Pediatrix Medical Group Inc (MD) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the MEDNAX 2014 fourth quarter earnings conference call. (Operator instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Charles Lynch. Please go ahead.

Thanks. Good morning. I want to quickly turn over the call to Roger and Vivian but first read our forward looking statements.

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, and 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 takes 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 as quarterly reports on Form 10-Q including the sections entitled Risk Factors. With that I'd like to turn the call over to our CEO, Dr. Roger Medel.

Thank you. Good morning. Thanks for joining the call today to discuss our results for the fourth quarter and full year of 2014. We had a great quarter to end the year. Our revenue was up by almost 15%, bringing our full year growth to 13% and our total revenue to just over $2.4 billion.

For the fourth quarter our top line operating income and EPF all grew by double digits in line with our long-term expectations. I think it's important to note that we achieved this growth in Q4 without any year-over-year increase in parity payments, which we will talk about later in some more detail.

Our same-unit growth continued to accelerate in the quarter to just under 5% with strength in same-unit volumes across anesthesiology, neonatology, and other pediatric services. We also wrapped up our most active acquisition year ever. During the fourth quarter we completed 4 practice acquisitions. I discussed two of these on our last earnings call, but we also completed a small pediatric cardiology acquisition in December and then we finished the year with the purchase of Metropolitan Anesthesia Alliance, based in Memphis, Tennessee.

Including these deals, we were able to put close to $0.5 billion dollars to work for 13 acquisitions last year. 11 of which were practices and 2 of which were strategic non-practice businesses.

We complemented these acquisitions with an additional $490 million in share buybacks, including over $360 million completed during the fourth quarter under our new $600 million authorization that we announced at the end of October.

Overall we were able to utilize nearly $1 billion dollars of our capital in 2014. We also positioned ourselves as very favorably for the future. Despite our level of capital use during 2014, we start this year with very modest leverage and ample financial flexibility. In intermediate term, while a subset of Medicaid parity payments would have resulted in a modest headwind to EPS growth in 2015, we are filling this gap with share repurchases and the contributions from acquisitions that we completed in 2014.

So I hope this provides you with a good visibility into how we're looking at the coming year from a financial perspective. More fundamentally though, we enter 2015 better positioned to address the needs of our hospital partners.

It's becoming clear that the challenges of health care reform are getting more and more real, whether it's through the implementation of the Affordable Care Act, the focus on the institute of health care improvements, triple aim; which is to improve the patient experience, include the health populations, and provide cost effective care or as we saw this week, CMS's intent to move more Medicaid and Medicare reimbursement towards value based structures.

As for our part throughout last year, we continued to invest in our clinical research, education, and quality programs. Our ability to improve outcomes through the analysis of extensive patient data continues to advance. As most of you are aware, last year we reached a milestone of over 1 million patient records in our neonatology data warehouse. We also surpassed 600,000 audited cases in our Quantum clinical navigation system that supports our anesthesiology practices.

Our ability to collect this data creates benchmarking tools for our physicians and develop quality improvement protocols which helps us in the mission we've had for 35 years, to take great care of our patients.

But it also brings significant value to our hospital partners through the ability to reduce complications, highlight and address variations in care processes, improve physician and patient satisfaction, and ultimately enhance cost effectiveness.

The non-practice acquisitions we completed last year serve the same ends, with our acquisition of Surgical Directions adding perioperative consulting capabilities, and the acquisition of MedData bringing great solutions for improving physician and patient satisfaction to the revenue cycle management process.

With all of this in mind, I anticipate that we will continue to expand the conversations that we're having with our health system partners to generate both organic and non-organic growth. Throughout last year, I discussed a handful of these opportunities such as our joint venture with Phoenix Children's Hospital, the service line extensions we brought into the market for the Tristar System in Nashville, and the additional services we brought on board for both Women's Hospital of Texas and Navicent Health in Macon, Georgia.

In the past year, we also created a new position of Chief Development Officer, which is held by Dr. James Swift, who joined MEDNAX about 7 years ago. Under Jim's leadership we're having substantial conversations with many of our hospital partners focused on our ability to add new services in their facilities. Whether this is through an RFP process, the assumption of employee physicians, or broader system-wide initiatives. Our company will also continue to evolve towards a market focus rather than an individual specialty focus, in order to bring all of our capabilities to the table for all of our hospital partners.

Finally, in terms of our positioning for the future, as I mentioned before, we put nearly $1 billion dollars to work in 2014 to both grow our Company and buy back our stock. We will continue to evaluate ways we can allocate our capital and resources with the goal of becoming a more valuable partner to our hospitals and further enhancing shareholder value.

We enter 2015 with a strong pipeline of attractive acquisition opportunities and signed letters of intent which should continue the successes we had in 2014. We will evaluate possible add-on services to our MedData platform. As that business continues to grow, they've identified a number of opportunities to expand service capabilities, and we will support them in those efforts.

Additionally, we will continue to evaluate opportunities to grow beyond our existing specialties in ways that can broaden our service capabilities and enhance our ability to provide great patient care and to add value for our hospital partners.

