those practices on the same unit basis, that would impact their bonus.

Sure, that makes total sense.

But a lot of the other expenses probably had already flowed through once those payments come in.

What other expenses do you mean, Brooks?

Well, just your normal G&A expense, and you have the practice expenses as revenue that's going to come in after you have handled the traditional accounting for your business.

Yes.

The other expenses -- right, we would basically accrue for them as we incur them.

Right.

So this revenue -- we are just like right now waiting to get the cash and accruing it.

Like I said to Ryan, there's only one state so far that we have received any retro payments.

So hopefully, there's a lot more to come.

Got it, that's good.

So switching gears, I'm just curious if the timing of acquisitions has largely mirrored what you had expected for the year or whether anything has changed dramatically relative to what you are thinking for 2013.

We never get them done as fast as I want.

But we also are not --

Come on, you got to get those guys moving.

Right.

We are not rushing, either.

We are going to wait until they are right to get them done.

I would have liked to have seen one other acquisition completed by now.

Having said that, there are a couple of anesthesia acquisitions we are working on that I'm fairly confident we will get done this quarter.

So I'm happy about that.

To put my two cents worth in, to your question to Vivian, I think that the parity payments only need to be affected by the bonus and the tax.

Yes.

It's a fixed-cost business.

You've been around long enough --

Sure.

We are not hiring more people; we are not paying more malpractice insurance; we are not incurring any other additional expenses.

But they do have to be affected by bonus and taxes, obviously.

Sure.

So I guess my gut tells me that will help the margins over time, at least for the two years --

Yes.

-- or maybe two years plus that you will be collecting them, and it will be a good thing.

Let's hope it's longer than two years.

Right, exactly.

I was just curious -- one last thing.

Obviously, traditionally, 3Q you see a little bit of uptick in the Medicaid mix.

We are a little bit into 3Q now.

I am assuming you are seeing the normal shift.

So we probably shouldn't be expecting a payer mix shift in the favorable direction we saw in the second quarter as we go through the summer period.

Is that how you are thinking about it right now?

Well, what we did for the forecast, Brooks, is that we basically put it at the same favorability as Q2, which is about 30 basis points -- I'm sorry -- not favorability but negativity, which is the 30 basis points or so.

But it is higher than Q2 because of what you just said.

We agree with you that basically year-over-year, hopefully, it won't be as dramatic, but it is a higher mix, generally, in Q3.

Yes, okay, that's good, thanks a lot.

Rob Mains, Stifel.

Vivian, a couple of clarifying questions.

First of all, on the payments that you are receiving for parity, if they are being done on a cash basis, then there is some catch-up payments that you are going to be booking that aren't going to be recurring.

I guess from what you are saying is that you expect the volume of states that are coming on, going forward, to eclipse any kind of one-time benefit that you are going to receive in any given quarter from the catch-up payments.

Is that a fair statement?

Well, we are still expecting to get more one-time payments, too, because -- so, not only am I going to get more states, I'm hoping; but I also need to get more of the retro payments because, as I said, there's only one state right now that has paid me retro.

So it should be on both fronts.

Okay, but the $0.05 for the third quarter shouldn't be viewed as a high water mark?

No, no.

I think we have been conservative because, again, we basically don't have a lot more visibility onto this.

And like I said, we meet every couple weeks or so, and it does continue to be favorable on the number of states that have their plans approved, etc.

But until I see that cash and they start paying me on a more regular basis, it's hard for me to estimate that.

Okay, fair enough.

And then if births are flat and NICU volumes are down, is that a percentage of babies admitted to the NICU issue?

Is it a length of stay issue?

Is it a little of both?

The percentages are down slightly, but nothing that -- it's basically within historical, well within historical ranges, as well as the length of stay.

So it's not the longest length of stay that we've ever had and it's not the highest percentages.

But, if it's 12 -- I don't have the numbers in front of me -- but if it was 12.1, it may be 11.9.

Or if it was 12.3, it may be 12 -- it's not what is causing the drop in admissions.

Yes.

The admin rate is really pretty much right on track.

And as Roger said, it's miniscule is the difference, and so is the length of stay.

So it's really not that at all.

Okay, so then the obvious follow-up is that there is no trend to be read from that?

Yes, right.

Okay, that's all I have, thank you very much.

Matt Weight, Feltl & Company.

I don't recall in the past you guys citing declines in anesthesia same-unit volumes.

So I'm wondering -- it would be helpful if you could provide any kind of range of what the historical same-unit volume growth in anesthesia has been.

Well, Karl is here, so I'm going to let him add a little bit more color.

But the one clarifying statement I want to make is that it was slightly down.

So the volume impact, the biggest volume impact overall on MEDNAX is related to NICU volume.

So, with that, Karl, do you want to add more color to that?

Yes.

I think, traditionally, we have been seeing growth in our anesthesia volume.

So I think Vivian is right; it was slightly down.

I would almost call it flat.

So we didn't see a dramatic change there.

some of it we know is a function of -- we had a hospital lose some business.

A payer moved a chunk of business out.

We know that impacted us at one place.

But we did see it in other locations being down a little bit on the outpatient.

But there was nothing that was concerning.

We didn't see drastic moves, and it was -- as Vivian said, it was slight.

Historically, we have seen increases, so this was a little bit of a difference, and we will continue to watch it to see if it changes as we move forward.

