Pediatrix Medical Group Inc (MD) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the MEDNAX 2018 Fourth Quarter Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

And I would now like to turn the conference over to our host, Charles Lynch.

Please go ahead.

Thanks, operator, and good morning, everyone.

I'm going to quickly read our forward-looking statements, and then I'll turn the call over to Roger Medel.

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' 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 section 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 earnings press release, our annual report on Form 10-K and in the Investors section of our website located at mednax.com.

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

Thank you, Charlie.

Good morning, and thanks for joining our call.

I'm happy to report that our EBITDA and EPS results were within the ranges that we provided previously.

As well, same-unit revenue growth improved compared to the third quarter with volume increases across all of our service lines, except for neonatology.

Finally, we also met the 2018 targets that we established for our corporate and operating initiatives.

And during the fourth quarter, we also completed a $250 million share repurchase program.

Looking across our service lines.

Our women and children services were affected by continuing softness in birth volumes, with total deliveries at the hospitals where we cover the neonatal ICU declining modestly for the quarter.

Our other specialties within this service line, including maternal-fetal medicine and pediatric cardiology, saw modest volume growth, while newborn nursery growth was strong.

This has been a focus area for us, as I have discussed in the past, and we will continue to pursue growth opportunities in this area.

Our payer mix was also favorable compared to the prior year, which is similar to what we saw during the third quarter.

In anesthesia, our results were largely in line with our own expectations.

Volume growth was modestly positive.

And while payer mix remains unfavorable, the practice-level operational initiatives that we have developed have been effective to-date in helping to offset this headwind.

Operating results in anesthesiology remained distorted during the quarter due to the nonrenewal of a contract that we have discussed in the past.

But as of January of this year, a significant part of that impact is now behind us.

Finally, our radiology service line finished a strong 2018 in terms of both organic revenue growth and our strategic expansion.

In 2018, we added 5 groups through acquisitions, representing both tuck-in additions to our existing practices and geographic expansion.

Our radiology organization now totals more than 785 physicians, either affiliated with our on-the-ground practices or reading for vRad and reads nearly 12 million studies annually.

I am excited about the opportunities ahead for us, both in the growth of the organization and the clinical innovations, which we are pursuing.

This morning, we also announced our preliminary expectations of 2019 adjusted EBITDA.

Given the many moving parts in our 2018 results, we believe this can give you a better picture of how we're looking at the year ahead, and I would like to take some time this morning to discuss our thoughts behind those expectations and the priorities, which we have established.

In terms of market trends, at a high level, we're operating with the expectation that the headwinds that we experienced in 2018 will persist.

These include clinical compensation growth, a payer mix migration towards Medicare in our anesthesiology services and soft birth trends at the hospitals where we cover the neonatal ICUs.

To varying degrees, these have been the key external drivers of volatility in our results over the past couple of years.

And our strategic plans revolve around addressing these factors through all of the aspects of our businesses that we can control.

For that reason, we anticipate that 2019 will be a year of intense internal focus for us as we continue to execute on our operational and corporate initiatives.

Above all else, the priorities that we have established within these initiatives have the common goals of stability of our business, consistency in our operating results and visibility of the trends that we see in the marketplace and across our organization.

From a financial standpoint, our goal remains unchanged: to realize $120 million in annualized improvements by the end of 2019.

Based on what we achieved in 2018, we remain on track to achieve the target, but the steps we will take need to become more transformative in comparison to the more tactical steps we took in the early stages of these initiatives.

We have identified areas where we intend to invest further, utilizing resources outside of our organization in order to either accelerate our plans or to expand them.

We expect that these steps will be focused both on our practices and on our infrastructure support of the practices through the management services we provide.

The first of the steps that we are taking is focused within anesthesiology.

This is an area where a lot of our activity from 2018 was very practice-centered and focused on specific areas where we could make improvements for individual groups.

As we move through the year, our plans increasingly engage not just operations team but also our clinical leadership; our consulting organization, Surgical Directions; and our information technology resources.

Through this involvement, we have been able to identify opportunities that aren't just practice-specific but that can be targeted across our complete anesthesia organization.

In terms of incremental investments, we had initially committed to the rollout of additional IT capabilities to improve our practices' clinical scheduling systems and process efficiency.

This should yield a better experience for our clinicians by reducing the amount of their time spent on nonclinically-oriented tasks.

In addition, this will allow our clinical leaders and operators to better measure, benchmark and manage their clinical teams, which we expect will ultimately result in enhanced productivity and reduced premium and agency labor costs.

Finally, using a common platform and metrics will enable the sharing of best practices among all groups.

I think this first investment we're making is a good example of the transformative steps we're taking through our operational initiatives.

To the extent that we're managing against the expectation that certain headwinds will persist in our business, we also need to establish pathways for continuous improvement in processes, inefficiencies and in the productive use of our clinicians' time.

As we move forward, there will most likely be additional areas where we focus and consider investments, and we will continue to discuss these initiatives throughout the year as we progress.

I hope walking through this specific rollout can give you a sense of how we will identify similar projects and what we are looking to achieve.

While our operational initiatives will be a key priority for us in 2019, the deployment of our capital will also be a focus area.

A hallmark of our organization has been our cash flow generation, which we believe provides us the opportunity to generate value to our stakeholders even in an environment, as we anticipate for 2019, that may present headwinds to EBITDA growth.

During 2018, we devoted more than $420 million towards a combination of acquisitions and share repurchases, a significant portion of which was funded by our free cash flow.

