Pediatrix Medical Group Inc (MD) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the MedNax 2019 Third Quarter Earnings Conference Call.

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

I'll turn the call now over to Mr. Charles Lynch, Vice President of Strategy and IR.

Please go ahead.

Thank you.

Good morning, everyone.

Welcome to our third quarter earnings call.

I'll briefly read through our disclosure statements, then turn the call over to Roger and Stephen.

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 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 our CEO, Dr. Roger Medel.

Thank you, Charlie.

Good morning and thanks for joining our call to discuss our results for the third quarter of 2019.

Our adjusted EBITDA and adjusted EPS were in line with our guidance ranges for the quarter.

We saw strong volume growth across our hospital-based neonatology and other pediatric services in anesthesia and in radiology.

Labor cost trends remain a key focus for us, and while the environment remains challenging, cost trends for the quarter were also in line with our internal expectations.

Increases in nonlabor expenses offset some of the top line strength we experienced, but our overall operating results were in line.

Across our organization, we remain intensely focused on our transformational activities, whether they relate to clinical and nonclinical cost trends, information technology or process improvements.

During the quarter, we continued to expand the scope of our investments and activity, and Stephen will provide more detail of what we have done and our expectations.

Additionally, following the organizational changes I detailed last quarter, the leadership of each of our core service lines are moving forward aggressively with their operating plans.

As you know, our women and children's medical group consists of pediatrics and obstetrics, our hospital and office-based medical groups.

Within pediatrics, patient volumes benefited from an increase in births across the several hundred hospitals where we provide services.

During the quarter, deliveries increased by roughly 1.5% on a same-unit basis.

This positively impacted most of our hospital-based services, including neonatology, attended deliveries, newborn nursery services and hearing screens.

Payer mix was also moderately favorable for the quarter, continuing a trend that we have experienced since 2018.

We're also moving forward on our plans for strategic growth of pediatrics and obstetrics.

Our focus here is on capturing more of the total addressable market for these services, which we believe remains a significant opportunity for both organic and acquisitive growth.

To that end, during the quarter, we completed 3 practice acquisitions, including a neonatology group, a pediatric ENT group and a pediatric neurology group.

Earlier this week, we also announced the addition of a pediatric plastic surgery group here in Florida.

Each of these groups adds to our existing footprint of services in Indiana, Florida and Nevada, and I think the diversity of specialties that are interested in joining pediatrics and obstetrics is a strong indication of the unique position which we hold in our industry.

In radiology, same-unit revenues increased by mid-single digits during the quarter.

We believe this growth exceeds market growth in the 5 core areas where we have built our on-the-ground practices in Florida, Texas, Tennessee, New England and Nevada.

We also believe it reflects the strength of our hospital partnerships as well as the innovative value proposition our physicians bring to those partners and to our patients.

We believe there is significant room for strategic growth of our radiology group, and we are focused on the geographies where we have now established a strong presence.

We will continue to look for smart tuck-in acquisitions in these markets to complement our organic growth, and we anticipate that we will complete some acquisitions in radiology over the coming quarters that reflect that strategy.

Finally, in anesthesia, we saw the strongest volume growth of all of our service lines during this quarter.

And while payer mix was slightly unfavorable, this was in line with our longer-term expectations based on the demographic trends across the markets for our practices.

Within our anesthesia organization, we remain intensely focused on our initiatives for both individual groups and for the organization as a whole.

These have the common goal of aligning our revenue and cost trends against a difficult external environment of supply and pricing constraints, and they cover a broad spectrum, including hospital relationships, portfolio management, clinical resource utilization and compensation structure.

They also include the engagement of our consulting group, Surgical Directions, which plays an important role in our ongoing efforts.

Lastly, following the end of the third quarter, we achieved an important milestone in our transformation with the sale of MedData to Frazier Healthcare Partners, which closed yesterday.

We're excited for the MedData team, which, as of yesterday, is now owned by a deeply experienced healthcare partner committed to supporting MedData's growth.

This was important for us since in addition to cash proceeds, we also remain aligned with MedData as a key customer.

For MEDNAX, this milestone enables us to focus entirely on our core physician services business and provides us with additional capital on top of the strong cash flow that we have generated so far this year.

Thus far in 2019, including the proceeds from the MedData transaction, we have been able to generate almost $500 million in capital or roughly one entire turn of our annual adjusted EBITDA that we have dedicated to debt repayment, share repurchases, our transformational investments and acquisitions.

And following the close of the MedData transaction yesterday, we now have no borrowings on our revolving line of credit.

In all, we have taken meaningful steps this year to focus our business structure on our core physician services, to flatten our organizational structure and enhance the operational leadership of each of our core medical groups and to align our capital structure for long-term flexibility and sustainability.

So we are confident that we have the right plan in place to deliver value to our shareholders and all our stakeholders, patients, clinicians and employees as well.

With that, I'll turn the call over to Stephen.

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

As Roger mentioned, this quarter was in line with our expectation.

So I'm going to focus on a few items within our results, our updated views for the remainder of the year, our transformational and restructuring activities and our thoughts about how those will progress as we move into 2020.

Finally, I'll give some more details on balance sheet and our sources and uses of cash.

First, as part of our third quarter results, we recorded a $1.4 billion adjustment to goodwill as we discussed in our earnings release this morning.