Lastly, we have shown that we view share repurchases as an additional avenue to add shareholder value and we will continue to consider additional buy-backs. So overall I'm extremely happy with how we ended 2014 and how we positioned ourselves for continued growth in the future. And I am very excited about this year ahead. With that, let me turn the call over to our CFO, Vivian Lopez-Blanco.

Good morning. And thanks for joining our call. I want to add some brief details to Roger's comments on our fourth quarter results. At the top line, our net revenue for the fourth quarter of 2014 increased by 14.7% to $651 million. 10% of this growth came from recent acquisitions with anesthesiology practices contributing roughly 2/3 of that growth and the remainder coming from neonatology and related pediatric subspecialties and non-practice acquisitions.

Same unit revenue grew by 4.6% with volume increasing by 3.2% and revenue attributable to net reimbursement related factors growing by 1.4%. On the volume side we saw good growth across most of our services. Our NICU days were up 3%, an acceleration from third quarter and anesthesia volumes were up more than that. Our other pediatric services and maternal-fetal medicine volumes were positive as well, partially offset by a slight decline in pediatric cardiology.

On the reimbursement side, as Roger mentioned earlier, parity revenue didn't have a year-over-year benefit for us in the fourth quarter. The 1.4% increase from net reimbursement related factors was principally due to continued improvement and reimbursements received from third-party commercial payers.

In terms of payer mix, our percentage of patients covered by commercial programs improved by about 30 basis points compared to last year's quarter. We recorded roughly $17 million in parity revenue or about $0.05 per share after the impacts from incentive compensation and income taxes in the fourth quarters of both 2014 and 2013. So in terms of same-unit revenue growth, the 4.6% growth we reported for the quarter represents a true apples to apples comparison.

It also compares favorably to the 4% same-unit growth we reported in the third quarter, excluding the impact of parity. Our profit after practice expense for the fourth quarter was $223 million, up 17.2% year over year. Profit after practice expense margin improved by 73 basis points, which reflects the positive impact from our same-unit growth.

Our general and administrative expenses grew by 22% over the prior year which reflects increases due to the mix of acquisitions, primarily those of non-practice businesses. Our depreciation and amortization expense also increased year over year related to acquisitions. Overall, our operating income grew by 13.9% to $141 million and our operating income margin of 21.7% decreased slightly by 15 basis points versus the prior year period.

Finally, our fourth quarter net income grew by 11.9% and diluted earnings per share of $0.89 grew by 14.1% as compared to the prior year period. For the quarter weighted-average diluted shares were 99.1 million, down about 2 million shares from the prior year, due primarily to the repurchase activity we undertook early in the year and during the fourth quarter.

Looking at our balance sheet, we had cash and cash equivalents of $48 million at December 31. And accounts receivable were $352 million. An increase of approximately $67 million as compared to December 31, 2013.

Day sales outstanding were 50 at the end of the year, down about 1 day from the end of the third quarter. Our total outstanding debt under our new credit facility was $568 million at December 31. Up from $288 million at the end of the third quarter.

We finished the year with a total leverage of only 1x based on a full year 2014 EBITDA of $559 million, and with roughly $930 million available under our credit facility.

Lastly, during the fourth quarter we generated cash flow from operations of $179 million compared to $139 million last year. For the full year we generated cash flow from operations of $423 million compared to $405 million in 2013.

As we announced in December, through open market purchases and an accelerated share repurchase program, we completed $361 million in share repurchases during the fourth quarter under the $600 million authorization we announced in October. As of December 31, 2014 we had 96 million shares outstanding compared to 101 million shares at December 31, 2013.

Moving on to our outlook for the 2015 first quarter, as we announced in this morning's press release we expect that our diluted earnings per share for the three months ending March 31, 2015 will be in a range of $0.68 to $0.72. The range for our first quarter outlook assumes anticipated same-unit revenue growth of 1% to 3% year over year, including approximately 1% unfavorable impact on pricing from the decrease in parity revenue from the 2014 first quarter.

Included in our first quarter is approximately $0.02 of Medicaid parity net of the impacts from incentive compensation expense and income taxes compared to $0.04 in last year's first quarter.

As a reminder our results for the quarter -- for the first quarter of every year are impacted by some timing issues that affect our results on a sequential basis. For the first quarter of 2015 these factors include impacts on net revenue because there are fewer calendar days than in the fourth quarter, as well as a significant increase in expenses associated with Social Security payroll taxes that are higher at the start of each year when compared to the fourth quarter of the prior year.

These recurring items impact our operating income, net income, and earnings per share, and are included in the outlook for the 2015 first quarter. It's also important to remember that we typically have negative cash flow from operations during the first quarter of every year as we use cash and amounts under our credit facility to pay bonuses, primarily to our physicians, and 401(k) plan matching contributions that accrued throughout the prior year. Now I'll turn the call back over to Roger.

Thank you, Vivian. As I said before, I'm very pleased with the progress that we have made through 2014 and in particular with the continued improvement in same-unit revenue growth we saw during the second half of the year. I also think we positioned ourselves very favorably for continued growth with an active acquisition pipeline, opportunities to build new hospital relationships, and deepen our relationship with our existing hospital partners, and most importantly our ability to provide high-quality cost-effective care to our patients. I'm excited about the future and I look forward to the progress we can make in 2015. Operator, let's go ahead and open up the call to questions.

