Pediatrix Medical Group Inc (MD) 2016 Q1 法說會逐字稿

Welcome to the MEDNAX 2016 first-quarter earnings conference call.

(Operator Instructions) As a reminder, today's conference is being recorded.

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

Please go ahead, sir.

Thank you.

I want to read our forward-looking statements, and then I'll turn the call over to Roger and Vivian.

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 assessment of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate.

Any forward-looking statements made during this call are made as of today, and MEDNAX undertakes no duty to update or revise any such statements, whether as a result of new information, future events, or otherwise.

Important factors that could cause actual results, developments, and business decisions to differ materially from forward-looking statements are described in the Company's most recent annual report on Form 10-K and its quarterly reports on Form 10-Q, including the sections entitled Risk Factors.

In today's remarks by management we will be discussing non-GAAP financial metrics.

A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this morning's press release, our quarterly report on Form 10-Q, or the Investors section of our website located at MEDNAX.com.

With that, I'd like to turn over the call to our CEO, Roger Medel.

Good morning and thanks for joining the call to discuss our results for the first quarter of 2016.

I want to talk about those results and then talk about our strategic outlook for this year.

For the first quarter, our revenue growth accelerated to almost 18%.

Same-unit growth was just over 2.5%, or up 3.5% without the effect of parity, and our EBITDA growth accelerated to 12%.

We completed four practice acquisitions, and we have continued to add to our pipeline of signed letters of intent.

Looking at that pipeline and other discussions we are having, I am confident that we will have another very active year in 2016 as we work to use our capital for acquisitions across all of our specialties and business lines.

We've also had some major clinical achievements.

Earlier this year we published the results of our 100,000 Babies Campaign.

From 2007 to 2013, across 330 neonatal intensive care units caring for over 420,000 sick or premature babies, we measured the outcomes of using our clinical data warehouse and CQI protocols to re-engineer the delivery of neonatal intensive care.

In the paper we demonstrated that this campaign resulted in significant improvements in all critical areas of neonatal care: higher use of breastmilk, lower incidence of infections, retinopathy of prematurity, and enterocolitis, and in very low birthrate infants a decrease in mortality of 22%.

I can't say how proud I am of this achievement, and we're already moving forward to additional campaigns like this one, using our scale and data to take better and better care of our patients.

Now, in terms of our strategic outlook for this year I think it's important to start with what we look like today.

You may have noticed that there is a new logo at the top of our press release this year.

It says MEDNAX, Health Solutions Partner.

That logo represents how we have positioned our Company over the past few years.

We have added to our existing specialties; we have added new specialties; we have added new service lines, like telemedicine, consulting, and a management services organization.

And I will tell you how these additions all fit together.

What it comes down to is that we are still the same Company we have always been.

For more than 35 years now, we have succeeded by looking at what is going on in the world around us and adapting to change.

And the healthcare industry is changing fast these days.

We held our annual meeting of medical directors a few weeks ago, and we focused on change: changes in the business of medicine, and changes in the practice of medicine, and how those two things are converging.

One of the keynote speakers we invited to this year's event was Dr. Victor Dzau, the President of the National Academy of Medicine, which was formerly the Institute of Medicine.

Dr. Dzau has been a champion of the Triple Aim which he spoke about at length.

When you look at what's happening in healthcare, the Triple Aim is meant to give providers goals for the next wave of change.

What it says is, it's not enough anymore just to provide great care.

We need to be able to improve the health of the whole population of patients; we need to bring down the per capita cost of care; and we need to focus on the patient experience.

And in case anybody didn't think this mattered, that's also how we're going to get paid.

The way we have changed at MEDNAX is in the same direction.

I can't think of a better demonstration of population health than our 100,000 Babies Campaign.

We started this campaign long before the world talked about population health, but the concept was the same back then.

When you focus all of your efforts on taking great care of your patients, good things happen, especially if you're doing it across hundreds of neonatal intensive care units at the same time.

But today we're also thinking about the whole continuum of care for a population of mothers and their children, from conception all the way through adolescence, and how we can add value every step of the way.

So we've been adding new service lines in and lot of markets, and we'll keep doing that in partnership with our hospital customers.

On the cost side, we can prove that better clinical outcomes save money.

In the paper we published on the 100,000 Babies Campaign, we have calculated that just the decrease in central line infections resulted in a cumulative reduction in the cost of caring for those patients of $58 million.

We also acquired vRad because we believe that telemedicine has benefits across the board, including cost.