This was a noncash accounting adjustment, and I'll highlight just a couple of points here that you'll also find in our 10-Q.

Number one, this charge relates almost completely to our anesthesia group, where our operational and financial performance has been challenged for some time and a topic of discussion on a number of earnings calls.

And two, this adjustment reflects the changes in our organizational structure that we detailed in August, where our 3 core medical groups are now their own individual units within our overall physician services segment and under the rules, are required to be tested separately.

To be clear, this charge was purely an ordinary course accounting treatment of goodwill and the entire amount of the charge was noncash.

Now in terms of our operating results for the quarter, we reported adjusted EBITDA of $133 million and adjusted EPS of $0.91, in line with our guidance ranges and right on top of Street expectations.

On a year-over-year basis, adjusted EBITDA was up about $3 million compared to Q3 of 2018.

For those of you maintaining models on the company, keep in mind that our EBITDA for the third quarter of last year was burdened by roughly $10 million in salary expense related to the physicians at our North Carolina anesthesiology practice that remained employed through 2018 after our contract expired.

Adjusting for this year-ago expense, our adjusted EBITDA did decline somewhat, about $7 million or 5% on a year-over-year basis, but we continued to narrow that gap during the quarter compared to the first and second quarters of this year.

As Roger mentioned, our top line performance exceeded our expectations, driven by stronger end market demand.

In total, our same-unit revenue growth of 4.2% was above our guided range of 1% to 3% with most of the upside driven by patient volumes in anesthesia, neonatology and other pediatric services and radiology.

[First to] the hospitals where we manage the NICUs increased by just over 1.5% in the quarter, with the remainder of our reported growth in NICU days relating to a modest year-over-year increase in average length of stay.

We did benefit from an additional weekday during the third quarter which impacted our overall same-unit revenue growth favorably by about 60 basis points.

But even net of that, the results were ahead of our expectations.

On the cost side, our labor expenses were largely in line with our expectations for the quarter, both at the practice level and within G&A.

Based solely on those cost trends, we would have anticipated a better pull-through of EBITDA based on the revenue strength we saw in the quarter.

As we noted in our release this morning, we did see higher-than-expected costs related to med mal, legal and other insurance during the quarter.

I'm not going to go into specific details on these costs, but I do want to give a couple of comments here.

Overall, we've seen a generally tougher legal environment throughout this year, in terms of litigation activity, med mal settlement amounts and hardening insurance markets, and I'll add that a lot of this isn't unique to us.

That said, these cost items offset some of the favorable top line trends we saw in Q3 to the tune of roughly $5 million or $6 million more in the quarter than we had included in our guide.

And we expect that they will persist at these higher levels in Q4 and likely carry into the next year.

From a P&L perspective, we record our expenses for these items in 2 areas, both in practice salaries and benefits and in G&A.

So both of those line items are affected by changes in the cost trend.

Moving on to our transformational and restructuring expenses.

These totaled roughly $20 million in the third quarter and were predominantly related to our consulting spend and severance-related costs.

As you'll also see in our guidance for the fourth quarter, we expect our investment pace to continue.

With that in mind, I'd like to give you a fuller sense of how we're scoping these investments.

As I've discussed for some time in the past few quarters, we've quickly ramped up our transformational activity in partnership with best-in-class third-party resources to identify and pursue operational improvements, tech-enabled process change and efficiencies across the organization.

I would broadly classify the work stream as we've stood up in 4 major categories: practice operations, revenue cycle management, information technology and human resources.

Within each of these buckets, we have multiple work streams, most of which involve some degree to a high degree of IT enablement.

We also have a large number of interdependencies, such that a lot of our work today is on those enabling IT investments, which will set the stage for process improvements, greater effectiveness of our infrastructure and ultimately, cost takeouts.

This activity is all within the scope of the transformational initiatives we've discussed in the past.

And we continue to expect that our time line will run through 2020 and taper off over the course of 2021.

I'll add that from a timing standpoint, we're still in the early innings of this activity with much of our efforts over the past quarter focused on supporting our existing activities to ensure that we minimize implementation risk.

On top of this work, we're now standing up incremental investments focused on core integration activities.

I'll define these as consolidating multiple systems for greater consistency, efficiency and data management.

This core integration activity includes replacing the multiple IT systems we utilize today with wall-to-wall implementation of Oracle in the cloud, moving to consolidate and standardize RCM platforms and systems and enhancing our IT support for our HR systems and talent management.

Based on this activity, our outlook for third-party related transformational investments for the fourth quarter of this year is roughly $25 million and is an appropriate way to think of our run rate investments for the next few quarters as we move into 2020.

As core new systems get implemented, there should be a tapering off of that spend.

The last comment I'll make on our transformational investments is that we are intensely focused on time to value.

For many companies, you would normally contemplate a meaningfully longer time line for this level of activity.

But for MEDNAX, we plan to compress that time line significantly.

And as a result, we expect to be intensely focused on our transformational activity over the coming 12 to 18 months.

With that said, I think it's useful to discuss our cash flow, which was very strong both in Q3 and for the year-to-date.

On a reported basis, operating cash flow from continuing operations in the third quarter was $156 million compared to $135 million in the third quarter of 2018.