(Operator Instructions) And we have a question already from Kevin Fischbeck of Bank of America. Your line is open.

Good morning. This is actually Joanna Gajuk filling in for Kevin today. Thanks for taking the questions here.

So just in terms of volumes, this definitely was something we were waiting for to see in the same store volumes of 3%. I guess in the past you talk about this level driving margin expense. I just want to confirm that this actually occurred.

And on that front, can you talk about, you know, the underlying trends there. Will you expect going forward for the NICU volumes and anesthesia, in particular for anesthesia whether there's any read through that you get from just improving hospital volumes overall?

So good morning, Joanna. This is Vivian.

Yes, we did see -- we're very happy to see these volumes in the fourth quarter and they are basically throughout all of our specialties. Anesthesia did very well as well. So yes it did have -- as I mentioned in my prepared comments, a positive impact on the operating income margins. So, as far as continuing, we certainly, you know, hope that they do. They have been trending upward since last quarter.

And so as it relates to anesthesia, I don't know of anything that has impacted it that we believe it wouldn't -- you know, it wouldn't continue. So I don't know -- Karl is here. I'll ask Karl, is there anything that you're seeing, Karl, from an added perspective here.

No. We had a very strong fourth quarter. Typically you see a strong fourth quarter from a volume standpoint. But the growth year-over-year was very strong and we were all happy with that. We are seeing, you know that has been playing out as we have seen some of our hospitals investing -- from a construction standpoint -- investing in growth. We're hopeful that that trend will continue.

But, you know, as you know we -- servicing them at the hospital, it's really up to the hospital to see that growth. We have seen that growth be in both outpatient surgery centers, as well as in the hospital inpatient side of the business as well.

Do you attribute that to reform, to economy, or anything else?

I don't have anything specifically that I would say that it meets with.

Yes. I think -- I think we have -- you know, we're not able to tell. I mean, obviously there's a lot of discussion, you know, on the reform. But I think as we have said before, we're in centers that have high acuity businesses and services. And all of that. It would be hard for us to pinpoint that.

Back if you would to the NICU volumes. Can you talk about the birth trends that you have seen in your hospitals?

Yes. You know, we always predicted that NICU volumes, you know, would come back, both as a result of the economy and also as a result of just the demographics. And so the fact that there were more -- if you look at a 15-year time period from 1975 through 1990, the number of births occurring annually was about 3 million babies per year.

Starting in 1990, the number had gone up to 4 million. And that has remained more or less along that 4 million baby number per year. So babies that were born in 1990 are now getting to be 25 years old. Because half of them are boys and half of them are girls we have an additional 0.5 million women now that are of child-bearing age and starting to come online, starting to be 25 years old and beyond every year.

So we expect because of that demographic that we will start to see an increase in births and hopefully this is -- this is what that means in combination with maybe some improvement from the economy. And if families have decided to withhold the idea of having a child for the time being, maybe we're seeing some of that as well.

Great. And if I can, lastly on the commentary, Roger, you made around looking at other specialties or whether or not limiting yourself to individual specialties. Is there any additional color you can give us in terms of which types of other specialties you're looking at or is it too broad at this point or any additional color. Thank you.

We're not really going to talk about which specialties, you know, we're looking at. We continue to evaluate the possibility of entering a new specialty and hope to have some decisions made before the end of the year. But, you know, keep in mind that we understand that there's a major anesthesia asset that is coming to market this year. And we will be very interested in looking at that when that happens.

Additionally we continue to have success in signing our LOIs for anesthesia and we feel like our pipeline is really outperforming. We expect to continue going down that path. So there's no pressure from lack of deals to enter into a third specialty. If we do it, it will strictly be because we see an opportunity to expand our strategic positioning to bring value the specialty, to our partners, and to our shareholders. But there's plenty of opportunity to grow within our existing specialties.

Thank you.

(Operator Instructions) We do have a question from Ralph Giacobbe with Credit Suisse. Please go ahead.

Good morning. Roger, your bullishness is clear in terms of the opportunities ahead. If you could help us reconcile to a little bit of a step-down in the organic growth rate that you would suggest for the first quarter, the 1% to 3%.

I know you mentioned parity and there is some seasonality. Is there anything else that we need to consider on why that would sort of step down a couple few hundred basis points. And typically you provide the split between volume and pricing in the forward quarter guidance. I didn't see it in the release. How should we think about that for 1Q?

Ralph, good morning. This is Vivian.

Again, it's really basically 2% to 4%. And so we don't think that that's sluggish at all. Again, we had a great fourth quarter and I hope those volumes continue. But I can't really declare that a trend. And so I think that the 2% to 4% is relatively in line with what we would expect.

And so as it relates to volume and pricing, typically it's been a little bit more weighted to pricing because of the fact that we had parity. We still have, as you see from the notes, we do have some parity that is still seeping over from last year, as well as the continued pieces for the states that have said they are going to continue that. So we are expecting that to impact it in the first and possibly the second quarter. So basically you could look at that half -- about half and half.