It is far more cost effective to have access to hundreds of radiologists on call, instead of having to recruit subspecialty-trained physicians to read studies at just one hospital.

It also improves outcomes.

And in the operating room, changes in workflow and scheduling can improve on-time starts, streamline the operating processes, enhance patient safety, and save hospitals hundreds of thousands of dollars a year per operating room.

So today we've got a consulting arm that can do just that for our hospital partners.

Our efforts towards enhanced recovery after surgery can also improve patient outcomes while at the same time reducing length of stay.

These programs add to the value our anesthesiologists already bring to our hospital partners, and they benefit everyone involved through better outcomes at a lower cost.

Finally, the patient experience isn't just about clinical care.

It's also about their operation starting when it's supposed to start; it's about all the caregivers communicating and making sure the operating room is a safe environment; and it's about quicker and easier recoveries after their operation is over.

All of the value programs that we're rolling out through our anesthesia practices -- patient safety, simulations, collaboratives, workflow consulting -- help to improve the patient's experience in the operating room and beyond.

The patient experience is also about helping them find out whether they're eligible for insurance coverage when they show up at the hospital.

It's about helping them figure out how to handle the higher and higher amounts of money they're responsible for after they're discharged.

We bought MedData and then Alegis to help patients when they are admitted and after their discharge.

These two acquisitions are just the beginning of a bigger management services offering that we can provide to our hospital partners and to outside physician groups, and we will continue to invest here as well.

The nice thing about how we've grown is that we've got a lot more points of contact with our hospital partners.

When people have talked these past couple of years about bundling, a lot of that meant trading off a subsidy here for a new contract there, or something along those lines.

What we can do today is take great care of our patients, but then also talk to the hospital about saving money in the operating room, or helping get their patients insurance coverage, or getting better with their collections, or thinking about a telemedicine solution.

The way I see it, that is how you get stickier relationships with your customers: by bringing value to them across the board.

And that is our definition of bundling.

What all this means is that if we've got a different logo under our name, it's not just a new logo.

It's the tip of the iceberg of everything we've done to change and adapt to the world as we see it.

We've been putting together all these pieces of a jigsaw puzzle, and they all support each other.

They also all start with taking great care of our patients, which is at the heart of everything that we do.

The nice thing is, the way the healthcare world is changing and the ways that we have changed mean that we have more and more ways to do just that.

We have gotten more diversified; we've got more ways to grow; and each step of the way we are becoming a real health solution partner to our physicians, hospitals, and health systems.

That is our vision for the future and how we will succeed and continue to grow.

With that, let me turn the call over to Vivian Lopez-Blanco, our Chief Financial Officer.

Vivian?

Thanks, Roger.

Good morning and thanks for joining our call.

I want to give an overview of our operating results for the first quarter and provide additional details in a couple of areas.

For the first quarter, our net revenue increased by 18% to $753 million.

85% of this growth came from recent acquisitions.

Our acquisition of vRad in May contributed just under half of that growth, as did practice acquisitions; and our acquisition of Alegis contributed the remainder.

Looking at our same-unit metrics, same-unit revenue increased by 2.6%.

Excluding the impact of parity in the 2015 period, same-unit revenue increased by 3.6%.

On the volume side, same-unit volumes increased by 1.5% and our NICU days were up 50 basis points.

We saw strong growth in our anesthesia volumes and other pediatric services, primarily newborn nursery, and pediatric cardiology also contributed to volume growth, while maternal fetal medicine volumes are flat year-over-year.

On the pricing side we recorded roughly $6 million in parity revenue in the prior-year quarter, or $0.02 per share in EPS that did not recur this year.

Excluding the impact of parity from last year's first quarter, our net same-unit growth from reimbursement-related factors was 2.1%.

Impacting this growth was roughly a 50 basis point shift in mix towards government payers compared to the first quarter of 2015.

On a sequential basis, though, our payer mix shifted favorably by about 40 basis points compared to the fourth quarter of 2015.

Our EBITDA increased by 12% to $144 million.

And our EBITDA margin declined by 100 basis points to 19.1%, with this margin declined partially reflecting the impact of parity revenue in last year's first quarter that did not recur this year.

Looking at some of the components of our EBITDA, first, our profit after practice expense for the first quarter was $234 million, up 19% year-over-year.

Profit after practice expense margin improved slightly by about 35 basis points, despite the impact of parity.

This primarily reflects a favorable impact from the mix of businesses we've acquired in the past year.