Taking into account the cash component of our transformational and restructuring expenses in the quarter, a better way to look at our true operating cash flow for the quarter is more in the range of roughly $170 million.

In terms of our primary uses of that cash, during the quarter we repaid $142 million in borrowings under our revolver and spent an additional $24 million for the acquisitions that Roger mentioned plus contingent payments on prior acquisitions.

Finally, our CapEx in Q3 for continuing operations was only about $8 million, which you should think of as an appropriate quarterly run rate going forward.

This puts our prospective CapEx at something like $30 million a year, down from about $50 million per year now that we've completed the sale of MedData.

I'll also reiterate some of Roger's comments on our sources and uses of cash this year.

Including the cash proceeds of the MedData sale, we have now generated nearly $0.5 billion in capital thus far in 2019 for almost an entire turn of adjusted EBITDA.

With that capital, we funded our transformational investments, acquisitions, share repurchases and capital expenditures, while at the same time repaying all of the borrowings on our line of credit.

And as of last night, we additionally had nearly $100 million of free cash sitting on our balance sheet.

On a pro forma basis for the MedData sale, our total debt consists solely of our 2 note issuances, and our leverage is roughly 3.4x.

Turning to our guidance for the fourth quarter and this year.

We provided in our press release this morning that we expect Q4 adjusted EBITDA of $125 million to $135 million.

This outlook is consistent with our expectation which I discussed last quarter, that adjusted EBITDA in the second half of the year should be fairly ratable between the third and fourth quarters.

Based on our results for the first 3 quarters of 2019 and this outlook, we expect full year adjusted EBITDA to be in the range of $500 million.

And in terms of margins, we expect our adjusted EBITDA margin for the whole of the year to be in the range of roughly 14% to 14.5%.

I'd like to conclude with a couple of thoughts about the overall complexion of our EBITDA and our margin trends.

First, based on our roughly $0.5 billion a year outlook for adjusted EBITDA, I want to give a sense of how it spreads across our 3 core medical groups.

Our pediatrics and obstetrics groups generate a little more than half our revenue but a somewhat higher percent of our EBITDA.

Our anesthesia group generates roughly 1/3 of our revenue but roughly 20% of our EBITDA.

And while radiology represents only about 15% of our revenue, its EBITDA is catching up quickly with anesthesia.

Second, related to margins, from a modeling perspective, our expected adjusted EBITDA margin for this year reflects something in the range of a 1 to 1.5 percentage point headwind compared to 28 -- since 2018.

We get a lot of questions about how to think of our margin trends beyond 2019.

So I'll make a couple of broader comments about our transformational activities and some high-level expectations for how these activities should impact results over the 2020 and 2021 period.

First, common focus of all our efforts is addressing this margin gap over the course of our transformation.

And today, we are fully resourced to move forward across the whole scope of our initiatives.

Second, as I noted earlier, we anticipate that 2020 will be a year of significant transformation focus for us, as I detailed before.

As a result, we do anticipate narrowing the quantum of margin pressure we face as we progress through the coming 18 months.

But I also want to emphasize that while the yields we expect to generate from our transformational investments will likely build over time through 2020 and 2021, the timing and magnitude of that progress depends on a multitude of factors and remains difficult to forecast.

As we move through the coming quarters, we will continue to refine our views, while at the same time being as transparent as possible about what activity we're undertaking and how it's impacting our core business trends.

And with that, let me turn it back to Roger.

Thank you, Stephen.

Thank you, operator, let's open up the call for questions please.

(Operator Instructions) And first we go to the line of A.J. Rice with Crédit Suisse.

I wondered, first of all, if -- I appreciate those comments about the segment margins between the different physician groups.

If you look at the other end of all the transformational work you're doing, do you have in mind, you're at a certain level of margin today, what the opportunity might look like looking 2 years out?

And does that concentrate itself?

I'm assuming that's mainly in anesthesia, but I wondered if that's right.

Can you tell us how that might break out across those segments?

A.J., thank you for the simple and straightforward and easy-to-answer question.

Why don't I say this.

I think it is hard at this point to give you sort of endpoint goals by business lines, but I think it is fair to say that we see opportunities in all of our businesses.

And I think the more that we peel this onion back, the more opportunities we find.

So this is an evolving story, but I think the directional nature of the evolution is a positive one.

I think I would also say we see meaningful opportunities in G&A.

I mean all -- if you think of it, it is sort of a virtuous cycle where we're working on all the businesses at the same time.

We're working on our G&A at the same time.

We are meaningfully, meaningfully upgrading our internal systems and capabilities at the same time.

And the more we upgrade our systems, the more opportunity we find everywhere else.

So I think our hope is to make continued progress for some time, really across all fronts.

Okay.

And maybe just one follow-up.

On your -- you're doing an increase in these pediatric group acquisitions.

I guess I'd be interested to know what is the competitive landscape for those deals.

I would think that might be less competitive given your strength in neonatology historically anyway.

And then second, any comment about what the pricing of those transactions and valuations on those transactions tend to be?

A.J., it's Roger.

Yes, we find that we are having a lot of reception from these groups.

They are interested in joining us, and it's more in building up this whole women and children's specialty group that we're trying to build up.

So we're having a lot of success not running into a lot of other groups.