And then the -- just on the parity, I just want to make sure. The $0.02 benefit in 1Q, I'm assuming that's all from states continuing the program and not lingering payments related to 2013 and 2014. And then is $0.02 the quarterly run rate? And then any update that you can give on additional states or if you think there could be additional states that come on board and extend the program.

Yes. So the $0.02 is not all from states that are extending. It is basically because there is still some runoff on, really, programs that had not started to pay. And so we do expect still to get money from 2014. And so the rest of it is from extension.

And so the $0.02 run rate I really don't see that as being the rate for the rest of the year. Potentially we will see run rate in the first and the second quarter maybe. But certainly, hopefully by the third quarter, everything will be caught up from the prior payments and what we will have is more on the extension.

You know, as it relates to the states there's still -- some of them have made changes to extending the programs throughout. Some of them have come in, like Washington now has it in the proposed bill. I don't know if that will continue.

But then Michigan pulled out neonatology. There are still fluxes up and down on it. But we're still -- it will still play out until they go through their legislative sessions. But we're still okay with basically roughly between 10% and 20% of what we feel that the total parity was. But we will see how that plays out.

Okay. Thank you.

Our next question is from Kevin Ellich of Piper Jaffray. Your line is open.

Good morning. Just a couple questions. Roger, in your prepared remarks you talked about HHS's initiative that came out a few days ago with the shift of value-based reimbursement. Just wondering if you could give us a little bit of your thoughts on how this might affect your business over the next couple years. And then do you also think that some of the other commercial payors are going to jump on the ship.

We don't have any details of course. But we are very excited about it, because we have been making investments in quality and measurements and outcomes and databases for more than a decade. It's about time that that investment paid off, not just for our patients, as it has over the years, but also for our shareholders.

So we are very excited about it. We are having meetings with payors about quality, about our programs, about our database and our statistics, outcomes, complications, all of those things are now all of a sudden of real and significant interest with the payors and not just Medicaid and Medicare. You know, some of the major payors we're having meetings with here in the next couple of weeks actually to talk about exactly this thing. So, yes, we're excited about it.

Great. And then just to clarify, this would really only affect the American anesthesia business, or is there any spillover to pediatrics?

There is always -- Medicaid sometimes takes their lead as to what they do from the Medicare side. Obviously different on a state by state basis. But there's -- there's always some spillover into that. And private payors care about it, as well. They're not just focused on end.

Great. Great.

And going back to the volume growth that we saw this quarter. Vivian, you said that anesthesia volumes were up more than 3%, if I heard that correctly. And I know Karl gave some nice detail, but do you think maybe there was any seasonality towards the end of the year with deductibles resetting and what not?

Well, clearly we see the fourth quarter always being a strong quarter. There's nothing in the dynamic of that that would have made the 2014 fourth quarter any stronger than the 2013 as a result of that. We've always seen -- especially December has always been a very strong month. Even with the holidays we get very strong volumes.

So that really, you know, would be consistent from a theme year to year. But we didn't see any change in that dynamic in the one year that would have caused it to be more pronounced in 2014.

Got it. Okay. That's helpful.

And then lastly, Vivian, some moving parts on the operating cost side. Salaries, benefits, supplies were a little bit lower than historically what's in our model. But then depreciation and amortization jumped up sequentially and year-over-year pretty significantly. Just wondering what is going on there and is $14 million a good run rate for the year?

Yes. So -- good morning, Kevin. Yes, you're going to see that because we did, as I mentioned in the prepared comments, talk about that that is related to amortization of practices that we acquire and certainly practices that -- the non-practice acquisitions. So you will see that in 2015, as well.

Got it. That's helpful. Great. Thanks.

Thank you.

Our next question is from Brian Zimmerman of Goldman Sachs. Please go ahead.

Hi. This is Ambarish filling in for Brian. My question to you is did you see any disparity in the growth across your geography, especially in the anesthesia business, or was it stable across all geographies.

Yes. I think that we did see it pretty much across most of the areas. I don't see that we have a big disparity in any of that. But I will let Karl comment more details on that.

Yes. Clearly there were some hospitals better than others. In general we saw positive trends across all the different states we were in.

Anything in specific between Medicaid expansion state and non-Medicaid expansion states?

No. That was not the case.

Okay. And my second question would be about the M&A pipeline and the evaluation multiples. Do you see the multiples rising? And if yes, what do you think is going to be the outlook for the year?

Well, our multiples, the multiples that we agree to pay for these practices are what we believe are the right multiples to pay for the practices. Others feel differently and have their own guidelines as to what they're paying.

Our guidelines have not changed. We do have -- we do go into this year with a number of LOIs in place and we expect to complete most if not all of those. And we are is a constantly adding new businesses to that pipeline, and new LOIs. So we had a great year last year. We expect we're going to have another great year this year.

And hopefully, you know, some of the rumors that we have heard about others indicating that maybe they're not going to be pushing multiples up as much as they have been in the past, hopefully those rumors will be true and there will be more sanity in the -- in the valuations.

All right. Thank you. That's it for me.

Okay.

Our next question is from Chris Rigg of Susquehanna Financial.