Second, our G&A expenses were 12% of revenue, an increase of 130 basis points over last year.

This increase reflects the higher mix of G&A expenses at our non-practice physician services and our nonphysician service companies.

Below the EBITDA line, our interest expense was $14.5 million, up from $3.3 million last year.

This increase is based on higher average borrowings, primarily reflecting the notes offering we completed in December of 2015.

The difference in interest cost between our senior notes at 5.25% and our revolver at roughly 2% impacted our EPS in the quarter by roughly $0.04.

Our first-quarter net income was $67.9 million, compared to $68.7 million last year.

We reported diluted earnings per share of $0.73 versus $0.72 in 2015.

On a non-GAAP basis, adjusted EPS of $0.87 grew by 5% over the prior year.

For the quarter, weighted average diluted shares were 93.1 million, down about 2.2 million shares from the same period in the prior year, due primarily to the repurchase activity we undertook in the first quarter of 2015.

At the end of the quarter, accounts receivable were $466 million, an increase of approximately $21 million as compared to December 31.

Days sales outstanding were 56 at the end of the quarter, up about one day from December 31.

Last quarter I discussed how our DSOs were impacted in the fourth quarter by coding personnel shortages related to the transition to ICD-10 coding during the late fall.

As we took steps to resolve our staffing needs and add coding resources, our DSO peaked in January of this year at 58 and since then has improved consistently by approximately one day per month.

We continue to generate strong cash collections, and I am confident that we will continue to see improvements in our DSO through the second quarter.

For the first quarter we used $33 million to fund operations, down from a use of $54 million in last year's first quarter.

Our total net outstanding debt was $1.4 billion at March 31, up from $1.3 billion at the end of 2015.

This increase was related to cash used for operations, acquisitions completed during the quarter, and the repurchase of $59 million worth of shares completed under our ongoing authorization to buy back stock to offset the dilutive impact of our equity compensation programs.

Moving on to our outlook for the 2016 second quarter, as we announced in this morning's press release we expect that our earnings per share for the three months ending June 30, 2016, will be in a range of $0.89 to $0.93, and that our adjusted EPS will be in a range of $1.04 to $1.08.

We are also introducing a quarterly outlook for EBITDA.

For the second quarter of 2016 we expect that our EBITDA will increase by 8% to 12% compared to the second quarter of 2015.

The range for our second-quarter outlook assumes anticipated same-unit revenue growth will be 1.5% to 3.5% year-over-year, including approximately 0.5% unfavorable impact on pricing from the decrease in parity revenue from the 2015 second quarter.

Excluding parity revenue from both periods, a non-GAAP measure, our second-quarter outlook assumes same-unit revenue growth will be 2% to 4% year-over-year.

Our second-quarter 2016 results will also be affected by the anticipated impact of our senior notes offering in December.

The difference in interest cost associated with this offering -- a 5.25% coupon -- compared to the cost of our credit facility borrowings at roughly 2% will impact our second quarter by roughly $0.04 per share, all else being equal.

Additionally, our second-quarter 2015 results included approximately $0.01 per share from Medicaid parity, net of the impacts from incentive compensation and income taxes that will not recur in the second quarter of 2016.

Now I will turn the call back over to Roger.

Thank you, Vivian.

Operator, let's go ahead and open up the call for questions, please.

(Operator Instructions) Ryan Daniels, William Blair.

Roger, I am hoping you can provide a little bit more color on the integrated solution offering you're offering to hospitals at this point.

I guess a little bit more detail on the recognition among your client base of those offerings, a year into the One MEDNAX strategy; and then number two, what the pipeline looks like and different conversion rates are looking like for those integrated solutions.

Yes, I would say that we're making progress with our hospital partners, certainly through our MedData acquisition.

I think that they are the ones that are really leading that charge.

What we started out with by just simply being a revenue cycle management company has converted into much more of our solutions having to do with early outs and eligibility, proof, and particularly on the Medicaid side.

So we think that there is a lot of growth along those lines.

One of the things that's interesting to us is that as more and more people are eligible for Medicaid hospitals, because Medicaid is a poor payer, it tends to spend less money in trying -- in building up that infrastructure for Medicaid.

So I think that is one of the areas where we can really help our hospital partners and have in fact done that already.

We're looking at other possibilities in this management services arena.

We believe that there are other opportunities to make other acquisitions in this area that we will be able to be successful at.

So I think that everything is going down the path that we laid out for us.

We're very happy with our acquisitions, and we think that we'll continue to show some significant growth in that line.

