Pediatrix Medical Group Inc (MD) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the MEDNAX Third Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, today's call is being recorded.

I'll turn the conference now to Mr. Charles Lynch, Vice President, Strategy and Investor Relations. Please go ahead, sir.

Thanks, good morning, everyone. I'll quickly read our forward-looking statements, and then I'll turn the call over to Mark.

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, its quarterly reports on Form 10-Q and its current reports on Form 8-K, 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 in the Investors section of our website located at mednax.com.

With that, I'll turn the call over to our CEO, Mark Ordan.

Thanks, Charlie, and good morning, everyone. I want to start my remarks by telling you what an honor it is to work with my colleagues at MEDNAX. There is a real passion throughout the organization, including my fellow members of our support team in our offices, for providing the best care for our patients, for leading in research and clinical support, for being careful financial stewards and for being the best possible partner to hospitals, practices, physicians and all clinicians.

I've already met the leaders of hospitals who attest to our commitment to quality care, and we hope to expand our relationships. And I've had the privilege of meeting many of our doctors and nurse practitioners, visiting our NICUs and receiving a resounding welcome and show of support for our continuing commitment to reinforce our mission to take great care of the patient.

Joining me on today's call are Mark Richards, our new CFO; and Dr. Mack Hinson, who leads our pediatrix and obstetrix operations, which of course, will meet all of our operations after the sale of our radiology medical group closes. Mack and I work hand-in-hand to lead the day-to-day operations of the company, along with a dedicated and now smaller senior team. Mark, as you may know, has worked with me for over 10 years and is an operations and capital allocation focused CFO. Mark and I will detail the results of the third quarter. Mark will detail the results of the third quarter and then I, along with Dr. Hinson, will provide a more granular understanding of how we are operating.

Before I turn the call to Mark, let me make a comment about the radiology sales. I thought before I joined MEDNAX that the company should focus on its core and decide accordingly. In my first days and weeks, that opinion was reinforced, and our Board members shared that conviction. So we restarted the sales process, make certain it was competitive and concluded it in just over 1 month. We were and are very pleased with the agreed-upon price. And when the sale closes, we will be able to make our strong balance sheet much stronger, allowing us to operate our core practice areas more efficiently and to grow more certainly.

I have no update today on closing timing since we are in the customary regulatory approval process. When we do close the transaction, we expect to pay down debt and fund accretive growth more easily. We assure that we are very shareholder-friendly. And if tools by buybacks or distributions ever seem wise in the future, we'll work with our Board to do what's best.

Mark will now speak about the third quarter.

Thanks, Mark. I certainly appreciate the warm welcome. I'd like to thank Mark, our Board and the MEDNAX team for an exciting opportunity to work here. My focus over the past 2 months and going forward is on operations with the goal of driving core profitability. I'm overseeing accounting, finance, tax, technology and RCM, and we'll continue to refine our organizational structure for optimal efficiency while also ensuring that adequate relief sources are available to execute on our business plan and growth initiatives.

Before going into our third quarter results, I know that modeling our company has been challenging given the divestiture early this year of American Anesthesiology and the announced sale of MEDNAX radiology solutions. So concurrent with this morning's press release, we provided on our website full quarterly financials for 2019 and year-to-date 2020 for our continuing operations, and I'll make references to those financials were both sequential and year-over-year trends.

Turning to the quarter. I'll give some details on our P&L drivers to add some context to the information provided in our release. As we announced, our same-unit volumes declined 4.3%, which marks a partial recovery from a roughly 9% year-over-year decline in the second quarter of this year. This recovery was greater in our office-based practice areas based on the more severe impact those services experienced during the second quarter.

And on our preliminary basis, our overall volume trend in October appears to be similar to what we saw in the third quarter, with patient volumes across the organization down by mid-single digits on average compared to last year.

Within our hospital-based practices, which include neonatology and related services, pediatric ICU, head hospitalists and PED's ER, our NICU days were down 3.9%, while volumes and other related services were down somewhat more. Births at the hospitals where we're in the NICU were down 3.2%, and rate of admission was down slightly year-over-year.