Good morning. Just wanted to check some of the below the line -- EBITDA line items. You already touched on D & A. With regard to the interest expense, I just want to get a sense, for the $3.3 million in the quarter is that about the right level for Q1 or do you expect that to go up a little bit?

Yes. So it will slightly go up depending on if we decide to do another share buy-back, as well as the acquisition activity that will happen in Q1. So that will have an impact on it.

Okay. And just with the share count, is that going to be about 94, 95 million for the first quarter, fully diluted?

Yes. Right. Because I think you're doing the math well. That most of the impact of what we got in the fourth quarter will be in -- certainly impacted from a weighted average perspective in Q1. So it will be on the higher end of what you just said.

Got you. What I'm really frying to get at here, if I reverse engineer from EPS upward, it looks like -- again, it looks like, tell me if I'm wrong, that the year to year EBITDA margin is going to come down by about 100 or so basis points, including the parity payments, if you excluded a little bit less. Is there something with the mix of business right now that is sort of pressuring the margin, or am I just completely off base? Thanks.

Yes. We don't really expect the EBITDA margins to go down that much. You have it overstated.

Okay. But if it does come down, is it just the mix of new business that -- that might be pushing it down a little bit, or is there more of sort of the first quarter cost now than there was a year ago? Thanks.

There is -- it is definitely that, because on a dollar-for-dollar basis it does grow. So you do have less parity, as well.

Got you. Thanks a lot.

And our next question is from Ryan Daniels with William Blair.

Good morning. Thanks for taking the questions. Roger, one for you.

You talked about your IT platforms and all of the data that you have accumulated. I'm curious if you have thought about commercializing any of those. Maybe baby steps in selling that to the market under a hosted or licensed model. Especially as you move more into revenue cycle, it seems like a natural lead potentially to get more of that business as well. Any thoughts there?

Yes. We talk about it on and off. We always end up thinking that baby steps gives us a competitive advantage over some of the other groups, and if you want to have access to it, it's more than just a database.

It's a coding program. You know, guidelines, statistics, et cetera. So we've always felt in the end we always end up thinking well, have a competitive advantage. If you want to have access to this, you need to be part of what we're doing at Pediatrix. For the time being last time we talked about this, which might have been 6 months ago, once again that's where we ended up. I think it's the right decision.

Okay. That makes sense. And then as a follow-up just any insights that you have on MedData and Surgical Directions and the integration, both from an internal standpoint and how you're leveraging those assets to improve your operations and then maybe externally how the acquisition has been received and how you're pushing that in the market? Thank you.

Yes. Thanks. We're excited about both.

MedData for us, you know, there were a number of reasons. Number one, in and of itself, it was a fine company, free standing, $60 million in revenue. And it's something that was interesting to begin with.

But, you know, in addition to that, what MedData -- the two other reasons we wanted to get MedData were, number one, MedData had capacity. So as we acquire some of these anesthesia practices, it's easier for us to put them under the MedData system until we get them integrated. It allows us to save some -- it allows us to save some time and effort as we bring some of these new practices on board.

Additionally, MedData is in other specialties that we're not in right now. And so, again, if we were to go into a different specialty, we could telescope a lot of time and effort because they have already figured out how to do the revenue cycle management for some of these other specialties that we're looking at.

So those were the reasons that we got into MedData. We're very excited about them. We think they are going down the path exactly that we thought they would be going down. Not only with us internally. And we have given them more of our own business internally. But they're growing on their own externally and we expect that they will meet their budget for the year.

Surgical Directions is also an awesome company. You know, we're very happy with them. They are helping us -- as it turns out, we have been able to really get value from them by introducing them to our existing hospital partners.

So when we go to a hospital, we see that they have issues with their OR, their staffing, their scheduling, whatever, we say we can bring in these guys and they can help you. And that has been extremely successful in a couple of particular hospitals that are big clients of ours. We are very happy with both of those acquisitions.

Thank you. Very helpful.

Yes.

We have a question from Brooks O'Neil of Dougherty and Company.

Good morning Roger, Vivian, Charlie and Karl. I just want to say first, congratulations. Who would have thunk that you could be investing $1 billion in growth in the '90s.

You were there when we didn't have two nickels to rub together.

Pretty darn good. I'm excited for you. I have one question then.

It looked to me, If I was paying attention, you only deployed about half of the amount that you had earmarked for the accelerated repurchase. Can you tell us a little bit about what your thinking was in taking that step?

Yes. So we wanted to make sure that we addressed the parity issue first. That's done.

We have an additional $200 million authorized that we haven't pulled the trigger on yet. And we're evaluating whether, given the assets now on the market and given some of our other strategic initiatives we're thinking about, we're evaluating whether it makes more sense for us to go ahead and pull the trigger on that other $200 million that we have authorized in share repurchases or -- or, you know, invest -- seeing what the investment opportunities are in some of these other larger assets that are apparently coming to market.

But in any event, at the end of the year, if we don't pull the trigger now, it doesn't mean that we won't pull it at the end of the year. What we will do at the end of the year is what we used to do in the past with Pediatrix. You remember before we got into anesthesia, we looked at whatever money we had spent. If we had money left over, you know, we would go ahead and repurchase some of our shares.