Okay, perfect.

Then another different question, just looking at the novel Part D drug payment model, it looks like anesthesia practices would see some pretty marked increases.

I think it was about a 50% positive change.

I know that would probably be more for your outpatient areas or pain management.

But curious if you had any thoughts on the potential impact to MEDNAX if that actually goes into place?

Hi, Ryan; it's Vivian.

Yes, I mean it's as you said: it's more for the pain centers, because obviously for the hospital piece it's not impacted.

So there could be certainly some positive impact from that.

Have you guys tried to calculate what the impact for MEDNAX would be?

Yes.

I mean it's just not -- it's positive, but it's not as material.

They're still working on the calculations.

As you pointed out we estimate that any impact would be concentrated in our pain clinics.

Yes.

Which are a small part of (multiple speakers).

Yes.

And it's only a piece of the medication, so it's not -- it's positive, we're happy that it's going to occur from that perspective.

But it's not something that is going to be that material for overall MEDNAX.

Okay.

Understood; thanks.

I will hop back in the queue.

Brian Tanquilut, Jefferies.

Roger, as we think about the acquisition arena, I mean, NAPA obviously traded to private equity.

So how are you thinking about the opportunity set in front of you in terms of the buckets: big deals, midsize deals, and small deals?

And then if you can just give us some updates on your comments from last quarter on the radiology practices that you are looking at.

Yes, you know, we looked at that; and obviously we did not end up owning that.

We think that there are plenty of opportunities for growth.

I mean, I've got -- I don't know, half a dozen LOIs -- I mean, sorry, I have a dozen LOIs in our pipeline; and they include anesthesia practices, basically all of the specialties that we're in.

So we're not having any trouble getting these deals sourced and getting LOIs in place, and I believe we will close most of these deals.

The opportunity that we see is that now we have more areas of growth than we have ever had in the past.

In the past while we were focused on neonatology or anesthesia, or neonatology and anesthesia, now we're looking at radiology, and we're looking at management services, and we're looking at telemedicine.

So there's a number of additional opportunities for growth.

So we're pretty comfortable that we're going to have a pretty good year and continue to grow.

On the radiology side we are talking to a number of radiology practices.

We believe that we will have our first hospital-based radiology group on board before the end of the year.

There is a lot of practices that are interested in talking to us, and we think that that will add yet another potential avenue of growth for us.

Thanks for that, Roger.

To follow up with that, Vivian, as we think about the returns on these acquisitions, the different specialties, and as you go outside of the hospital practices -- I mean, how should we be thinking about return on invested capital for, say, a nonhospital practice or a nonhospital business versus your traditional acquisition targets?

Yes.

Honestly in the anesthesia space, because the multiples have been moving a little bit higher on that, it will be more comparable to that.

Again, it's changed.

It's shifted some of the components on the P&L; but like you said, on the return on capital it's closer to that.

But what Roger said is they're pretty high-growth businesses, and we're very happy to see the organic growth that MedData has contributed and then certainly vRad as well.

So we are happy with that, and it will be similar to what we've seen on some of these anesthesia practices.

On the radiology side that Roger is talking about, those, it's a little soon to tell on that.

But again we think it's attractive because of the higher organic growth that these businesses have, as well as complementing the services that we provide to the hospitals.

Okay, got it.

Then last question for me, do you mind sharing with us any thoughts or descriptions that you can give us on balance billing practices for your anesthesiology business?

Yes.

We just don't do that much balance billing.

As you may know, here in Florida there was a bill that got passed this year about balance billing.

But due to hospital relations, we already suppress balance billing for most commercial patients.

In anesthesia we estimate that the maximum at risk cash payments will be approximately $55,000 per year.

In pediatrics we estimate that the potential risks are about $40,000.

So the total combined maximum impact would be less than $100,000.

There is, by the way, similar legislation being contemplated in California, and we don't even balance bill in California.

So any such legislation would really have no impact on MEDNAX.

Cut it.

All right, thanks, guys.

Kevin Fischbeck, Bank of America.

Great.

Just actually want to clarify.

The $55,000 and $45,000 was the Florida balance billing?

Yes.

Yes.

Okay.

I guess, when we look at the guidance for Q2 I guess you're looking for a little bit lower, at least at the midpoint same-store revenue growth versus what you saw in Q1.

Is there any reason to think sequentially that's just slow off, or is that just Leap Year not being in Q2?

Yes, I mean, I think maybe our -- are you looking at that ex-parity?