In the year ahead, our intent is to commit capital towards both repurchases and practice acquisitions.

On the acquisitions side, our pipeline has a similar profile to what we achieved in 2018, including attractive, small-to-midsized potential acquisitions across radiology and women's and children's services.

While we haven't included any larger, more strategic acquisitions in our outlook for the year, we will certainly pursue any such opportunity if we see it as having a significant benefit to our organization, both competitively and financially.

With that in mind, we do expect to be buyers of our own shares during 2019, utilizing our own free cash flow and, to the extent our ongoing process to identify a capital partner for MedData results in a successful transaction, some portions of the proceeds of that sale.

In the near term, we do intend to repurchase our stock through open market transactions during the first quarter of this year.

Lastly, I want to give a brief update on our ongoing search for candidates for our Board of Directors.

That search has progressed well since we announced it last quarter.

And as of today, we've developed a short list of candidates that our Nominating Committee is in the process of reviewing.

Based on this progress, we expect that we will make decisions over the next couple of months.

To reiterate what I said earlier, above all else, our priorities for the coming year have the common goals of maintaining stability and consistency in our operating results.

The initiatives we have been undertaking and we'll continue to undertake follow those priorities and are designed to enhance the effectiveness of the support we provide to our physicians as well as the differentiation of the services we provide to our patients and our hospital partners as a true national medical group.

We believe the plans we have in place for 2019 represent a strong and balanced approach to address both the headwinds and opportunities across our business.

We also believe they reflect at the continued transformation of our organization, enhancing our adaptability, our value as a health solutions provider and, similarly, our ability to add value to our stakeholders.

With that, I'll turn the call over to our Chief Financial Officer, Stephen Farber.

Steve?

Thanks, Roger, and good morning, and thank you for joining our call.

I'd like to touch on a couple items within our fourth quarter results, and then I'll walk through our first quarter guidance and preliminary outlook for the year, including our sources and uses of capital and, finally, I'll add to Roger's comments on our focus areas in 2019.

Looking first to the fourth quarter.

Our results were in line with our expectations, in some places slightly ahead, but there were -- or there are a few moving parts to call out.

On the positive side, same-unit revenue growth was modestly higher than our 0% to 2% forecast, primarily on the pricing side.

Our managed care rate growth was relatively good during the quarter, and we also did not experience any negative impact from payer mix, with an unfavorable comparison in anesthesiology offset by a favorable comparison in women's and children's services.

Related to the nonrenewal of the Southeast Anesthesiology contract, our salary expense for the physicians affected by that nonrenewal was $8 million or roughly $1 million less than we had forecast since there were a number of physicians who took positions elsewhere and, thus, were not on our payroll.

As a result, the overall impact to our EBITDA compared to 2017 was roughly $14 million in the quarter, consisting of this salary expense and the lack of EBITDA contribution from that contract.

Separately, MedData's EBITDA results were modestly below our expectations.

This was primarily due to a combination of revenue and expense items during the fourth quarter.

Finally, as Roger indicated, we did hit our targets for operational and G&A improvements for the year, which totaled $35 million and $25 million, respectively.

Below the EBITDA line, we completed our $250 million accelerated share repurchase late in the fourth quarter, with the final settlement of shares we received occurring earlier than we had forecast, benefiting EPS by roughly $0.005.

A slightly lower-than-expected tax rate also benefited our EPS by roughly $0.01.

Partially offsetting these items, we issued $500 million of 6 1/4% senior notes during the quarter, and the higher cost of these notes as compared to the revolver borrowings we repaid impacted EPS negatively by roughly $0.01.

Turning to cash flow.

We generated $128 million in operating cash flow in the fourth quarter, bringing our operating cash flow for full year 2018 to $290 million.

This full year amount understates our true underlying cash flow generation since it includes $62 million of cash tax payments we made in the first quarter of 2018 that were deferred from the second half of 2017.

So I think adding that amount back gives a better reflection of our operating cash flow and a good reference point for your own expectations for 2019.

I'll touch on this in a few moments when I talk more about the year ahead.

Finally, turning to our balance sheet.

We ended the quarter with total borrowings of $2 billion, consisting of our revolver borrowings and senior notes.

This represents leverage at year-end of roughly 3.5x debt-to-EBITDA.

Now I'd like to turn to our guidance for the first quarter and our preliminary outlook for the year.

I'm going to start with our view of the year as a whole in order to put our Q1 guide in context.

As we reported this morning, we expect our adjusted EBITDA for 2019 to be in the range of $550 million to $580 million.

That range encompasses a number of different scenarios in terms of volume, pricing, mix and operating costs as well as our own operational and shared service initiatives.

It also takes into account our experience through 2018 in terms of our end markets, in particular, payer mix in anesthesia and birth trends across the country.

And as a side note, our guide does include MedData for the full year.

We will adjust for that when and if we complete the transaction.

Our views on payer mix dynamics in anesthesia are relatively unchanged, and we do anticipate a continued migration towards Medicare based on demographic trends across our footprint of practices.

To put this in some context, for the full year 2018, our anesthesia payer mix by volume shifted roughly 85 basis points towards government.

All else being equal, that payer migration impacted our EBITDA in 2018 by roughly $15 million.

Should last year's trends continue, we would anticipate a similar headwind in 2019, and that is incorporated into our guidance.

On the neonatology side.

While our own NICU volumes had varied quarter-to-quarter, that's been against a persistently difficult backdrop.