I'll note that the third quarter of last year was a fairly strong comp period with births up 1.7% and NICU days up 3.4%. So it's important to keep that comparison in mind.

Looking at a 2-year stacked basis, for example, births declined by just under 1%, which is in line with our experience over the past several years. In our office-based practices, which primarily include maternal fetal medicine and pediatric cardiology, volumes also declined by approximately 5%, a significant recovery from Q2 when volumes fell by roughly 17%.

Pediatric Cardiology remained among the most impacted service lines in the third quarter, but MFM volumes rebounded sharply and were down only slightly compared to last year.

On the pricing side, we received just over $14 million in CARES funding during the quarter, which was a contributor to our 3.9% same-unit pricing growth along with normal managed care price increases. Offsetting this, CAGR mix was modestly negative during the quarter. At this point, our overall mix remains in line with the range it's been in for the past several years. And for the quarter, the negative comparison appears to be a year-over-year fluctuation within that range, with last year's quarter being modest to leave on the favorable side of that range.

I also want to flag items on the expense side. Our practice level salary, wage and benefit expense was up about $8.6 million in the quarter. Most of this increase were just over $6 million, reflects the flow-through of CARES funds in the practice bonus expense.

Our G&A expense was up about $3 million year-over-year. As we detailed in our press release, G&A includes about $10 million in expenses we incurred as part of the transition services agreement we have with NAPA following the sale of American Anesthesiology. The reimbursement for those expenses is reflected in our investment and other income line item. So there's minimal impact to our adjusted EBITDA, but they do inflate our G&A expense. As 1 last bridge for G&A, there were just under $3 million in PSA expenses within our second quarter G&A.

Finally, on our G&A expenses is the wind down of the TSA with NAPA. This activity will wind done as we move through 2021. But in terms of financial impact of MEDNAX, there will likely be a lag time for us to bleed off these expenses currently being reimbursed for. So I would think of our G&A expense, excluding those TSA costs, as a future state that we'll work towards and not an immediate step down in G&A.

Our transformational and restructuring expenses were $34 million for the quarter, which included about $27 million of costs related to our executive and board restructuring, roughly $5 million in consulting costs and the rest related to contract termination fees and the like. We will continue to reduce our transformation activity through Q4 of 2020 and expect any ongoing consulting expenses to be minimal by early 2021.

Overall, adjusted EBITDA was just under $73 million for the quarter, up from $69 million last year. We know that many analyst models for the quarter still included our radiology organization. So to help bridge results in people's models, we detailed in our press release that MEDNAX Radiology Solutions generated Q3 revenue and adjusted EBITDA of $126 million and $21 million, respectively.

Again, on a sequential basis, our adjusted EBITDA showed a sharp recovery, a $73 million from $56 million. For 1 last piece of detail, the CARES funds we received in Q3 contributed $8 million of EBITDA compared to a $3 million contribution in the second quarter of this year.

I'll make 1 final note on adjusted EBITDA for those of you keeping models. While we weren't providing financial guidance for the fourth quarter, I'll point out that while we have applied for additional CARES funds based on HHS guidance, it's uncertain how much we will receive during the fourth quarter. So the more appropriate comparison to use for your models would be our third quarter adjusted EBITDA, excluding the CARES contribution to that EBITDA. As we have done for the past 2 quarters, we'll provide specific details of any cares funding we received during the fourth quarter when we report early next year.

Turning to our balance sheet and cash flow. There are a number of moving parts on what's flowing through continued operations and discontinued operations, particularly, given the collection of retained R from the anesthesia transaction flows through discontinued operations. The better way to look at cash flows then is our total increase in cash for the quarter to $295 million from $132 million at the end of June. Roughly $40 million of this increase reflects anesthesia AR collections. Another $28 million reflects the receipt of income tax-related refunds and the remainder reflects operating cash flow from our core operations within continuing ops and from radiology within discontinued ops.