But occasionally, we'll find somebody else out there.

Our multiples for this, which is another huge advantage for us, remain in the 4 to 5x range.

So that's another reason why we're very focused on this.

So it's been the historical multiples that we have paid for the majority of these groups and they remain within that 4% to 5% range.

Our next question is from Ralph Giacobbe with Citi.

I just wanted to try to clarify the 2020 commentary.

I believe you said you would narrow the margin pressure.

And I think you had mentioned sort of the way you're looking at '19 is about a 100 to 150 basis point headwind, so some narrowing of that.

So you still expect margins to be down.

And I just want to be clear, off the baseline of roughly 14.2% that's implied for the full year this year, is that the way we should be thinking about it?

Ralph, it's Stephen.

Yes.

I mean I think that's substantially correct.

We obviously get a lot of questions around this.

And so we wanted to be as explicit and transparent and helpful as we could be, understanding that we really haven't guided yet on 2020.

So we just wanted to give a directional view.

The -- look, we've made progress with sort of the negative drag on our margins, but we have a long way to go, and we've been talking about that for a bit.

And we just want people to be realistically calibrated.

This is -- there's a lot of work to be done and we're right in the middle of doing it.

Okay.

And then, I guess I do want to ask on sort of the consulting and transformational cost, because it sounds like that's obviously going up in the fourth quarter.

And I think you said it's going to run rate at kind of the $25 million next year each quarter.

So correct me if I'm wrong there, but I think you've spent somewhere around $50 million this year.

It sounds like you're going to spend another $100 million or so next year on these transformational costs.

I know you strip them out of EBITDA.

But I mean that's 10% to 20% of your EBITDA base.

That obviously drags on cash flow and the margins are really getting sort of squeezed again next year.

So I guess I'm just struggling a little bit with sort of the time line for improvement and how all of these sort of costs are going to drive and how much it's going to drive incremental EBITDA improvement as we think even about '21 and beyond.

Sure.

Sure, Ralph.

I think the -- maybe the easier way to think about it is to frac it out a little bit into a couple of different buckets.

Part of what's happening now is, look, we are doing a wall-to-wall Oracle in the cloud implementation, which, as you all know when you've seen it at other companies, it just costs a bunch of money.

And we're also doing revenue cycle and we have a very large revenue cycle operation.

It involves well over 1,000 people, and there are numerous, numerous systems that we have for the different businesses and for different pieces of that process.

We are working to consolidate those as well and frankly, do it simultaneous with the Oracle implementation, which is, it is a -- I think a fair way to say it is, it is a very substantial effort.

And so trying to do both of those simultaneously, it carries a lot of costs.

Those are very different than some of the other transformational activities that we're doing, which are much more normal consulting-type activities.

So I consider it -- even though we're going to the cloud, I kind of still would call it, maybe I'm just getting old, but I call it heavy iron transformation.

So we really have -- I would cleave our spend into 2 different buckets.

I think it's a little premature for us to specifically break it apart that way.

But there is a big chunk, particularly going into its start.

The Oracle stuff started a couple of months ago, and it's really ramping up into Q4 and into next year.

It has a natural curve to it where you get pretty heavy and then you get close to done over the course of kind of 4 or 5 quarters.

So I think that is a meaningful part of the explanation of the scaling up of those dollars.

I think there are other things that we're doing that are frankly getting done where I truly believe -- I mean look, I've been through a number of these.

And we probably have -- we have dozens of work streams that are tilted up.

And I believe every work stream has a beginning, a middle and an end.

And that's our goal, is to drive each one of these work streams through that process.

So we're still seeing new ones start.

We're seeing ones we started a few quarters ago come to an end.

And there is, I think, kind of a constant hum in the background now of the larger systems transformations that simply just need to play out.

Our next question is from Chad Vanacore with Stifel.

So let's talk about organic growth, a little bit better this quarter.

You saw birth rates up, which is unusual.

Do you have any visibility into that being a continuing trend or not?

Chad, it's Charlie.

It was a good number this quarter.

Leaving aside admit rate or length of stay, the underlying births were, as Roger mentioned, up about 1.5 points.

I think it's useful to look back on that a little more statistically because if you revert back to Q3 of '18, it was a relatively weak quarter.

So if you look at it more on a 2-year stack, there is a modest improvement in trend, but we're still looking at a multi-year trend line that's closer to static.

And that's kind of how we're taking a look at it, instead of taking quarter-to-quarter and trying to change our outlook as each quarter goes by.

Okay.

Any idea why, when you had last quarter put out your outlook, you had assumed like 1% to 3% same-store revenue growth.

You're ahead of that...

Chad, we're losing you.

(technical difficulty)

We'll go to Pito Chickering with Deutsche Bank.

Could we dig a little more on the -- those 5, 6 [numbers that are in the] costs in the quarter that added about 60 basis points of margin pressure over the next 12 months?

So a few questions.

What's the split between medical malpractice insurance and legal?

Why did it step up this quarter?

It sounds it wasn't incorporated in your guidance from last quarter.

And kind of why do you have comfort that this is a onetime issue and will not sort of keep on increasing?

Sure.

It's Stephen.

Yes.

I'm happy to give you a little more color on that.

I think the real message this quarter, there has been some pressure in that area over the course of the year, but it did become more acute this quarter.