Because (multiple speakers)

Yes, ex-parity, yes.

Ex-parity I don't think it's really lower.

But we did have -- certainly NICU days were really good last year in the second quarter.

But I don't really think it's lower when you calculate that.

It's 2% to 4%, and then 1.5% to 3.5%.

Yes, 2% to 4% you needed 3.6% in Q1?

Yes.

But 4% is the high end of the range.

Yes, okay.

All right.

I said at the midpoint.

That is why I gave you a range.

All right.

But I guess at the midpoint you had a Leap Year would explain it.

Okay.

So the commentary about multiple -- about deals and being able to do deals, I guess it sounded to me a little bit like we should expect to see more non-NICU and non-anesthesia deals going forward.

I just wanted to see if that was the right interpretation of how you're thinking about the pipeline.

I guess it's still strong, but it seems like you're moving in a different direction.

I just wasn't 100% sure as investors how we should think about that.

If you have any more additional color, I understand the (inaudible) commentary about how it's more important to focus on quality and deepening the relationship broadly.

But I didn't know if you had any more color on that strategic direction.

Is it a big shift, or it's just on the edges?

No, I wouldn't say that at all.

We have got a bunch of deals that are anesthesia- and pediatrics-related in our pipeline.

There may be one or two, probably one deal in the pipeline that is related to management services.

But the bulk definitely of what we're looking at with the LOIs that we have in the pipeline are all clinical.

Physician services, yes.

Okay, great.

Then last year you guys talked about how you reorganized the Company to focus a bit more on selling the entire Company, focusing on potentially cross-selling contracts and things like that.

I just wanted to see if you had any update on the success that you may be having there.

Yes.

I mean I think that we are having some significant success.

We haven't really talked about it because a lot of these deals take some time to get put together.

You're awarded a contract, and now you have to work to get it put together and that.

Our plan was at the end of the year to come up with a global analysis of how well that program has worked.

I can tell you that our fastest-growing segment right now are OB hospitalists, and that's all internal growth.

We're probably the largest group of OB hospitalists in the country right now.

We probably have 15 OB hospitalist practices that we own right now.

And we probably have four or five others -- and again that is all internal growth deals that are in -- that we're getting ready to put together.

It takes a while to recruit the physicians, and it takes a while to get the program and all of that.

But that's just one example of how the program is working, and it's our fastest-growing segment right now.

Okay, great.

Thanks.

Gary Taylor, JPMorgan.

A couple questions.

One, just going back to the EBITDA guidance for 2Q, the 8% to 12%, is it fair to say biggest swing factor sequentially there is just how payer mix plays out sequentially?

Yes, that is certainly a big factor.

Then of course we have always the parity overlap, which is less in Q2 albeit, right?

But still some of that lingering.

But, yes.

Okay.

Then just versus our model, which I guess is relevant maybe only to me, but in the first quarter gross margin beat us by $4 million, but G&A was $4 million higher than we thought, 12% in the quarter.

I had in my mind that we were targeting 11.5% for the year, or that you were thinking in that range.

Maybe I am not remembering that correctly.

But have you talked about where G&A you think shakes out for the year?

I mean, honestly, I think it will be in 11.5% to 12% range.

I can't look at it as precisely, but I don't know if you're looking at it -- are you taking out depreciation and amortization?

Because that's [15] basis points or so in there.

But, yes, in that range, Gary, it's going to be.

I think part of what I am trying to introduce with that, too, is that the margin has shifted.

Gross margin is improving because of these -- the different mix of practices that we have, both with vRad and MedData.

But it does impact op income, as you know.

So there is a little bit of a shift of that.

Got it.

Then finally you had alluded to again higher organic growth in the vRad and MedData.

Is there any more color or quantification or help you can give us around that in terms of those (multiple speakers)?

Sure.

Yes.

We look at that.

For both MedData and vRad their volumes are in the high single digits.

Okay.

Great; thank you.

Ralph Giacobbe, Citigroup (sic).

I guess going back to the margin question, I know 1Q is seasonally lower.

You came in still a little bit lower I guess than we had thought.

Is that just a function of the business mix coming on having inherently lower margins?

Is it a function of new deals just being lower, but ramping up ultimately to corporate average?

Just trying to get a sense of how we should think about normalized margins going forward, given the changing mix of the business.

Yes.

It's similar to what I was mentioning to Gary.

There is a little bit of a shift on the margins.

So on the gross profit side positiveness because of the vRad and MedData; and then below the line they have higher G&A as a percentage of their revenues.