With that, now I will turn the call back over to Mark.

Thanks, Mark. I'll now pick up and provide you with a look at what we're up to and what it means. While I look at our share prices and read analyst comments about our company, I see a misunderstanding. We are not an organization that is sitting around waiting to see what share we will get of our country's birth rate. And at this point, we don't see any signs of a major drop in birth rates like we've heard about anecdotally. Instead, we are very actively managing every aspect of what we do to maximize efficiency without ever putting our patients anywhere but as our #1 priority. We have been reducing our overhead and, in particular, slashing on outside consulting spending, which for the year-to-date, was almost $50 million in total and almost $30 million related to our continuing operations.

While we're not just providing earnings guidance, I will reaffirm our view that we can achieve a steady-state EBITDA run rate of $270 million in 2021. This assumes no major continuing effect from COVID. My confidence, and this is bolstered by the combination of our control of our business and spending, along with a direct and constant push for sustainable, organic and new growth.

If you're having trouble getting from our current quarterly EBITDA levels to where we think we can go, I would point to a few things at a high level. First, the $14 million in CARES dollars we received in the third quarter and the EBITDA associated with those dollars did not fully make up for the lost revenue we experienced due to the pandemic. This is clear when you see that even including these dollars, our same-store revenue remained down slightly this quarter.

Second, we continue to make overhead spending reductions, which likely won't be fully evident until after the end of this year. We've also made significant changes to our leadership team and reporting structure, which also were not reflected in our third quarter results.

Third, the changes in sales and growth, which are reporting directly to me and our veteran Chief Development Officer, Dr. Jim Swift, and operations reporting to me Mack and Mark are new and will materially affect the way we run the company. I want to expand on this last point. Mack and I are visiting our practices and hospitals in our key markets, and we now, for the first time, have practiced data analytics to allow much more effective monitoring and financial control of our operations. This sole focus on increasing efficiency and firsthand understanding of our practices and partner hospitals was begun last fall by Mack and our team. This now has a full support and attention of our entire organization.

To underscore the importance of this focused sales, business development and strategy now report directly to me and to Dr. Swift. We see many ways to grow organically and with a combination of new practices and new and expanded hospital relationships, and we are very confident that we can grow without straining from women's and children health. I can attest to the strong relationships we have firsthand with hospital systems who are eager to find ways to expand our partnerships. And we will be all over this.

In fact, just this week, we were very pleased that subject to customer Board approval, the Memorial Healthcare system here in South Florida announced their decision to choose MEDNAX to lead their neonatology services across 3 hospitals, including Jo DiMaggio Children's Hospital. This achievement was only possible because of our reputation, our dedicated and rededicated focus on women's and children's care and relationships that were built and nurtured long before I got here. Our founder, Dr. Roger Medel and our senior leadership with Mack made this a reality. I can promise you that our passion for excellence and smart growth is alive and well at MEDNAX. Dr. Mack Hinson will now share how her team is combining this passion for both clinical excellence and operations excellence. Mack?

Thanks, Mark, and good morning, everyone. As Mark said, starting the course with Roger Medel, we have been insisted on building our relationships and our reputation as a leader in women's and children's health. When we met with the leaders in Memorial Healthcare, this was the focus and the commitment we brought to them. So we're very excited to begin providing services during 2021 and to bring our decades of dedication, investments in data and clinical research and our mission to take great care of the patient to several additional outstanding hospitals here in South Florida.

Across the 3 Memorial Healthcare hospitals, where we'll be providing neonatal care, there are roughly 13,000 annual deliveries and 120 NICU beds. This is about 1.5% addition to the 2019 annual volume across the pediatrics organization. This is now a very flat organization with a complete absence of silos. We'll work together in teams to make sound decisions for all of our operations teams and our medical groups.

I agree with Mark that we are misunderstood as a company. We're not just a group of neonatology practices but a diversified national medical group across more than a dozen pediatric medical and surgical specialties, plus maternal fetal medicine and hospital services, providing the most vulnerable patient population in the country to care to these patients, the expecting mothers, their newborns and children.