As the roughly 400 hospitals where we manage the NICU, total delivery volumes have been down roughly 1% to 2% in 8 of the last 10 quarters.

Unless and until we see some inflection point in that key driver of our volumes, we're incorporating a continuation of that trend into our outlook.

Again, to put this in context, every 1% change in our same-unit NICU volumes equates to a roughly $5 million impact in annual EBITDA.

Our outlook also contemplates our trend in labor cost inflation.

As you can see in our P&L, our annual labor expense is more than $2.5 billion, and the vast majority of this expense is clinical.

Moreover, this is far from a homogeneous labor pool, it encompasses highly skilled and, in many cases, highly specialized clinicians across multiple specialties and varied geographies.

As a provider of the services we focus on, it is our highest priority to ensure we can recruit and retain physicians and clinicians that care for patients in critical situations.

And against the backdrop of relatively full employment across the country, we are not immune to inflation.

This is not a new phenomenon for us nor should you view it as a new phenomenon, but I do think it's important to put our clinical compensation cost in the right context.

The very diverse nature of our clinical workforce doesn't create broad levers that lend themselves towards universal efficiency measures.

And at more than $2.5 billion a year, it does not take a significant amount of inflation to create pressures for us, particularly if it's coupled, as it has been in the past few years, with additional headwinds to revenue growth in the form of volumes, payer mix and a challenging reimbursement environment.

It also makes sense for us to anticipate that there will be pockets of more significant pressure such as we've experienced in the past.

I want to emphasize that we have identified a number of areas where we can deploy resources to bend this curve, and we're in motions to do just that.

I'll touch on some of these specific areas in a moment.

But related to our 2019 outlook, I want to highlight some of the key pressure points we've been focusing on, particularly against the existing financial goals we have for operational and shared services initiatives.

Lastly, our outlook contemplates a moderate level of acquisition spend in the range of roughly $100 million.

This is similar to our acquisition activity in 2018.

And at this point, we would expect the profile of our pipeline activity to be similar, with a focus on smaller-to-midsized deals within radiology and within women's and children's care.

While there is always the potential for some larger, more strategic deals, we're not incorporating any such deals into our outlook.

So those are the big drivers of our outlook for 2019 and, obviously, we'll revisit each quarter based on our experience as the year unfolds.

I'll also make a couple of comments related to our first quarter guidance, the details of which we provided in our earnings release this morning.

I know that modeling the progression of our EBITDA from the fourth quarter to the first quarter can be challenging to begin with and likely even more so this year given all the moving parts within our results over 2018.

To that end, we provided additional detail in our press release this morning about the seasonal factors that typically impact our Q1 results.

The greatest of these is the disproportionate share of our annual Social Security payroll taxes and 401(k) match that we incur in the first quarter.

Historically, we've taken about 40% of these expenses in Q1, which impacts adjusted EBITDA by about $25 million, all else being equal, compared to if they were distributed evenly throughout the year.

We expect that impact to be similar in the first quarter of 2019.

Second, the first quarter of this year has 1 fewer weekday than last year, which equates to roughly $4 million in reduced EBITDA.

This adds to the expected seasonality of our earnings this year in terms of the expected contribution from Q1 to our forecast full year results.

As you'll be able to see, our Q1 guidance range equates to roughly 20% of our full year outlook, which is at the low end of the range of that contribution over the past number of years.

This day count also impacts the comparison of our expected first quarter results to last year.

In addition, as we disclosed in the past, the EBITDA contribution from the Southeast contract was roughly $11 million in the first half of 2018 and, more specifically, about $5 million in the first quarter of 2018.

Now turning to our focus areas for 2019.

Roger provided a broad perspective on the operating plans that we have in place.

I want to add some detail to those plans in order to give you some color on what kind of activities we're targeting.

Since joining MEDNAX, I've been heavily focused on our costs.

I've also spent a considerable amount of time with our operating leadership to get a better understanding of the dynamics between -- behind these cost trends as well as our ongoing operational and shared services initiatives.

These have been very effective so far.

But we've also discussed, over the past couple of quarters, that as we move forward, our initiatives begin to move away from tactical steps and towards more transformational ones.

The primary reason for this is that while our clinical cost structure does not lend itself to uniform measures to offset inflation, there are, in fact, a number of areas where we believe we can drive more consistency and more efficiency.

From my own perspective, I believe there are significant opportunities to harness data, analytics and technology to drive performance across the enterprise.

I also believe this will require meaningful IT and operational investments in areas like technology-enabled process change, shared service expansion and improvement and also meaningful deployment of administrative tools and technology directly into our practices.

To that end, we've been contemplating different areas where we intend to supplement our own internal resources with external resources in order to accelerate the rollout of new technology and tools along with support for the implementation of these tools as well as analytics.

The first commitment we have made is to support the rollout of a robust scheduling and clinical resource management tool across our anesthesia organization, which Roger referenced in his prepared remarks.

We anticipate that the cost we will incur for this rollout will be roughly $15 million to $20 million, and we intend to complete it over the coming 4 to 6 quarters.

That's a significant acceleration from what we might achieve across more than 40 different practices without outside resources.

So there is a distinct time benefit right there.

But to put the dollar cost in a different perspective, our total clinical compensation expense in anesthesia alone is north of $0.75 billion.

It doesn't take a significant percentage change in the trajectory of that cost trend to pay back our $15 million to $20 million investment in very short order.