So you are looking at some shift related to that.

I think it will settle out in the 11.5% to 12%.

So depending on what volumes do, then you're going to see some of that margin constricting like we have seen.

Then of course basically I'm trying to break out the amortization, because that is a big number for these non-physician type of practices, because they're so large and just the accounting side of that.

Okay.

I guess I was just talking (multiple speakers)

So you've got to take a look at that.

I guess I was just talking broadly from like when I look at EBITDA margins over the last couple years -- and granted there's always moving parts, including parity that's been restricting it a little bit as well.

But we have hovered around this 23% range the last several years.

Again, as we go forward when we look at -- I understand and certainly appreciate the changes between G&A and salaries and things.

But just from a total margin perspective, should we think of margins stable at that level?

Or because of the new business coming in, are there inherently lower margins that we should think about going forward on the business?

Yes, I think in the 22%, 22.5% range will be respectable.

I think that it shouldn't -- that is what we are targeting for, again, given what happens with the organic growth and all that.

But 22%, 22.5%, that's what we look at.

Again, like you said, first quarter is not a good indication of the rest of the year because there's less days --

Sure.

-- and other expenses.

Okay, fair enough; that's helpful.

Then can you give us a little more color on the anesthesiology growth specifically?

I think in the press release you specifically said that was strong growth.

So I was hoping you could spike that out, like you just did for the vRad side and MedData side.

Can you give us a sense of what anesthesiology volumes were on a same-unit basis?

And maybe, what percentage of volume does anesthesiology make up at this point?

Yes, so pretty much you'll continue to see the progression of that in our public filings until anesthesia is roughly about 39% to 40% of total revenue for the Company.

They did have a really good growth rate in the quarter; it was roughly up over 3%.

Okay, great.

Then just last thing, just to clarify.

The 40% of revenue; I know you gave it on the revenue stat.

Do we think revenue and volume the same way?

Or is the revenue-per different, like?

Or should we think a 40% revenue, 40% volume is roughly the same way to think about the volume component of anesthesiology versus total?

Well, no, I mean it's volume and pricing all-in, right?

You have to look at both.

But when I was talking about the three, over three it's all-in.

Okay.

We can maybe follow up on line.

All I am looking for is just the percentage of volume that anesthesiology makes up.

Is it also 40%, the way it is as a percent of the revenue?

Yes, I'd have to go back and check that.

I don't remember that off the top of my head.

Okay, all right; we can follow up.

Thank you very much.

Chad Vanacore, Stifel.

Just thinking about how any potential effects of the Zika virus -- how could that potentially impact volumes?

I'm thinking about maybe fewer births but more neonatal care.

Have you guys put your brains to thinking about that?

Well, I did gather up some statistics.

In the United States there's been a total of 388 cases that have been identified, most of them travel-related.

I can tell you that at MEDNAX we have had no NICU cases in the United States.

Across our maternal fetal medicine practices we're not aware of any cases.

In data from Puerto Rico we have seen -- in six of our NICUs in Puerto Rico we have seen three babies born to mothers who had tested positive for the Zika virus.

All three babies tested normal head circumference by head ultrasound.

We are monitoring one additional pregnancy who is now at 34 weeks, but so far as per protocol her head -- or the baby's head ultrasounds are normal.

So we have not seen any incidence of microcephaly in the United States, and certainly not within that units where we provide care or in Puerto Rico for that matter.

I don't know, I think the CDC -- I'm working from memory here.

But a week or 10 days ago I think the CDC issued a statement telling potential mothers that they did not need to worry about the Zika virus for the time being.

Now, that is not a direct quote, but it was something along the lines that that wasn't a consideration for potential pregnancies at this point in time.

That is great color, Roger; thanks.

Thinking about the uses of cash, though, what do you see as a better use of cash flow right now?

Is it still share repurchases, or debt repayments?

Well, my better use of cash flow are acquisitions.

That's what I want to do.

I want to put the money to work.

Acquisitions not only bring you earnings, but they bring you cash flow and they bring you relationships with hospitals, etc.

So to me, my number-one use of cash is to continue to acquire practices.

Okay.

Then just thinking about the vRad performance, I know you touched on it.

But how is it performing compared to budget right now?

It's performing actually a little better than budget.

We think that that was a great acquisition for us.

The revenue is growing, and we like what we're seeing there.

We like the opportunities that we believe that's going to offer us as we get into the hospital-based businesses of radiology, to provide backup and opportunities for growth to those hospital-based practices.