It's incumbent on us to ensure that physicians across our organization are fully supported so that they can care for their patients as best as possible. Physicians spend years of their lives learning and training in the science of medicine in order to bring their knowledge and skills to the bedside of the patient. It's an art, honed through repeated patient interactions that allows every clinician to translate science and to get passionate care for our patients. But health care is also a business. It's our business. It requires us to work every day to put tools in the hands of our clinicians so they can deliver high-quality care to our patients in the most cost-efficient and effective way possible and to do so in a way that positions us for growth as an organization.

In order to do that, last fall, we focus our efforts around a market-based approach. In each geographic area, we consider how we can strengthen and support our practices and how we can be better partners with our hospitals so we can expand existing relationships and form new ones.

What sort of tools are we supplying? We're introducing several tech-enabled solutions that will improve the efficiency of the work our clinicians do each day. These include a significantly more streamlined charge capture system, a cloud-based image access and storage solution, the continued development of our cloud-based neonatology-specific notes and data system and upgrades to our ambulatory HR that are better for our clinicians and improve the patient-facing portal for our patients and their families.

Since August, we are supplying real-time data to practices they can see and, more importantly, manage patient volumes. Our operations team and clinical leaders are highly focused on improving access to patients and more actively managing our market relationships. These data enable comparison of our productivity data across the practices and will allow a more direct dissemination of best practices. This also enables a more active management of staffing and expense allocation.

One of the greatest predictors of success in our partnerships at the hospital and health system level is a high degree of strategic alignment between our clinical leadership and our partners. This requires our clinicians the skill set beyond just the practice of medicine. And to this end, we're relaunching our pandemic delay clinical leadership development program. Physicians and our practitioners from across the organization will be starting this new program at the first of the year so we can actively develop and support future clinician leaders at MEDNAX.

The steps we're now taking will help us better allocate resources, will improve the efficiency of our clinical staff and will enable improved patient access and market relationship management and will foster stronger health system relationships.These actions will maintain our time for the business, improve our presence in our markets and retain and attract talented clinicians and new practices to a growing MEDNAX.

With that, I'll turn the call back to Mark.

Thanks, Mack. Operator, now let's open up the call for questions, and Mack and Mark and the SVP, Charlie Lynch, are available to answer questions.

(Operator Instructions) And first on line of A.J. Rice with Credit Suisse.

Advance wishes to team as they go forward from here first of all, I know I appreciate the comments about not being too focused on shorter volatility of birth rates, but I know there was a comment in the press release about the -- what you're seeing in terms of maternal fetal patient volume being only slightly down. Does that give you any indication of what the next couple of quarters might look like in terms of volumes? Does that suggest similar to your long-term trend volume likelihood?

Yes. This is Mack. It certainly suggests that we're seeing a similar type of volume that we've seen in the past, the fact that we're returning to a baseline. And beyond that, I think it's hard to predict forward beyond that information.

Okay. Maybe a strategic question. Obviously, when you finish the sale of the radiology business, we're calculating you'll be just north of 2x debt-to-EBITDA So presumably, you have a lot of decent amount of flexibility on your capital deployment. Can you talk a little bit about how you're thinking about capital deployment in terms of share repurchase, tuck-in deals, larger deals, other uses of your cash flow going forward as you complete the radiology sale?

Sure. I touched on that briefly in my comments. This is Mark. First we think there are a lot of growth opportunities in our core area and around our core area, and we're working very hard on that. So we want to make sure that we have the capital to deploy to make that happen and to always have a very strong balance sheet process.

I think we're -- we have a very sophisticated Board, and we're very careful about capital allocation. And as I said, we're very shareholder-friendly. If, in the future, it made sense to consider a buyback or some kind of distribution, we'll, of course, we'll do that. The great thing is for this company to have a great core business and to also have the financial flexibility to make the right moves. So we have no plans to announce today, but our eyes are wide on.