I mean we do focus a lot of our actuarial efforts in Q3.

We kind of do it throughout the year, but we do redo it every quarter.

And I think without getting -- this is not an area that really any company talks too much about because it does involve pending litigation and other things like that.

But I would say that a significant portion of the delta did relate to med mal accruals.

There is a -- and part of it related to some specific case development for us.

Nothing that I would specifically call out, but some of it also related to general market.

So think about it this way.

If anyone in provider land has an adverse jury verdict that is outside -- that is a couple of standard deviations beyond what you might normally expect, pretty much every actuary around the country will then bump up what they want companies' accruals to be on every case, regardless of whether there was anything specific related to that company's own accruals.

So I think we've kind of had both of that -- both of those items with -- and particularly in Q3.

And once you raise your approval level to a certain level, you tend to kind of keep it there for a while until you see what happens.

So the activity in Q3 will drive -- we will have fairly consistent accruals in Q4 absent some other activity, and we'll likely carry them forward until they annualize into our baseline.

So that just tends to be how functionally it works.

In terms of the insurance market and all that, I mean we have seen a hardening in various subsectors of the insurance market, and I think others have as well.

Interest rates doesn't do -- low interest rates don't do anything to help the insurance companies, and it tends to manifest itself in increased premiums and tougher terms.

So I think it is a mix of all of that, but with the balance leaning more towards med mal.

Okay.

Fair enough.

And then as a follow-up, same-store pricing was pretty good this quarter.

Can I ask what percent of your managed care contracts are locked in at this point?

And can we assume that 2019 managed care pricing trends continue in 2020?

Or will there be any changes to it?

I think we don't really discuss our managed care contract book quite that way, the same as the hospital companies tend to do.

So a lot of things that we have are evergreen.

We have other ones that we do go through renewal cycles, but there's really nothing that I would call out any differently than what we've historically discussed.

And we'll go back to Chad Vanacore.

Are you reconnected?

Yes, can you hear me?

Sorry about that guys, power loss knocked out the phones.

We were talking about organic growth expectations.

You're a little bit above the range.

Any way that we could kind of characterize it going forward?

Next quarter, you're still expecting in that 1% to 3% range.

Is that a good way to think about 2020 as well?

Chad, I think it -- I don't mean to dodge in any way, but I think it's a little premature for us to talk about 2020.

I think our -- look, we were very happy to see the volume in Q3.

We would love to see the volume in Q4.

We tend to look at this stuff kind of on an 8-quarter kind of rolling average and every now and then, we do get a quarter that pops, and we're always happy to see it.

But I do think it's too early to say that the worm has turned and we're in a different place.

We would rather maintain a conservative outlook.

Okay.

How about thinking about the write-downs in the quarter.

You wrote off a bunch of anesthesia this quarter.

Was anything related to MedData?

Or will you expect that in the fourth quarter?

There will be something modest in Q4 because you always have to book the transaction to wherever you were carrying it.

We were -- in June, we marked the asset to $300 million and we ended up selling it.

There's a whole bunch of pieces that go into the sale, and we actually are just in the middle of undergoing the valuation work for some of those pieces.

So I can't tell you right now where it comes out.

I expect we will take a modest mark to whatever the transaction was.

I will take this opportunity though, just to make it clear because we've had some questions this morning around this, and I wanted to hold off the answer until we had a public forum.

There are other elements of the transaction that are beneficial to the company.

For example, we expect a cash tax benefit over the next couple of tax payments of something roughly around $30 million.

So we did receive last night, yesterday afternoon, we did get our $250 million.

We got our $0.25 billion yesterday.

We do expect another roughly $30 million over the next couple of tax periods.

There were some transaction costs that go the other way.

We do have $50 million of contingent interest where we may have additional proceeds down the road based upon the performance of the asset.

And I really do think -- and I want to emphasize this for everyone that follows the company.

Look, this was a handcrafted deal and it took a while and it's for a very specific reason.

We need and want MedData to be well owned and we wanted to find a partner and a team that was -- that has a high likelihood of being very successful at running and growing that business.

Why?

Because we're their largest customer.

And while we don't represent that big of a piece of the pie for them, we rely upon them to deliver results for us, and we want them to continue to deliver and to continue to improve.

So we are, at the end of the day, very pleased with the outcome and have a lot of confidence in the Frazier team's ability to drive this thing to another level of success.

Steve, you mentioned that the cash tax benefit is $30 million over the next couple of periods.

How come in the fourth quarter you're assuming a 26.5% tax rate, which seems high?

Yes, well look, our tax rate tends to move around a little bit.

There's always something of a Q4 true-up that's kind of in the year at whatever we booked.

And remember, also, that's booked tax, it's not cash tax.

So our cash tax often diverges quite meaningfully from whatever our booked tax provision might be.

Our next question is from Jason Plagman with Jefferies.

Just wanted to go back to the Q4 outlook for a second, on the same-store outlook.

Is that pretty equally weighted between volume and price?

Or is it all -- is it heavily -- more heavily thought of on the volume side given the performance you saw in Q3?

Jason, it's Charlie.

I would say, normally, when we have a range like that of 1% to 3%, we typically try not to be too precise within that.

So for your purposes, I would think about some equal weighting between volume and price within a range like that.