At that point in time we had already bought back over $0.5 billion worth of our shares. If we don't pull the trigger now in February or March doesn't mean that we wouldn't pull it in October, November or December.

Nice to have that flexibility.

Yes. We will go through that exercise with our board during every board meeting.

Sure. Congratulations. Thanks a lot.

Thanks, Brooks.

Our next question is from Darren Lehrich of Deutsche Bank.

Good morning, everybody. Nice quarter.

Thanks.

I wanted to come back to your commentary with regard to evaluating other specialties. And I guess the question I have is, is this something that your hospital clients are asking you to take on? You know, just when you think about the strategy to continue to grow out your offerings do you think it's because the clients are wanting you to do this or do you think your capabilities have reached a point where it just makes sense to have more offerings? Curious just to get your thoughts on why you're pushing into new areas potentially over the next year or two.

Okay. Well, the answer is both. On the one side, if you look at our pediatric business, over the years, we have expanded our pediatric subspecialties into cardiology and hearing screening and pediatric ICU. We are probably the largest group of pediatric hospitals in the country right now.

All of those have been mostly opportunities that we -- and now pediatric surgery, we are -- we have three pediatric surgery practices, and we expect that we will own more pediatric surgery practices before the end of this year. And that is driven mostly by hospitals asking for our help in dealing with their patient population.

You know, one of the things that we are doing is we're going -- we're changing our structure a little bit and we're going more from a specialty-based structure where this is our neonatology business, this is our anesthesia business, this is our office-based business. We are going to a more market-driven structure where we have a market, you know, whatever in Atlanta, and within Atlanta we have maternal-fetal medicine, neonatology, anesthesia. So trying to be less siloed and more inclusive in the markets of the needs of the hospitals.

So you will see that growth as we address the needs of the hospitals in the specific markets. But in addition to that, you know, we have over the last 18, 24 months spent time looking at what other specialty might make sense for us. What else is out there that, given our expertise and given the state of the market, might present us with an opportunity to add a third leg to our stool. And so that we're looking at.

And, so that we are looking at. And you know, we may or may not, like I said, there are -- the other thing to consider is like everybody else, we have limited resources. So if we have a large anesthesia market -- anesthesia business is coming to the market this year and we're able to successfully play a role in that, then, you know, we may decide even though, you know, we like the other specialty, we may decide to not pull the trigger on that for another year or two until we feel more comfortable.

So there's a lot of factors that play here. But, you know, to answer your question, the answer is both. At the local level, we are going to grow and we are going to add specialties mostly on the pediatric side. But we are looking at a specific third leg of the stool that we may or may not enter before the end of the year.

That's helpful. And then just my follow-up question was really going back to the volume strength. And I didn't hear you say what the births were either for the year or in the quarter. I would like to get that number if you can comment.

And then I guess the real question is around the use of extenders. Can you just comment on how that may be impacting your productivity levels or your ability to grow volumes any differently, or if this is just more about the underlying improvement in demand.

I'm looking at numbers here. Give me a second. It looks to me like births in our hospitals for the year were pretty much flat. I'm not seeing significant growth in the births that occurred within our hospitals.

Okay.

Yes. That's correct. Yes.

As far as physician extenders, we think that -- you know, we like them. We think that they have a role to play. We think that they help us, you know, to be more efficient in our patient care and within our hospitals. I'm not sure I'm answering your question. What exactly was -- did you want?

I'm curious if that has allowed to you grow volumes any differentially versus the improving demand. It's just a question of your extenders growing faster than your physician base.

No, I wouldn't say that. You know, obviously, you know, when we acquire a group as we have said in the past there's three -- on the anesthesia side there really are three different models. There's a group -- there's a model where the group has always used physician extenders, nurse anesthetists, and they employ their nurse anesthetists, and we're happy with that.

And there's the model where they don't, and they just say we are not going to use nurse anesthetists and it is a physician only model and that is what they use. Then there's a third model, which is interesting to us, which is the one where the nurse anesthetists are actually employed by the hospital. So the physicians use -- get the benefit of having the nurse anesthetists, but they are employees of the hospital. It just depends on what model the group that we're acquiring has utilized.

Great. Okay. Thank you.

We have a question from Brian Tanquilut of Jeffries. Go ahead.

Congratulations.

Thank you.

Roger, just to follow up on Darren's question and Kevin's. As we think about the value-based purchasing decision or the announcement from CMS the other day, do you think that you need to get into a third practice category to fully take advantage of that opportunity when it comes?

No. That's not why we're doing this. I mean, I don't think that plays any role at all in our thinking. I mean, we don't even know what the details of that are going to be, how they're going to look at putting plans together or anything. So that -- that is not the reason why we're looking at another specialty.

Okay. Great. Got it.

Vivian, what is your view on optimal leverage? Roger just talked about how we will reevaluate based on how much you spend on acquisitions. But where do you think MEDNAX can be levered up to, given all of the acquisition opportunities coming up, there's a big anesthesiology deal and potentially a third category on your specialties.

Well, for the right reasons I'm happy to put debt on our books. I'm just not going to do it for financial engineering stuff. We have historically been fortunate enough that given our earnings and our cash flow and -- and our line of credit, we have had more than sufficient access to the cash that we have needed without having to put significant long-term growth.