Okay, that's it for me.

I'll jump back in the queue.

Whit Mayo, Robert W. Baird.

Maybe just first back on vRad, can you just remind us when that falls into the same-store count?

I guess the corollary to that question is, if that's about 6% or 7% of your business now, wouldn't that have some upward push on your organic growth by about a point or so?

Yes, it will be in the third quarter.

Yes, it will be in the third quarter.

It laps in May, but it won't be a complete quarter.

So it will be in the third quarter.

And, yes, we do think it will have some positive impact.

I am not going to specifically say what, but you're not far off from that point, because their volumes have been pretty good.

But we do expect it to positively impact the organic growth.

Got it.

My second question, Vivian, since I brought it up -- and you may not like it -- but just on malpractice trends.

Can you just walk us through the factors driving the favorable developments, and why that should continue to be a tailwind for the foreseeable future?

I do like the question, because it's been a very positive trend.

I know there was some report out -- I don't know it was yours or someone else's -- regarding that.

But we've seen this positiveness, and I don't see any reason why it wouldn't, a little bit about how our program works, which is why I think we've had a lot of success in it.

We do have a formal claims committee process that includes not only lawyers but it includes a physician in each one of the specialty to review a claim.

Again -- so there's the clinical merits of a claim in addition to just the legality of it.

So we do think it's a core competency of our management.

And really we manage not only the legal side but we manage the clinical side of it.

And because we do have also a network of physicians, if we're seeing anything that is potentially a trend or whatever, we have training opportunities for that.

So I really believe that that's going to continue, because the program continues to always have tweaks to it.

As a matter of fact now we are bringing in the vRad component of it as well, and so we'll have the radiology piece.

So we just don't see that that will be changing anytime soon.

I mean, our experience, the way the actuaries look at that -- and obviously we have our own actuaries, but we also have our auditor's actuaries that look at our claims every quarter, as a matter fact -- and basically the mod factors and everything that is used continues to somewhat be closer to the Company's experience because -- I don't want to get much into the details of this.

But there are industry standards, and then there is performance of your own trends.

So we're looking at the components of that really every quarter, and our claims have continued to be favorable.

So I just don't see that that's changing.

Don't be jinxing me.

No, that's helpful, I appreciate it.

Chris Rigg, Susquehanna Financial.

Just wanted to -- when we think about same-store revenue growing in the 2% to 4% range, normalized for parity, does that lead to stable same-store margins?

Or can you grow margins at 4% and maybe some contraction at 2%?

Just trying to get a sense for how we should think about the cost structure relative to the same-store revenue growth.

Thanks.

What I've said in the past is that anything north of 3% gets to be good on the margins because especially on the neonatology side, where there is big fixed component of the practice cost -- namely the physician services piece of it.

So anything north of that we like because we start to see some positive impact on the margins.

Okay.

I know this came up in a roundabout way earlier, but when we think about acquisition multiples across the various silos that you guys are looking at, can you just rank -- even if you don't want to give us specific numbers -- where the highest multiples are right now, versus where you're seeing the lowest multiples?

Thanks.

Well, historically and continues to be that way, the lowest multiples have been in the neonatology field.

Those have stayed down around the historical levels.

And the highest multiples have been on the anesthesia side.

Then even on the revenue cycle stuff, that's just somewhere in between?

Yes, it's somewhere in between.

Okay, thanks.

Dana Hambly, Stephens.

Roger, you've talked now -- several times you mentioned the OB hospitalist program.

I probably should know more about it, but just give us a sense of how big this market is.

Do most hospitals have this program and you're taking that business?

Or is just it's really new and it's something that could be at every NICU that you operate?

Yes.

No, it's really new.

It started because hospitals were looking at their med-mal expenses, and basically the idea there is that if you have a hospitalist ---- which is really, an OB hospitalist is just an obstetrician -- in the hospital 24 hours a day, and you have a mother in labor and something happens where you need to intervene immediately and do an emergency C-section, you don't have to wait an hour for the private obstetrician to drive in from their offices etc.

etc.

You have somebody there that can intervene immediately.

It's also very helpful for the nurses who don't feel like they are alone taking care of a pregnancy, because the obstetrician is again in his or her office 45 minutes away, and the nurse is trying to read the fetal monitoring strip and she isn't sure.

So it just provides a whole important backup to mothers in labor.

And I think it's a lot safer way to run a delivery service, to have an obstetrician present in the house 24 hours a day.