And that's how we're thinking about initiatives like these, compressing the time to value from implementation to completion and accelerating the time line on ROI.

As we indicated in our release this morning, we will be breaking out the cost of transformational investments like this one as we move forward.

I think this will help clarify which investments we're making proactively, and our decision-making process behind this is heavily dependent on the returns we expect to achieve.

I think it's a little bit premature to place a hard dollar figure on what we'll commit to in 2019, but a good way for you to think about it is that we expect to move forward on 2 or 3 additional similar investments through the course of 2019 and, quite likely, several more in 2020.

And we're committed to providing you with details on our areas of focus we'll have in a rationale -- and the rationale for our decisions.

Lastly, I want to touch on our cash flow and our plans for uses of capital in 2019.

Since I joined MEDNAX, one aspect of this organization that has continually impressed me is our cash flow profile.

Adjusting for various timing issues such as the tax payments we deferred from 2017 into 2018, we generally convert between 60% and 2/3 of our EBITDA into operating cash flow.

In 2019, we would expect a similar conversion of EBITDA to cash flow.

Against that, our CapEx requirements are fairly minimal.

2018 capital spending was only roughly $50 million, and that included roughly $20 million from MedData.

Our current outlook for acquisition activity this year is fairly modest given our internal focus such that our expected capital deployment for deals as part of our 2019 forecast would utilize only about 1/3 of our free cash flow, with the remainder available for share repurchase activity we intend to undertake and other uses.

So overall, we believe that we can fund both a modest acquisition pipeline and a meaningful return of capital to our shareholders through internally-generated capital.

And as we indicated in our release this morning, we intend to utilize some portion of our share repurchase authorization by open market purchases during the first quarter of this year.

Finally, in addition to our free cash flow, we do intend to utilize any proceeds from our previously announced plan to sell MedData towards a combination of debt repayment, share repurchases and acquisitions.

We remain relatively early in that process.

But so far, I'm pleased with the level of interest we've seen in MedData, which I believe validates our views that it would represent an attractive platform for the right capital partner.

From a modeling perspective, we expect that MedData would move to discontinued operations when we reach an agreement for sale.

And for modeling purposes, MedData's EBITDA for 2018 was $42 million, and we have budgeted $45 million for 2019.

I'll also point out that a significant portion of our historic CapEx has been related to MedData.

So the potential of that business -- the potential sale of that business would have a fairly nominal impact on our ongoing free cash flow.

Overall then, we believe our cash flow profile, supplemented by the potential proceeds from the MedData sale that would be available for a combination of debt repayment, share repurchases and acquisitions, will enable us to pursue significant value-additive activities through 2019 and moving forward.

And with that, I'll turn it back to Roger.

Thank you, Stephen.

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

(Operator Instructions) Our first question comes from the line of Ralph Giacobbe with Citigroup.

Details were helpful but hoping you could help bridge a little bit more in terms of embedded core growth expectations in the guidance, both in terms of revenue and EBITDA.

Sure, Ralph.

Other than the key assumptions that we've outlined, I'm not exactly sure what it is that you are looking for.

I mean, when you put all of the different pieces together, I mean essentially, if you look at the midpoint of our guidance, it's essentially fairly consistent with the results that we reported for 2018.

And Charlie, do you have anything you'd like to add to that?

No, that's helpful.

I guess there's, obviously, a lot of moving parts with some of the contracts coming off and some of the pressures you saw, and I understand the continuation of pressure.

But some of those pressures also continued in the fourth quarter, and the results are better than, seemingly, the guidance looking ahead.

So that's what I was trying to bridge in terms of just core growth when you look at the business and, say, when we strip out some of the, call it, onetime items, what's the baseline growing -- or not growing for that matter?

Sure, yes.

I mean there is -- we did add a lot of detail in our disclosure, in our written comments and in our release this morning.

And I guess, really, the only thing additive that I would say, Ralph, is when you look at the various buckets of headwinds and you look at all of our activities that we have underway and additional activities that we are working on, I think the goal for the year is you try and have them largely offset each other and to focus on a year of stable and consistent results.

Okay.

All right.

Fair enough.

And then if I could, you talked a lot about the strong cash flow that the company generates.

Any thoughts or updates on how you approach or think about a dividend?

I mean, we talked a lot about repo and M&A and maybe debt paydown, but given the stability of that cash flow and sort of where you are in the maturity cycle, is there any increased thoughts or discussion around a dividend?

Hey, Ralph, we haven't really spent a lot discussing the possibility of a dividend.

I think that we've made it pretty clear that we intend to be buyers of our own stock going into the year and into the quarter.

We've got a board meeting coming up, and I'm sure that's a topic that will come up again.

But as of this point, I don't really have anything else to talk -- to say about a dividend.

Okay.

And then just real quick, I just want to clarify, the nonrenewal of certain contracts that you mentioned in the press release, there's nothing incremental, that's just related to the -- that contract.

Is that correct?

That's right.

Next, we'll go to the line of Brian Tanquilut with Jefferies.

Hey, it's Jason Plagman.

So a question on the G&A spend.

In Q4, that's up a little bit more than people were expecting.

Given the cost initiatives there, should we expect that to trend down throughout 2019?

Or how -- where do you think we'll end 2019 from a G&A dollar perspective?

Yes, Jason, we haven't really cracked out at that level of detail in terms of our guide.

Our primary goal was to extend from a one-quarter forward guide to a full year guide, so you can have a sense of what we're working towards.