As some of these assets become available and the opportunities are there, for the right reasons we will absolutely put more debt in our books. What am I comfortable with? Just off the top of my head, I would say 3x, if we -- if that doesn't sound extremely excessive in today's world. But, you know, anything beyond that we would have to have a real good reason and get very comfortable on why we would be doing that.

So I thought you were going to compliment us because we have 1x. (Laughter) Which is a lot more than what we have had in the past.

Well, you've done a good job. Thank you for taking my question.

Okay. Okay.

Our next question comes from Chad Vanacore of Stifel.

Good morning.

Good morning.

As Kevin pointed out earlier, you did a great job of keeping direct expenses pretty low. On the flip side of that it looks like G&A ran higher than it has in the past several years. Is that related to the MedData acquisition or is there something going on, and should we expect higher G&A as a percent of revenue going forward?

Good morning. Yes, that's accurate.

There is an impact on G&A related to MedData. Again, it will continue, as it relates to how much, it just depends, you know, on what happens with the other part of the business, which obviously as we bring on a lot more acquisitions, that has an offset to that. I do expect it to be ticking up in the 30 to 40 basis points because of that.

Okay. And we just -- as far as share count goes, Vivian you mentioned 96 million shares as of December 31st. Is that right?

Yes.

And then the assumptions for first Q is 94 to 95 million?

No. I didn't say that. I think someone else said it on the call. What I said was that it will be closer to the higher end of that. Certainly not in the 94 range.

Okay. Have you already baked in share repurchases into that -- into that guidance?

Not really. Again, as Roger mentioned, if we decide to do another accelerated share repurchase, potentially when you do the weighted average share calculation it doesn't really have much of an impact in that quarter, which is really what happened as you saw in the fourth quarter. Most of that share repurchase is going to fall into the first quarter because we did it later in the fourth quarter.

All right. That's it for me. Thanks.

Thank you.

And we have a question from Gary Taylor of Citigroup. Your line is open.

Sorry. Can you hear me.

Hey, Gary.

Good morning, Gary.

You've been hiding?

No. I'm not trying to. Thanks for taking my question.

A counter to the recent question that you just had on G&A was, since we began the anesthesia odyssey we have seen the gross margins coming down just because those practices are not as profitable. Gross margins significantly better year over year this quarter. I guess that is just a counter to the G&A surgical, these non-practice specialties, Surgical Directions and MedData having higher gross margins. Is that primarily what we're seeing there?

No. I was directing the question more on the operating income line, not so much on the gross margin, Gary. So the gross margin was definitely very positively affected by the fact that we had great volumes, which is what I have said to you in the past. When you get such a good same unit growth, that will impact that gross margin. Obviously the operating margin was slightly negative. I think I said 15 basis points or so because of the fact that we did have higher G&A.

Okay. So this is the first full quarter of MedData and the gross margin jumps. Maybe I wrongly thought gross margins were higher there.

Correct.

You're saying that wasn't the biggest contributor. It was really just the underlying performance.

Correct. Correct, Gary. Yes.

Okay. And then Roger, I just wanted to go back to this risk payment question that has come up a little bit and ask a couple other quick ones. The first one is are you still -- particularly on NICU, is that still per diem reimbursement everywhere for you or are there any places where you have moved to at least experimenting with an episode bundle or anything like that?

No. It's all -- it's all per diem.

Okay. And having lived through the whole PPM cycle back in the '90s, which was, you know, mostly primary care, some specialists taking risks, taking capitated risks, is there ever a situation -- you have done this for a long time. You have so much data, that you could see taking some financial risk for a population of child-bearing age females and you feel like you could actually manage that? Or is that sort of last thing that you would want to touch unless you were, you know, forced to?

Well, you know, we see a lot of opportunities. And definitely that is one of them. But, having access to this data gives us as I said before, a significant competitive advantage, right?

So if you have a narrow network that you're putting together and you're going to add neonatologists to your network and I can tell you what the complication rates are, what the death rates are, what the admission rate, discharge, length of stay. If I can give you that information broken down on a per-gestational-age basis. Every baby that is born at 34 weeks, for gestational -- for birth weight, for every baby born at 800-grams, if I can give you that information, I think I have a lot better shot to be in your narrow network than if I just show up there and tell you what a great doctor I am or what a great, you know, group of physicians we have.

And so we have got it broken down by -- I can show you, for example, if you are a hospital that is delivering X number of babies and has X number of admissions to the NICU, I can show you the rate of complications that you can expect. How many of those babies are going to have pneumothoraces or develop necrotizing enterocolitis or retinopathy of prematurity.

I think we have a significant competitive advantage. And we believe that we could utilize that data to get into different kinds of reimbursement methodologies.

My last follow-up on that and then I'll let you go, we know the length of stay for you on average in NICU is somewhere between 17 to 18 days. I don't know if I've ever seen or heard you talk about what the standard deviation is on that. And I certainly know there are some outlier cases where a baby might be in the NICU for 6 months, 3 months, 6 months.