Okay, fair enough.

And then I wanted to ask about the practice level transformation activities.

Should we assume that some of those start to pay benefits a little bit sooner than the Oracle transition and can contribute some in 2020?

Or are those more heavily loaded to after 2020 as well as the practice level initiative?

Sure.

Sure.

It's Stephen.

The answer is all of the above.

We have some practices where we have very significantly moved the needle already over the past couple of quarters by bringing in third-party resources and really having a lot of different formats for engagement.

And in some cases, we're taking resources that we deploy to a practice, to improve that practice over a couple of quarters and get it reset, and then they move on to a different practice.

So I think we really expect a sort of continuous stream at the practice level to drive these improvements.

And frankly every one that we do, we're learning more about how to better do it the next time.

So I think we have a lot of activity, and we're feeling a high degree of confidence with our ability to continue to drive those transformations.

Okay.

And a last one for me.

Just given the cash you now have on the balance sheet with the proceeds from MedData and your typical strong Q4 cash flow, any thoughts on capital deployment for 2020, mix between M&A and buybacks and so on?

I think that we will continue to do all of those things.

We have done that this year, obviously, with our opportunities in women and children's to put the money to work and generate more cash flow and earnings, et cetera.

That's a serious consideration.

We have redone as well our growth team, we have a new head of growth, which is both looking at organic growth and acquisitions, and a new head of sales, a new marketing team.

And so we're expecting that 2020 will be a good growth year for us.

So I think we'll do a combination as we have done in the past.

Next we'll go to Kevin Fischbeck with Bank of America Merrill Lynch.

Great.

Just in the past, you've talked about, I think, 3% being the kind of revenue number that you expect to need to be able to do to kind of keep margins stable and better than that, can lead to improved margins.

Is that still the right number, in your view, I guess, long term?

It sounds like maybe the next few quarters until you anniversary the med mal issue, it might not be the right number.

But long term, is 3% still the right number?

Or do you -- feeling differently about that?

Kevin, it's Stephen.

Yes, we've -- I mean this is, I think, the fourth quarter that I've reported, and I've -- and this has come up on a couple of previous quarters.

That is a legacy number that predates my being here.

And so we -- that's not something that we've really talked about or relied upon for some time.

I do think that it ends up being more complicated than that.

There are a bunch of pieces that feed into it as we've sort of indicated throughout our commentary.

Charlie, I'm not sure if you have anything you'd want to add?

Yes.

I would say, and Kevin, to Stephen's point, a lot of what we've talked about, particularly through the course of this year, is a somewhat more significant comp -- cost trend just based on all of our clinical services, our specialties and geographies.

And I think that's pretty apparent in our results through the course of this year.

And that's what we're working against.

We're working around the edges of reducing premium pay, we're looking at enhanced clinical resource utilization, all of which is geared toward moving that needle and reducing the hurdle above which we need to get to generate margin.

The only other thing I would add is that within each of our specialties, as I think you're aware, this different makeup of operating leverage and where volumes come through in one service line or specialty, might have a more powerful pull-through than another that has more variable costs.

So it does get a little bit more complicated to pick a single number above or below which our margin moves.

So we're just trying to be a little bit more holistic about how we're thinking about margin trend.

Okay.

I guess maybe just to follow up then on that, because it was helpful to get the segment profit with directional commentary.

It sounds like based upon some of your earlier comments during the call that you feel a lot better about market share growth and deals, I guess, in your higher-margin NICU and radiology businesses.

Is that fair to say that you would expect those to continue to grow as a percentage of the overall company?

And I guess maybe that could be another mitigating dynamic towards margin?

Yes.

I would say in general, I mean, one purpose of giving that kind of color also can help you -- I hope, give some thought around business mix.

As we continue to invest in and enjoy the growth of our radiology group, that's becoming a bigger and bigger part of our overall EBITDA makeup, and that business mix, hopefully, continues to be important going forward.

But on the overall growth side, I'll reiterate something that Roger brought up.

We're looking at somewhat more tailored growth strategies across our different service lines.

And within women and children's, it is a broad nationwide look at the total addressable market.

And that's not just neonatology, it's the dozen or more other subspecialties that we have a presence in, in many cases as an effective operating partner alongside the systems that we work with.

And that meaningfully expands the top of the funnel versus just looking at neonatology.

Maybe I'll just ask one last one.

On anesthesia, you've seen some bigger contract losses the last couple of years, the most recent one in Minnesota.

It doesn't sound like it's a big deal earnings wise.

Just maybe give an update on what you're seeing there.

Any trends on contract renewals and retention rates?

Yes.

I don't know that I would consider that a loss.

I think as we've said in the past, we had reached an understanding that we were not really fulfilling the original plan for that practice and we have an active portfolio.

We manage our portfolio depending upon what we think is in the best interest of our practices.

We don't -- I don't -- to answer your question, I don't know that there's anything else going on of any significance in any other practice.

We, again, are managing our portfolio.

And if it -- we always try to save the practices and talk with the hospitals and do whatever we can to make the practices perform.

In some instances, it's just not possible to do that, and so we agree to just part ways.

But I would, again, just frame it all under the portfolio management banner.

Our next question is from Gary Taylor with JPMorgan.