And what they're seeing, hospitals are seeing, are these cases can be incredibly expensive from a medical malpractice standpoint.

A bad baby case is probably one of the worst nightmares that a hospital administrator can have from a med-mal standpoint.

So they're seeing some significant benefits there.

But in addition to that, what they see is that because the hospital is offering this service, the local obstetricians are switching their patterns of referral and bringing more patients to this hospital that have that service available for them.

So the benefit for the hospital is two.

Number one, less med-mal exposure; but number two more business, because more obstetricians in the community are electing to bring their patients here.

What we have seen -- again, we started from scratch.

It's probably been two or three years since we started our first OB hospitalist program.

It was at the request of one of our hospitals.

And again, today we probably have 15 or so of those programs across the country, and we've got four or five that are in the hopper that we are signed up for and ready to start providing care within the next -- whatever, a couple of months.

Great.

A lot of information, thank you.

Then congratulations on the 100,000 Babies Campaign.

I know obviously the goal is to improve health and lower cost.

But just thinking about it from a more of a greedy business perspective, is this something -- when you publish these, these get published -- I know NAS was published last year.

Do they help in the either recruiting efforts or contract wins?

Have you even studied that at all?

Well, there are clearly are some subtle benefits from recruiting.

The idea that we are able to provide our physicians with the opportunity to do this kind of research, to have access to the medical education and the quality programs and all of that.

I don't know that we could ever quantify that.

But it certainly helps with your image, and not just with recruiting but with our hospital clients.

The other thing that it does is it helps us when -- that we like to do -- is present the information to our payers.

When we get ready to renegotiate our reimbursements with the different payers, we are quick to bring up all of the other things that we work on from a patient quality standpoint.

Okay, thanks.

Last one, Vivian, what is remaining on the share authorization?

Well, the only one we have open at that moment is the one that is ongoing for the dilutive impact of our equity programs.

What we did this year is that we have frontloaded that, and so we don't expect to do any more under that program.

That is obviously an estimate, but that one is an ongoing authorization.

Okay, great.

Thank you.

John Ransom, Raymond James.

I am sorry if this has been asked; I jumped on a little bit late.

But is there anything to think about with your back-half EBITDA margins that is different than your front-half EBITDA margins?

I believe your guidance implies some uptick to get there, unless I am doing the math wrong.

Thanks.

Well, remember, John, that the first quarter you can't -- the first quarter is always lower.

Maybe that's what you're thinking about.

But we do think that there is -- the number I was quoting was for the whole year.

So just if you do the math, you're right; there is going to be some higher number along the way to get to the 22% or so, 22.5% like I was saying earlier on the call.

Are you seeing any change?

I know your margin is going to move as you buy more anesthesia, which has lower margins.

But are using any material change in what I would call same-division EBITDA margins, up or down?

No.

I mean, it's just a function of, I think, what you said.

It's more of a mix of the practices.

If it is anesthesia versus neonatology, maternal fetal, that thing, not because of the division or anything like that.

Just lastly, as you guys look at -- you mentioned you might buy your first hospital radiology practice this year.

What's that marketplace look like in terms of supply?

Who are you competing with?

How do the multiples compare to anesthesia?

How do the margins compare, that sort of thing?

Thanks.

Well, we think that there are a number of practices that are looking at their options.

I don't know that specifically I could name any competitors for these practices.

I'm sure there will be.

But for the time being I would say that we don't have an idea of where the multiples are going to go.

Obviously that will depend upon how many competitors there are and what the -- how far others are willing to go.

But I am sure that that there are significant opportunities here.

I can tell you that the uniqueness that we have is vRad and the fact that we can now say to these practices: You don't have to provide 24 hour a day coverage of all the subspecialists in-house.

We can do that.

We can help you.

We can enhance the coverage opportunities.

Or as you grow you don't necessarily have to hire all of these additional specialists.

We're the only ones who have that and the whole IT, the technology that they have put in place and the investments that they have made.

So I think we have a pretty -- it sounds to me, having met with a number of radiology practices, that we have an attractive competitive advantage there.

Great.

The margins, how do they compare to neonate and anesthesia?

I don't really want to talk about that.

We haven't gotten that far along in the diligence yet.

So I'm not prepared to speak to that at this -- yes.

I don't want to attract too many other competitors to this business, so I'm not talking margins.

There are a lot of things that my wife doesn't want me to talk about, but I end up talking about it anyway.

I was hoping we had the same relationship, but I guess not.

All right, thank you.

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