Okay. And maybe just a final question then. I know over the course of the summer there have been discussion about as you refocused on the Women's Health business and pediatrics legacy business, there was the potential to reaccelerate a bit the growth rate. I know putting in the first volatility quarter-to-quarter aside and maybe get back to certainly low to mid-single-digit type of top line growth. I wonder if you have any views on that. I know that wasn't really your assessment that you offered. It was for the previous group, but I wondered if you're -- how you feel about that.

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Well, I won't put a number to it yet because the processes that I described in my comments have really just recently started, I do think that we have a lot of avenues for growth starting now and going forward. So I am confident that we can achieve a solid level of both organic and new growth. But again, in our areas, we're not looking to do anything outside of our core areas. And we're very fortunate that our core areas have a lot of opportunity. And I would go back to the comment that Mack made that by looking at our company and the span of our company and you look at it market by market, think about how we can be better and bigger partners with hospitals and have more practices join us in and around our core, I think it gives us a very credible way to grow without stretching.

And I'd say, talk about the new award that we got from Memorial Hospital here in South Florida, I think there are opportunities like that throughout the country. And we have a great team of operators who are really working on how to take advantage of those opportunities. And that -- and this may seem unimportant to me. It's all important. This is all we do. This is what we talk about day and night. We are working together with a team. We have no other distraction. This is what we're doing. So that gives me a lot of confidence in our ability to grow.

Our next question is from Brian Tanquilut with Jefferies.

Mark, just a question on the comment that you made during the prepared remarks about just not seeing birth rate compression. Obviously, you put up a 5% NICU volume growth, sort of 4.3% same-store number for the quarter decline. How should we put those 2 comments together? I mean what's the link between those 2?

Well, the reason for my comment is, obviously, we hear plenty of anecdotes. We've read articles, and we're pretty passionate about this to look to see if there's some clip that we're approaching or something because we hear dire predictions. We're not in the basis -- we're not in the business of making long-term forecast on birth rates. We'll leave that to others. But we don't see anything within ARPU at all that would indicate a precipitous decline.

So what I was saying is that I see us growing, and we expect that there'll be plus or minus, some changes in the birth rate, but we just don't see anything that would tell us that we're walking into a clear sustainable decline. And you should assume or I'll tell you, we have looked to see if we could find a trend like that, and we have. And when we tour our NICUs and our team is out quite bit, we haven't found that.

So obviously, if something precipitous were to happen and it would change things. If, God forbid, the pandemic becomes worse for the country than it has been, that would affect us. But we just -- we have tried very dispassionately to find a trend, and we have -- so we're certainly not expecting a big jump in the growth rate either.

No. I appreciate that. Very helpful. So And I appreciate you addressing the sell-side concerns. So I guess, just along those same lines. If you don't mind just describing to us what the comp structure is now that we're down to the legacy core business without anesthesiology and rad. Just think about the flow-through of payer mix changes and volume changes over time, what's the variability in the comp? And how should we be modeling that, again, with the risk in the horizon of whether it's fair mix shift or volumes compressing?

Well, I'd say that, that kind of detail is to come, and I'm not dodging the question, but we're making an awful lot of changes. We have operated this company. We still operate this company with the focus on both our core business and on radiology. So we are in the process of restructuring the way we operate, which is going to affect our overhead and how we run the business. And if -- should we grow in the areas that I think we will, I think, it's going to enable us to -- we still have the financial leverage characteristics that we've had, but I think that we can operate as a much more efficient company than we've been able to in the past. We'll provide those details in the coming quarters as we make our changes here.

I appreciate it. And then last question for me, Mark, you're known as a turnaround guy coming into MEDNAX as a fresh set of eyes. Obviously, there are cost opportunities here, and I guess, you guys alluded to in your prepared remarks. But if you can just give us more detail on what are the areas you're seeing right off the bat where you could see non-compensation expense opportunities?