And also really, there was a lot of moving parts over 2018, so we were just trying to make it easier for you to get an overall sense of 2019.

So hopefully, that was helpful and constructive.

In terms of G&A, more qualitatively, I would say you should expect that number to bounce around a little bit because there are so many different parts in that.

I mean I'll give you a couple of examples.

Our revenue cycle operation is in that.

Our IT is in that.

Our rent expense is in that.

It's -- there is just a significant, significant number of items that comprise it.

And to try and delve into that is fairly complicated.

And I'm not sure how useful it would be in terms of understanding our overall outlook.

Okay, yes.

That's fair.

And then just thinking about from a margin perspective, so if I back out the Charlotte salaries from the Q4 results, I get an EBITDA margin of $15.5 million or approximately.

Should we expect that to be where you end next year for Q4 '19 as well?

Or what's kind of -- given the cost savings that you're driving, is that the way you're thinking about it, with the savings offsetting the headwinds that you've mentioned?

Yes, I mean the way that I would think about it probably is that we are not as margin-focused as we are EBITDA-focused.

And so we've provided our guide for 2019 on adjusted EBITDA because that is precisely what we are looking at from a financial perspective as our primary objective.

And so there's a bunch of parts that sort of move around that, which impact margins up and down.

And if you think of 2019 as a largely stable, consistent year in terms of our expectations relative to our reported performance for 2018, I'm not sure that focusing too hard on all the different puts and takes is really going to get you to a better place because all of those elements have been baked into the $550 million to $580 million guide that we provided.

Next, we'll go to A.J. Rice with Credit Suisse.

A couple of questions, if I could.

First, I appreciate the -- your comments on the Q1 outlook.

I was wondering, you had comparable growth of 2.8% in the fourth quarter, but you're guiding for 0% to 2% in the first quarter.

I know you got the 1 less day, and it looks like it was probably a tough comp a year ago that you're dealing with.

Is there any other change relative to what you saw in the fourth quarter in trends that you're incorporating in your first quarter outlook within the business lines?

Or is it pretty much accounted for with those 2 things?

Those are basically it, A.J.

Okay.

And now, Steve, that you've had a little time to get your legs under you there, the 3.5% debt-to-EBITDA, which you guys are at now, what's your thought about comfort with that?

And would you like see that move in one direction?

Do you have a -- do you guys have an updated target you're looking at?

Yes, A.J., I mean I am fine at 3.5%.

And I think we've historically described our comfort in the sort of 3%, 3.5% sort of range, moving up and down.

I think clearly, for a little while, we're probably going to be at the higher end or a little above even what we view as our longer-term range.

And I think, over the next couple of years, you should see us, as we get incremental traction on all of these initiatives that we have in flight and all the new ones that we expect to launch, I think our expectation is some combination of debt reduction and EBITDA growth over time will bring that ratio back to a more normalized level within that sort of lower half of 3% to 3.5% type range.

Okay.

And in the press release this time and I think last quarter as well, it referenced that the payer mix -- the language is slightly different but basically, the payer mix was steady year-to-year in some form or fashion as it was described.

And I know you made the comments about the overall impact on 2018 of payer mix pressures in anesthesia.

But has it more steadied out in the last 2 quarters that, that's less of an issue as you move into '19?

Or do you think that's still a bit of a headwind for you?

Yes, A.J., we were -- we did speak a lot about payer mix in our prepared remarks sort of on purpose.

The -- and I guess I'd think about it this way, in Q4, we did pretty much have a wash, right?

The -- some beneficial payer mix in women's and children's basically offset the anesthesia mix.

And frankly, our anesthesia mix in Q4 was a little less than we had seen in other quarters, and women's and children's a little better than we have seen.

So our view on anesthesia mix is that it's probably a -- we view that as a persistent headwind.

And that's one of the reasons why we talked about it separately.

It's simply demographic-driven.

And so we view that as likely more persistent.

The women's and children's, we've had good impact and we've had some good benefits, but it's really based on a number of other factors.

And I think if you probability-weight it -- while we've enjoyed it of late, if you probability-weight it, it's likely to move around a bit more than the anesthesia mix is.

So we've incorporated in outlook sort of along those lines as part of our 2019 guide.

Next, we'll go to the line of Kevin Fischbeck with Bank of America.

So I guess, when we think about the guidance, is it right to kind of think about $60 million of cost saves this year because you got $50 million last year?

I wasn't sure if there's any nuance there about run rate of $120 million versus actual realized synergies this year?

Yes.

I mean look, I think, Kevin, our goal is to get to the $120 million by the end of the year.

And we do have that baked into our guide, but it's not $120 million run rate during the course of the year.

There is a ramping in over the course of time.

Okay.

So it could be something less than $60 million realized in the year.

Is that the right way to think about it?

Yes.

Okay.

So like, when I look at the guidance, it looks like you're talking about up 2%, down 3%, as kind of the number.

And if you assume, I don't know, half of the $60 million is realized this year, that kind of says that the core business is down 3% to 9% on an organic EBITDA basis even though you're doing, I guess, some deals in there, too, right?

Is that the right way to think about it?

And it sounds to me a little bit like what you're doing on the cost side kind of says that you're always thinking you're going to have to save $30 million, $60 million every year going forward.

But just I want to understand what you think the core business is layering in and whether you're setting yourselves up to be able to announce and deliver another round of cost savings next year to kind of keep a similar growth profile in 2019 into the future years.