But when you look at that length of stay what is kind of one standard deviation around that 17 to 18 days? Is it something that is very wide or is it -- is it narrow?

I would have to really get that information for you. I can tell you that we have babies that stay in the NICU for months.

Yes.

And so you want better information than that. And I would have to go back and ask Alan and the other people to pull that information for us.

Okay. That's all. Thank you.

Thanks.

Our next question is from Gary Lieberman of Wells Fargo. Your line is open.

Thank you for taking the question. Maybe as a follow-on to that topic. You said that your births in your same hospitals were flat year over year, but the NICU days were up 3%. Is there some reason for that? Is there a dynamic or a change in the demographic of mothers? What -- is there anything that you can give us that explain that?

It's within the historical ranges of both of the length of stay -- actually the length of stay is down a little bit. I think 40, 50 basis points year-over-year while admission rates went up. But it's on any given quarter, there's nothing that I could point to specifically that would account for that.

Okay. So if birth rates were flat into 2015, it might go up, it might go down. There's a variation around it. Is that how we should think about it?

Yes.

Okay. Then one follow-up. In terms of the decision acquisition versus share repurchases, it would seem like with I guess what we have heard on acquisition prices compared with the multiple of where the stock is trading, that there still must be a pretty wide disparity and that the acquisition must be significantly cheaper than where the stock is trading. So give us some insight into your thinking about why it's not just a much easier decision to do the acquisition. And if it is, why there's still some thought about repurchasing more shares.

Yes. Well, we try to stick to what our plans are for multiples that we pay for these practices. We, of course, would much rather put the money to work by buying practices than repurchasing our shares. We -- we're not only buying earnings, we're buying a lot of cash flow with these practices. And so for us all day long we would rather buy practices than repurchase our shares.

But there's a point where the practices just get to be too expensive and I could have taken the money, half a billion dollars, an additional half a billion dollars last year and spent it on buying practices. But it just doesn't seem to me like I want to be buying practices 11, 12, 13x multiples.

And so that -- to me, that's it. I would rather buy practices all day long. They provide us with opportunities within the hospital, other opportunities for growth. You know, they're bringing earnings and cash flow and all of that. But, you know, it has to be a reasonable price.

But in addition to that, it's really kind of a bifurcated strategy. As Roger says, we would prefer to do acquisitions all day long, but sometimes it just comes to timing. Right? Because we have certain cash flow length. And we want to put capital to use. It's not necessarily all the time one or another.

So we're always gauging that with our board as to what makes sense. I think, as I think Brooks O'Neil asked us before, we haven't really exercised all of the share repurchase that our board has authorized us to do because there's a potential acquisition opportunity that we want to explore. And so the timing of this sometimes is what drives it.

Okay. Great. That's helpful. Thank you very much.

Thanks.

And our next question is from Whit Mayo of Robert Baird. Please go ahead.

Hey thanks, I have really got just one last question. Vivian, can you just remind us what your revolver availability is right now? And as you look at your pipeline for deals and the desire to potentially get more active in the stock in the second half, do you need to revisit that at any point this year or do you think about another term note or is the facility enough to get the job done for now?

So first of all, I would be happy to go out and get more money if we needed it. I always tell Roger that shouldn't be the limiting factor here for anybody. But we do have about $900 million, north of $900 million, available on our facility. But as you know, the capital markets are really good. So I could go out and get more funding.

But we will certainly look at that as these things develop. But we've got -- we've got a large amount now. Remember, that we basically doubled it. We had an $800 million facility and we added $700 million to it. So we have $1.5 billion in total. Of which $200 million or so is a term loan.

Got it. And I lied actually. I have one other question.

Oh.

The -- no. Just back to sort of ask a question around parity. I'm just curious when you look at the states that have actually extended those programs, is that something that legislatively we're going to have to come back to every year and they have to continue to extend that? I guess I'm just trying to get a sense of, you know, how recurring those payments will be into perpetuity. Thanks.

I would think that they would have to go back every year because they have to go back and figure out what the funding is for all these programs.

Okay. Thanks.

And we have a question from John Ransom of Raymond James. Please go ahead.

Hi. This is [Bellon Ajia] in for John Ransom. Just a couple quick questions on pricing. Can you just tell me what the net Medicare pricing increase you expect in fiscal 1H would be ex parity.

Yes. We don't really break that out like that. So no, we don't break it out.

As far as, you know, the payor mix goes, we did see some favorability overall on our movement of our patients to commercial more than government. So that was favorable.

Okay. And just a quick follow-up. I think you may have mentioned that there was some better commercial pricing in the quarter. Can you speak about what drove that.

It's an ongoing process for us. Every year we know that there are certain contracts that come up for renewal, certain ones that have escalators in them. Every quarter you will see some impact from what is favorable pricing because we have renegotiated agreements that have come up for renewal in addition to the escalators from prior negotiations.

Okay. That's all for me. Thank you.

And there are no further questions in queue.

Okay. Well, if there aren't any further questions, we let me just thank everybody for participating this morning. And I will look forward to speaking with all of you next month, next quarter.

Ladies and gentlemen, that does conclude our conference today. Thank you for participating and using AT&T teleconference. You may now disconnect.