Well, we highlighted that the company, for a variety of reasons, spent a lot of money on general consultants over the last few years. It's not my nature to do that. I'm not questioning what was done in the past, but I will tell you we're not doing that in the future. And Mark Richards talked about that. So I think that there's just a -- when you focus on the company, I appreciate your comments as a turnaround person, I just look -- we just look at every penny we spend and how can we do it differently on everything. So we try to find that there are lots of ways when a company focuses to reduce expenses going forward. But like every company, we're learning from the pandemic about what travel is necessary and what travel isn't necessary and what we can do to make our own business more efficient. As we streamlined, our office expenses have come down. And they're going to come down further.

So I do think we're good, and we have nothing else to focus on. Having said that, I'm also as excited or much more excited about the fact that the team that was already in place when I got here was really an amazing team. I don't think that they have the opportunity over the last couple of years to do sole focus on this. As you know, there were an awful lot of external distractions and much bigger company, so we had to spend time on anesthesiology, radiology and all sorts of other things. So I can't underscore, certainly, my path. This is just what I've done. I've come to companies and said, "Hey, you have an amazing core business with obviously great people that I didn't hire. Let's work together with the team and focus on everything."

And even in the sales process, to -- for me and Dr. Swift and the team to be working so closely to go to me, but there's an opportunity we jump on immediately, and now the whole organization is involved. There's no lag time. You can imagine on a sales process to be that responsive has got to bear fruit. So I would go on and on about saying that we're finding efficiencies in many ways. And you could probably hear my voice that I find it more than a little exciting.

When I speak to the head of hospital systems, they talk about how much they rely on us now and how much they would like to expand our relationship, but we haven't had the bandwidth and the focus to be able to really work day in, day out on that. We can do that now, and we are doing that now.

Our next question is from Gary Taylor with JPMorgan.

I had a couple of questions. First is we're just thinking about valuing the company and calculating enterprise value. Are there any adjustments we need to make to the balance sheet outside of the $885 million of radiology proceeds? Are there any unearned CARES Act received or any accelerated payments on the balance sheet we need to reverse out?

Gary, it's Charlie. No. Those are what you would look at. I think as we mentioned, related to the RAD transaction, we don't anticipate any tax implications related to those proceeds. So that's a good proxy minus fees and expenses for what you would expect us to receive. On the CARES side, the only funds we have applied for or received are what we've talked about, which is the roughly $14 million we got in this quarter and something less than that in Q2. We didn't take any accelerated payments or anything like that.

And then my other question, Mark, I just want to make sure I understand what you're saying about the $270 million run rate. I think you're saying you won't necessarily guide for that in '21, but you're expecting, as you exit the year to be, at that run rate, excluding transformational expenses adjusting for seasonality, et cetera. Is that correct?

Well, when you say at the end of the year, my only hedge is like every other company on the planet, I don't know. It's unlikely that on January 1, the pandemic switch will be switched off. So I'm saying that if the pandemic wasn't affecting our business, and we described how it happened, then I think we should be able to achieve that $270 million run rate. I have seen a forecast that are a good amount lower, and I scratch my head and I don't see any sign of that. And I think that combined with -- if you look at what we were able to do in the third quarter and project that out along with the changes that we're making, and we're making those changes now, not like 7 months from now, we see no reason that we won't be able to hit that number unless we get clobbered from the outside.

And as I said, obviously, we don't forecast a steep decline in growth rates. If that were to happen, that would make a difference. As I said in the last call, I will tell you that we are in the business of also growing. And at a time when things are choppy and people are concerned about birth rates and they're not sure where they are, I do think that provides a buying opportunity for an organization that has a smart and careful long-term approach to our business. So I think that we don't hope for a lower birth rate, but there are opportunities that come in a choppier time, and we're here to take advantage of that.

Appreciate that. Just a quick follow-up. On the restructuring and transformational expenses, which have been pretty material the last couple of years certainly were this quarter as well, are you yet in a place to sort of talk about how and when those ramp down so we can start thinking about true EBITDA performance without the noise of excluding a material amount of expenses?