Yes, Kevin, let me sort of try and address that in a couple different pieces.

I think pretty much every health care provider has a similar dynamic to MEDNAX.

I don't really think we're all that unique where everybody's got some reimbursement pressure, everybody has cost inflation, particularly on the labor side.

I think in some areas, we have a little less cost inflation than, say, a hospital company might because we don't have a bunch of pharmaceutical spend, for example.

The flip side is 70% of revenue is labor for us, and most of that labor is relatively high-cost, specialized clinicians.

And so we probably have a bit more labor cost pressure than others might have, but we have other cost pressures that may serve to offset that a little bit.

So I do think it is fair to say, as it would be for just about any health care company, that it's really just part of the business that every year, you're always looking for ways to be more efficient.

Now I guess I would add to that, that there are some unique benefits to the fact that we have this, like, remarkably heterogeneous and geographically distributed $2.5 billion workforce, in that there are a significant number of opportunities to, every year, create incremental efficiencies, whether it's through technology or analytics or all the other stuff that we've talked about.

It would be very different if it was some monolithic cost and we were trading barrels of oil, so -- which we, of course, are not doing.

So that's -- I think from a general mindset, that is the case.

In terms of, like, specifically quantifying how much the drag is that we need to offset, I think there will be varying views on that from a general dynamic, I mean that's just the life of a health care provider.

Okay, no, that definitely makes sense.

And then I guess when you think about the issue that's kind of outlined that these are the headwinds in 2018, we think they're largely going to persist in 2019, the payer mix headwind of $50 million, I guess that's happening during a period of a generally strong economy.

So that feels like, I guess, about as good as it's going to be.

The birth one, in theory, should be reversing.

I think we all kind of expect, at some point, birth will improve.

But to your point, naturally, it's better to be cautious there and then -- and in labor cost.

I guess I'd love to hear your thought about -- do you think payer mix pressure in anesthesia stays this way?

Is it like what you think about it long term?

Or does it get better or worse?

Birth, does it get better or worse?

And the labor pressure, does it get better or worse over time?

Just I appreciate that you can't provide 2020 guidance for this company over the long period of time.

How do these things kind of bear out?

Yes.

I mean look, Kevin, far be it for me to try and project more than 1 year in the future.

But in a general sense, I would say you definitely called it right, Kevin, in that each of these areas, it's kind of in the extremis, right?

We have full -- so the takeaway, we've got full employment across the country, and we got a 3-point whatever percent unemployment rate.

Health care, say, you have a decent amount, like, depending on what study you read and who's saying what, it seems like the sort of national estimates for labor inflation are somewhere from the mid-2s to the low 3s.

And that's before you talk about the subset, which is health care, which is usually more challenged.

And then there's another subset within that, which is the fact that we have some highly specialized people where scarcity of those people is an incremental factor.

And then you look at some of the states that we do business in where they're even more competitive in terms of certain specialized health care providers.

So -- but it does seem to be in extremis.

If you believe that there's full employment environment until the end of time, then that's one view.

I don't think we really share that view.

So I think these factors are all -- look, I would hesitate to call it a perfect storm, but I guess I would say it.

I think we feel all of these pieces are somewhat in extremis and that the likelihood of everything staying like this on a persistent basis, seems to us to be pretty low.

At some point, there has to be reversion to the mean, which would be a benefit for us in terms of earnings.

And let me just add that the payer mix shift that we're seeing in anesthesia is probably, in my opinion, this is just my opinion, is probably as bad as it's going to get simply because that is being driven by the elderly population.

And so most of what we're seeing there is really based on semi-elective procedures, right?

So if you need a coronary artery bypass, you're not going to wait -- and you're 63 years old, you're not going to wait to have it done.

On the other hand, if you need a hip replaced or a knee replaced, you might walk around with a cane for a couple years until you can -- until you reach that age.

And so I think that, that is we -- I believe, and I think we believe that, that is most of what we're seeing, the increase in volume, which is good, being driven by the elderly population needing more procedures but, at the same time, with a payer mix that reimburses you less for those procedures.

So I really -- my own personal opinion is I don't see whether that's going to get any worse.

I think that, that is where it is for the time being as we cycle through this elderly population.

Next, we'll go to Ana Gupte with SVB Leerink.

Following up on the cost efficiencies which, as you say, are more -- just looks like backloaded.

What type of assumptions are you building into that for the recontracting that you're doing with anesthesia practices, risk-sharing on revenue and cost metrics, like maybe a 5-year period rather than the 7 you talked about?

And then what is kind of the progress that is being made on changing those contracts for additional groups?

Sure, Ana.

I would -- I think probably the simplest answer is that we have -- our forecast is based on a detailed budget process, which goes down to the practice level, and it does include our assumptions for each of the recontracting situations that are scheduled for this year.

So I would say, those are baked in.

Charlie, I'm not sure if you have anything you'd like to add to that.

Ana, I would just add that when we're looking at that kind of a transition in comp structure for our practices, I would just keep in mind that the underlying goal we have in that kind of a transition is to reengage the physician and the practice to have them retain some autonomy over what they're doing.

And engagement in their own productivity performance and growth is not as -- it's designed to reduce their compensation.

In fact, as we go into those discussions, without getting into too much detail, we're still looking to solve for the appropriate level of compensation that they deserve.

On a go-forward basis, the goal is to have an equitable sharing up and downside between the corporate entity and the practices, of the success of that practice.