Just a couple of questions.

One, I know we asked this question periodically over the last few years.

But I guess I just wanted to think about it again.

When you look at clinical costs, still growing faster than revenue growth even though you do have positive revenue growth.

If we just look at this quarter, what is the single largest factor?

Is it still legacy compensation escalators and contracts?

Is it CRNA shortage and much higher cost filling those positions?

Like how would you characterize what's still driving that differential?

Sure.

Gary, it's Stephen.

I think at the risk of saying the same thing twice, it's sort of all of the above.

We do have increasingly good insight into what the drivers are across each of the businesses and each of the different sort of clinician categories and the other drivers of costs.

We tend to not publicly frac those out too much.

And I guess I would say, when we look at this past quarter and really over the course of the year, there are a number of different buckets and it's geographically driven.

It is clinician category-driven and then there's other more general stuff just about the labor market and the sort of back office type activities that we have and the employment base.

So looking at it, I would tell you, in some ways it is comforting to see that there is not just one big single driver that is somehow incredibly difficult to overcome.

We have a number of different areas, each of which we have a different plan to address and are working on evolving.

And so we do hope to make meaningful progress over time.

Okay.

I want to go back to transformational expenses again.

I know Ralph was asking about this a little bit, but I just want to make sure I understand sort of the magnitude of this.

I thought when you had originally announced this, it was $75 million to $100 million over '19 and '20.

It looks like we're going to hit $76 million this year.

And it sounds like 2020 is going to be at least that high if not higher, given the guidance, the sort of run rate at $25 million for a little bit.

So I guess the 2 questions are, are we -- if we really are doubling that bucket, is it because you found more stuff to transform?

Or it's because the cost to do the transformation is more than expected?

And then finally, would you anticipate still having those expenses to any material degree in 2021?

Yes.

Sure, Gary.

Well, look, for this year -- the $75 million to $100 million, I think we've learned that it's an evolving process and we continue to find more opportunities.

So we're going to spend more than $75 million to $100 million, but we have not reframed what that looks like.

I think we'll have a better view -- now that we have made the decision to do the Oracle wall-to-wall, and now that we've made -- we're - we are -- we have made the decision to do a number of things in our core revenue cycle systems, but those system selections are still in the process of being finalized, so we can't fully cost them yet.

Those are meaningful adds, and they were not something we were contemplating 2, 3 quarters ago.

I think we -- to clarify, when we said $75 million to $100 million, we were very cautious to be specific that, that was around consulting spend.

And I'm not trying to be cute here.

It's just -- it was consulting spend and very purposely excluded things like severance expense.

Or if we have a contract that doesn't make sense where we have an opportunity to save money by doing it some other way, we're going to blow up the contract.

And if the contract has a cancellation fee, we're going to negotiate something and we're going to do it.

And those are the things that we figure out along the way and were not part of that original $75 million to $100 million.

Again, I'm not defending the $75 million to $100 million.

It's just what our view was at the time, and we're working hard to be completely transparent as our thinking evolves and as our process unfolds.

When I think -- I do think of 2020 kind of as the bulge year, right?

2019, we're sort of ramping into this.

The actual consulting type expense, including these sort of heavy iron projects is -- you add it up and it's roughly [$50] million for 2018.

It is going to be -- but we didn't really have much in the first quarter, a little more in Q2 and then it kind of ramps into where we are.

I think Q -- I think 2020 is going to be the heaviest year and I think you're going to see a meaningful tapering off over the course of 2021.

But we have a laundry list, Gary, of stuff that we're doing, data center consolidations, I mean I've got a list -- I've got a long list of things that will add value to this enterprise going forward that need to be done.

And we're not going to renovate half the house and put the second half until later.

We're going to renovate the whole house, and we're going to do it while we're living in it.

And so we're -- that's essentially where we stand.

Fair enough.

One more if I could, just on MedData.

Is there any negative operating leverage from that sale?

In other words, you've had to enter into an agreement with them for continuing revenue cycle services.

Is the cost of that contract sort of roughly equivalent to the, I guess, the employee cost or the net EBITDA that you've already guided coming out for that transaction?

Or is there any potential that, that's still something that we have to contemplate incrementally for 2020?

Sure, Gary, yes.

There's actually nothing to be concerned about with that.

We had -- we had essentially 0 change.

And we had 0 change in our pricing with MedData by virtue of the transaction, they were still, I would say, 99.44% free and clear from MEDNAX in the way that they operated it anyway.

I think we essentially did some tax work for them, and I think our -- and their payroll and insurance and a couple of very minor things.

But they were an almost completely freestanding enterprise.

We already had service agreements with them and SLAs and pricing and all of that.

We sort of beefed it all up in the context of the sale, as always happens, but we did not change our pricing.

So that is already baked into everything we've sort of discussed over the course of time.

Next, we'll go to Ryan Daniels with William Blair.

This is Nick Spiekhout in for Ryan.

Real quick, I saw it in last call.

You had kind of mentioned that you were shying a little bit away from acquisition growth, but it seems like you're kind of ramping back up with that, given the cash on the MedData.

I wonder if you could just discuss that a little bit.

Well, yes, I think what we meant was on the radiology practices, we saw that multiples were getting expensive and we would shy away from that.