But I don't think there's any major concerns to say things are changing at this point.

Okay, that's helpful.

And then, Vivian, one more parity question here -- for 2014, outside of any retroactive payments you received, would you hope to be recognizing revenue on an accrual basis?

God, I hope so.

I hope so, but I am hoping that things will get much better in the third quarter as predictability -- so that we can start estimating it.

Because right now, as I said to you guys in prior quarters, there are some practical things with it.

Our patient accounts folk are still looking to see the payments that we get -- really, how do they size up to what we expected?

Are all managed Medicaid programs being paid?

And just that rate differential because there are some locale differences on some of the codes and all that.

So without getting into a lot of these practical issues, I'm hoping that for sure, that will be the case.

That would be great.

And then, Roger, last question here -- I'm curious from an M&A perspective, with anesthesia you referenced in your prepared remarks escalating interest.

And I don't want to take too much into the escalating, but it sounds more bullish.

Why are you seeing that?

Is it healthcare reform?

Or any color on that would be helpful.

I think it is that.

I think there is instability and uncertainty about where all of this is leading, whether even any of it is going to happen.

And I think that the hospitals are putting a lot of work into these hospital-based groups.

Hospitals feel like they have to have flexibility in order to be able to contract with whatever systems may end up happening.

So I think there's just a lot unknowns.

And the physician groups are looking to see -- they are starting -- I think they -- they are not starting.

I think they have realized that they need to do something and their need to partnering.

They need to partner.

And so their questions are, should we be partnering with our hospitals?

Should we be partnering with large groups like ours?

And so we are seeing, I think as a result of that, an escalating number of groups that are looking for what their alternatives -- exploring their alternatives.

Great, thanks.

Let me also add, to answer Rob's question, the admit rate for the second quarter was 13.3%, and that is now 10 basis points from same quarter a year ago.

And the average length of stay was 18.2 days, and that is down 20 basis points from same quarter a year ago.

Darren Lehrich, Deutsche Bank.

I wanted to clarify one thing as it relates to the buyback authorization.

Is the amount that you have authorized -- does that equate to the number of options that were exercisable at year end last year?

So was it like 1.5 million shares?

Or can you just identify numerically how the authorization works?

Yes.

It's roughly about just the whole dilutive impact, which -- obviously, most of it comes from the equity programs.

So it's roughly in the range of 1 million to 1.2 million shares a year.

Okay, that's very helpful.

And then just going back to your volume outlook for the third quarter, I just want to make sure I understood what you are messaging here.

You referenced the comp, which we obviously can see for NICU was very strong.

In terms of how the third quarter volumes are being contemplated, is there any differential that you'd want us to consider for the guidance between anesthesia and the pediatrics business?

Will one be positive and one be negative and so it ends up all being flat?

Or is there any way to distinguish?

Yes.

When we talk about it, we talk about it overall.

And so potentially, like I said, this quarter -- and Karl has reiterated that -- most of that slight negativity was not coming from anesthesia because, like I said, anesthesia was slightly negative.

It was more weighted towards the NICU side of the house.

So we will continue to look at that.

And when we look at it, we just look at it all in.

Typically, all of our specialties -- some could be up, some could be down.

Other pediatric services is up.

So it's just all in.

It's hard to predict any one specifically.

Sure, that's fair.

Okay, and just in terms of the bonus effect of the parity, I know you have talked about this before.

But just the split -- is there a set number that you would guide us to going forward on this?

Well, no.

Typically, as we have said, the bonus for the practices that are in bonus -- we have the 50-50 incentive plan.

And so, roughly, that works out to about 45% or so.

In any given quarter, it could be different or for the year, depending on where they are at.

But we do plan on sharing that with them as part of their practice upside.

Okay, that's great.

Alright, thanks very much.

Kevin Ellich, Piper Jaffray.

Just three quick follow-ups -- now that anesthesia is 30% of revenues, and I know you have pretty good payer mix -- just wondering if you saw any impact from sequestration this quarter?

Yes.

So anesthesia impacted sequestration.

Our estimate for the whole year basically is pretty immaterial.

Okay, that's fair.

And to that point, Vivian, could you say what percent of anesthesia revenues comes from Medicare?

We haven't disclosed it, but we just -- like I said, it's not material, that 2% sequestration.

Got it, okay.

And then on the debt and interest expense, I guess, should we -- with the buyback and the increased expectation for maybe more acquisition spend in the back half, is it safe to assume interest expense is going to ramp up and you guys will continue to use the balance sheet, Roger?

Yes.

Again, these practices come with a lot of cash flow.

So when we acquire one of these practices, it's not just the earnings; it's also the cash flow.

But we will continue to use both our line of credit and the cash flow from our practices.

Got it.

And then just a very minute issue here, Vivian -- tax rate was just a little bit lower than I expected this quarter.

I'm curious if there's anything behind that and where you think tax is going to shake out this year.

Yes, I do think it will be -- that's a good question, Kevin.

I do think that the tax rate is going to be slightly lower than last year.

We continue to see some positive items that are called discrete items for tax, so basically they are occurring every quarter as we basically just have some of our uncertain tax positions that are reversing.

And so that is kind of what you've seen.

Okay, sounds good, thank you.

Okay.

Well, if there aren't not any more questions, thanks, everyone, for participating this morning, and we will look forward to speaking with you next quarter.

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