And that's what we've achieved so far in the early stages of some of this recontracting.

We have other discussions that are ongoing.

We'll update as we go through to the year.

But that's the real goal, is to have that engagement of the practices, to have them sharing a first dollar benefit when they identify ways to grow, ways to enhance their own productivity.

Okay.

Yes, I would love to hear more updates as you move throughout the practices.

Another piece on the guidance, I think you had some tailwinds on the managed care -- small tailwinds in the managed care contracting in the second half of last year.

Is that in there?

Is there any incremental to go?

And is there any upside?

Or is that at the higher end of your guidance?

There may be some upside, I guess.

Ana, I think, again, probably the easiest way to answer it is we have made assumptions in our forecast that are specific to most of the contracts that are significant enough to move the needle within our overall results.

So the guidance would effectively bake in our aggregated expectations.

Okay.

Then a final one on the NICU and the birth rates.

You've talked about cross-selling to -- cross-selling other services to hospitals and the well-baby care, but the pediatricians that are kind of more hospitalist-based bringing them onboard.

At what point would you feel that your own effort to offset some of the secular pressures would get you to a point where you don't have to bake in this 1% -- for every 1% NICU, you have this potential $5 million headwind, but it becomes flat that you -- even flat to even better, maybe.

Ana, I think that it's fair to say that we're making some good progress there.

I think that it is an area of focus for us that is producing some good results.

If you look at our press release, every area in -- within women and children's services grew during this quarter, with the exception of neonatal intensive care.

So that's really a reflection of the effort that we're making.

When you think about the services that are tied in or built around neonatology, you have maternal-fetal medicine, which is a very hard-to-come-by group of specialists.

There are maybe a couple of thousand of them across the country and these are high-risk obstetricians, which everybody wants because they drive business into the hospital.

But they're hard to get.

We're talking about well-babies, which is an area, again, that we have placed specific emphasis on, and which is growing for us because that's an obvious area of growth for us.

We're talking about OB hospitalists, which is our fastest-growing area right now, where we're providing the hospital with obstetricians to be in the hospital around the clock, ready to handle any emergencies that might come up.

We're talking about pediatric cardiology.

We're the largest group of pediatric cardiologists in the country.

We're talking about pediatric intensive care.

So anyway, there's a host of these services, which is why we can focus on that and tell you that we -- if you look at neonatology, that's more than 50% of our revenue.

And the impact on births has had, obviously, a material impact on our results.

And yet, we've been able to overcome that.

And that is the goal that -- this is the year of stabilization for us.

This is the year where we want to make sure that we're providing the stability in our performance that our stakeholders want.

And that is one main area of focus for us.

It's not just the cost savings on the side of anesthesia.

It's growth on the maternal-fetal side, and it's growth on the radiology side, which is also growing as well, and we haven't talked very much about that.

So that's what we're focused on.

And that's kind of, right now, in the midpoint of your EBITDA guidance for the full year?

I'd say, it's less than that.

I think we got a lot of room to grow.

And if I understood your question correctly, I think we have a lot of room to grow, particularly, again, in well-babies and OB hospitalists, yes.

Okay.

We'll next go to Gary Taylor with JPMorgan.

I just have 3 quick ones.

The first one is just going to go to Steve and make sure I understood what you're saying about some of the transformational expenses.

So you said $15 million to $20 million over 4 to 6 quarters related to the IT scheduling and clinical management.

I think you said 2 to 2 other similar initiatives and maybe several more in 2020.

So similar in terms of size of spend?

Or is there -- so were you saying it could be 2 to 3x the $15 million to $20 million?

I just want to get a sense of what you think that total amount is for 2019.

And it sounds like 2020 is going to be an investment year as well.

Yes.

Gary, the way that we are thinking about it is that these projects are all likely to have some scale to them.

We are not really intending to separately break out or separately report ordinary, run-of-the-mill $1 million, $2 million, $3 million-type of projects.

We are intending to break out larger ones that we expect to have larger impacts.

So I don't think they will all be $15 million to $20 million.

You could have some that are $5 million or $10 million or $12 million or $8 million.

I think it's unlikely that we'll have any of them that are really over $20 million individually.

And we have a whole lot of things that we're looking at.

So the one specifically that we talked about today is the one that's pretty fully baked.

It's in flight, we've got people working on it, we've engaged consulting firms that are working with our people to make them happen.

And so we were able to quantify it.

We've got a bunch of others where you should think of it almost like we'll make a number of little seed investments, right, spend a few hundred thousand dollars scoping the opportunities, prioritizing the opportunities.

And some of them we'll move forward with, some of them we won't.

So I am not suggesting that in 2019, you will see us do 3 or 4 projects that are $15 million to $20 million of spend, all of which occurs in the year.

I think you will see staggered starts of projects in the, call it, the $5 million to $20 million range of several over this year, several over next year.

And honestly, with the sorts of ROIs that we are finding, with some of the things that we're looking at, these are exactly the sorts of ways we would imagine you and our investors would want us to be spending our money because they are quite meaningful.

Two more quick ones.

I'm not sure this was exactly covered but just thinking about, conceptually, your fourth quarter seems the revenue and volume against the comparisons you had was surprisingly strong, yet the EBITDA performance -- I think third quarter EBITDA was down $11 million, fourth quarter was down $18 million, even though you beat the high end of your same-store revenue guidance and beat what we were expecting.