We have not done any anesthesia practices in, whatever it's been, 18, 24 months.

So -- but I don't think we've talked about women and children's in that same line.

And so we intend to continue to expand our women and children's services, and we do think we have some small deals in radiology that we will be able to complete over the -- in the forthcoming, whatever, few quarters.

So I think we still feel that way.

I guess I would add just one comment to that.

We have said in the past that if there is a larger transaction, and I'm not sending any signal here, but I just want to be consistent with what we said the last few quarters, if there is a larger deal that makes strategic and financial sense for the company, we will contemplate it.

So no one should be surprised if there is one, but I'm not trying to send a signal by saying that.

For the most part, as Roger said, we're focused on end market, adjacent market tuck-ins that enhance our strategic strength and our financial upside in the communities we serve.

Got you.

That's helpful.

And then just got a real quick modeling question.

With the revolver being paid down, I was just wondering where you expect to end the year as far as interest expense goes.

That should be a component of the guidance reconciliation for Q4.

So you'll be able to find that on our website, so [I'd refer you] to that.

We have a question from Whit Mayo with UBS.

Just a couple of quick ones here.

Subsidies and/or your contract admin fees in the Q look like they're up $10 million or 12% year-over-year in the quarter, which I guess at least on a growth rate, higher than we've seen in the last few quarters.

Just maybe refresh us the conversations you're having with your hospital partners.

And is that something that we should expect to become a larger source of revenue?

Or is there anything unusual there?

Whit, so that's part of our anesthesia renegotiation process.

It's when we go -- we talked about this in the past where a group is just not performing financially for us.

And one of the tools that we have at our disposal is to go to the hospital and say, "Hey, we need help".

And so that's part of the ongoing process of restructuring of our anesthesia business.

And Stephen, do you want to add something to that?

Sure.

There also is a growth element of that.

We have very close partnerships with a lot -- a very long list of health systems, right?

We have 400-odd NICUs that we run across the country.

And quite often and really increasingly so, our women's and children's franchise is -- I mean there's nothing like it anywhere, and we have access to subspecialized and sub-subspecialized physicians that a lot of others do not.

And so we often will have -- just on an ordinary basis, a health system that we do business with, will come to us and say, "Hey, we really need half of a pediatric cardiologist", or "We really need some -- name your favorite subspecialty".

I mean look at the -- we just did a little deal a couple of days ago that Roger mentioned for pediatric plastics in South Florida, where they really are a very highly specialized service.

And so we -- and oftentimes, those -- the format for those arrangements with the hospitals include a contract-based payment.

So I think there's a lot of factors that drive that number.

I think you kind of got the gist of it between Roger and myself.

Got it.

Maybe just -- I'll stick with maybe one last question since we're at the top of the hour.

I think last year, you sized your kind of 2 programs.

You had a G&A cost reduction program.

I think that was around like $40 million over a couple of years, an operational improvement program around maybe $80 million, so combined $120 million of savings between maybe 2018 to 2020.

Can you just maybe refresh us what you've realized from that program?

Maybe any update on those 2 programs and what the expectation is going forward?

And I think these are fairly distinct from your transformational initiatives as well.

Sure.

Sure, Whit.

I'm happy to answer that.

You are right.

Those programs were very specific and they were distinct, and those programs are largely complete and have been successful.

We delivered the number last year and we are in the process.

We are in the final stages of delivering that number this year.

So that $120 million is effectively baked into the pie.

The transformational stuff is separate.

And -- but in terms of those announced programs, they're essentially done.

The only thing I would add, Whit -- it's Charlie -- on that because I want to be kind of clear that this was not some kind of finite program and on 1/1/2020, nothing happens.

The entire management system that was set up around identifying those action items, tracking and executing them and validating them was incredibly valuable to us and it's ongoing.

So this is really from the practice level of very specific action plans for this group or that group and that will roll into 2020 and beyond.

It's effectively baked into the managerial process across each of our service lines.

So I just want to be clear that it was a clearly defined goal and we will meet that, but it will persist as we go forward.

Okay.

Can I maybe slide one last one in, sorry.

Just anesthesia, the compensation strategy.

Just any update, progress you're making to realign the groups with your new pay model?

Just any color to give us a sense on the receptivity, whether or not it's growing or not in the market and just any confidence on that initiative.

Sure.

Sure, Whit.

Look, I guess the general comment that I would make is, you've seen one anesthesia practice, you've seen one anesthesia practice.

And I think we're continuing to have a bunch of dialogue.

And they are -- again, they're all kind of evolving in their own way.

They've spawned the group itself on the nature of their hospital relationships.

I don't mean to give you a diffused answer.

But I think we continue to evolve with each practice as we work through this.

We are sort of a little hesitant to set specific targets about where we're going to get to, how many, by what time because we want to end up with a format and structure that makes the most sense for both parties and sometimes it happens quicker, sometimes it happens slower.

So I think that's -- but we are definitely leaning into that across the enterprise.

And with no further questions, I'll turn it back to the company for any closing comments.

Okay.

Thank you, operator.

If there are no further questions, then we will go ahead and terminate the call.

Thanks very much, and we'll look forward to speaking with you next quarter.

Thank you.

And ladies and gentlemen, that does conclude your conference.

Thank you for your participation.

You may now disconnect.