So as we're all sort of trying to -- attempting to model the sensitivity of the same-store revenue and some of the inflationary factors you called out, is there a single 1 or 2 items that impacted the fourth quarter EBITDA performance versus 3Q?

Gary, it's Charlie.

I don't think there's anything I would call out specifically.

As we go and you look over more than just one quarter over the previous or even one quarter over the last 2 previous, there's always moving parts.

And related to that, we always have a lot of changes, at least historically, whether it is deal contribution in any given quarter or not.

And as we look at the fourth quarter, in particular, of 2018, one thing that's notable is that in the prior year, we did have the addition of a couple of fairly sizable radiology practices at the end of the year, all annualizing out as we moved through 2018.

So I think that's one reason among many others that we're trying to provide a pretty robust view in total of our '19 outlook because there will be instances like that where looking at one quarter in itself may not be the best gauge of all those pieces you're talking about.

Last one, maybe just 30 seconds, for Roger.

I did want to just talk about radiology a little bit.

You alluded to the fact we hadn't talked about it much.

But as you look at, still for you, a relatively restrained acquisition spending target for 2019 and then what you'd laid out for us on goals in terms of building out radiology, does that suggest radiology's a larger percentage of that 2019 expected acquisition spend?

Or is there anything else to update us on in terms of the build-out?

Well, I can tell you that -- Gary, I can tell you that we have been pretty successful in obtaining growth within radiology from our local -- our on-the-ground practices growing into -- with the assistance from vRad, growing into local hospitals.

So a lot of that is working exactly how I would have predicted.

I do expect that there'll be more growth coming from our Houston practice.

I think there's opportunities for growth there as well.

We just can't overpay for these practices.

And so the way the acquisition market for these larger radiology practices is right now, it's pretty -- the multiples that are being paid for those practices are higher than we would like to pay.

So I don't think you will see any significant investments from us in radiology.

There are a couple of larger practices that we are interested in and that would be very nice and important for us to have, but it's going to be a matter of negotiations and whether they like to come with us or not.

But having said everything that we've said, I mean I wouldn't be surprised if you saw that at some point during the year, there was a larger radiology practice that we invest in.

And our final question comes from the line of John Ransom with Raymond James.

Just on the subject of radiology.

If you look at 2019 over 2018, at a practice-level EBITDA basis, is it up, down or sideways?

I don't know that we want to tell you that answer.

We have got a lot of competition in radiology.

And Charlie, have we addressed that?

We haven't broken it out specifically, no.

Okay.

I mean, well, more -- at a more high level, is it -- is the business trending -- I mean it's tricky blending that with vRad, is it trending like you thought, generally?

Yes.

Just answer to your question, it's up, okay?

So just to answer.

Just to answer, it's up.

And yes, it's trending like -- it's actually doing very well.

We'll go to Pito Chickering with Deutsche Bank.

Just to step back for a second on the guidance.

To make an apples-to-apples comparison, what would the EBITDA guidance had been in 2019 if you didn't adjust due to new adjustments?

Is it just putting the $15 million, $20 million of IT sort of pulling out of that number?

I mean that is a tough question to answer because it's unclear if the spend on that project, where it's going to land between $15 million and $20 million and where it's going to land between 4 and 6 quarters.

So I think -- I mean, of course, you're free to make on your own assumptions.

But I would intend to focus people on the sort of the $565 million midpoint of our guide or the $550 million to $580 million range.

And if you want to layer some of that on that, you are more than welcome.

I do think, my own personal view, and the reason why we are cracking out, going forward, a line -- separate P&L line to include those costs is because I think of them no different really than I would think about integration costs or restructuring costs or we happen to be calling it transformational costs.

But it's a -- we view these as sort of step function-type project-oriented investments that really to include them in our reported results would somewhat obfuscate the underlying true cash generation, cash-generating capacity of this enterprise.

Makes total sense.

But then I understand you guys are focusing on EBITDA dollars versus margins and I acknowledge there is definitely structural headwinds that are impacting some of your revenues.

But I still want to get a little better feeling for the give and takes on EBITDA margins.

So if we sort of back into 2019 revenues, the 2% acquisitions, 1% same-store, and use that $550 million to do a comparison '18 versus '19, it looks as though that would result in an EBITDA margin of 14.5% or about 100 basis points lower than last year.

Is that the right margin compression to think about when same-store revenues are growing 1%?

And if you can just give us a feeling for how we should think about same-store revenue versus what you guys need to achieve to get margin stability, that'd be great.

Wow, look, that is a mouthful for the last question on this call.

Two things.

First, we're more than happy to talk you later in a bit more detail in terms of making sure we really understand what it is that you're asking.

But in general, we're just not going to make commentary around margins for all the reasons that I've kind of already said on this call.

I'd kind of point people back to our EBITDA that, that said, look, our goal is to be constructive and helpful and to try and make sure that everyone has a consistently full and complete understanding of our thoughts about where we stand and where we think we're going.

So I would just suggest that you think about -- other than the large, just the individual distortions in 2018 that we've sort of discussed ad nauseam over the past couple of quarters, I would suggest that maybe the best way to think about 2019 is with a focus on adjusted EBITDA and with the general context of essentially consistent, stable-type performance as our overall goal relative to the prior year, acknowledging that there will be a decent amount of quarter-to-quarter noise on a reported basis given the events of last year.

Okay.

Operator, thank you for helping us this morning, and thanks to everyone for being on the call.

And we're going to go to work and look forward to speaking with you next quarter.

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