Gary, it's Mark Richards. Yes. I would -- we are in the process of ramping that down. And I would expect very early on in 2020 -- 2021, excuse me, that, that effort and the related costs will be moving to 0. Is that January or February, probably in that range, maybe just some residual that will flow through in the early part of 2021. But not the materially and certainly nothing to the level that you saw here in the third quarter.

And next, we'll go to Whit Mayo with UBS.

If I look at the EBITDA reported in the quarter and take out the $8 million for Cares Act, it gets me to $65 million. Historically, MEDNAX has earned, call it, 27% of the full year EBITDA in this quarter, which would imply kind of a $240 million base. So I'm just trying to come up with a starting point to think about how we build up to the $270 million. And if there's any headwinds or tailwinds that we should consider in terms of in a normalized environment where you would be versus the pandemic, where your budget was and where you are now, costs, anything that may help us sort of bridge the gap would be helpful.

Yes. Whit, it's Charlie. I can give you a couple of things, and Mark alluded to this in his prepared remarks. When you look at that 65%, it doesn't include the CARES money. That effectively gives you a fairly broad depiction of our operations right now as impacted by the volume trends we've seen this year related to the pandemic. And over and above that, when you look at the contribution from the CARES dollars we received this quarter, you can see too that even including those at the top line -- and I think the flow-through into EBITDA is comparable to what you would have seen if we had sufficient volume to get there. Our same-unit revenue was still down slightly year-over-year, which is somewhat less than our trend in same unit revenue for the past several years.

So that's the most important thing that while we're pleased with how much we've seen volumes come back and partially return to normal, they are not back to normal. And that has an impact and flow through into the EBITDA, as Mark mentioned, the $270 million is predicated on a view of normalized performance.

The last thing I would bring up is just a different reference point is when you look through the pro forma financials we provided for 2019, it's on our website. You'll see that for the full year 2019, for continuing operations, we had adjusted EBITDA of about $260 million, $261 million. So that, too, is a relatively appropriate baseline to think about for last year, which was not impacted by the pandemic.

And Whit, it's Mark. The other thing, I would say, over the last several months with the reorganization of the company and everything that went on, the sales process that I described as our now going forward sales process was somewhat interrupted. So in the third quarter, you still have significant expenses as Mark -- Richard said, will be mostly gone by the beginning of '21. And the overhead changes that I described will be in place in '21. So there was a lot of spending in the third quarter that we won't -- we don't expect to see in '21, coupled with an effect of sales, which you didn't see in the third quarter of this year because, again, I would say the month preceding the third quarter, that pace was not as robust as we expected to be.

I think, Mark, maybe you more specifically meaning our normal sales and marketing and business growth process, not the radiology sale process.

Yes.

That's all. Just to be clear, Charlie, I think you were suggesting that If we look at the CARES contribution, that's a decent representation of how performance may have been in the absence of the pandemic. Is that a fair characterization?

Structurally, that's what I met with. But my other point is relevant to this. I don't think we would have anticipated a negative same-unit revenue growth in a normalized environment. And by that, I mean the funding we received through the CARES Act did not fully replace what we experienced in lost revenue related to volumes.

Okay. No, that's helpful. And maybe 1 other question just scanning the queue. It does look like you've got some small disclosures around payer mix and subsidies, and subsidies looked like they were up $10 million year-over-year. And I know that's the normal course of business. But I guess, maybe just remind us how this works with your hospital partners, how much visibility you have into sustaining those type of increases and maybe what the trigger points are for you.

Yes. I saw what you mentioned in your note, Whit. And just a quick clarification there. That contract and administrative fee revenue was up about $10 million year-over-year. The majority of that increase is related to new business and contract sign and the like that includes some level of admin fees. Only about $3 million represents the same unit comparison year-over-year, so that's really where you saw the increase in that. And those are all negotiated contractual structures. So that's just part of the new businesses that we signed. We see that as just part and parcel of how we're providing services out of those contracts.

And Whit, it's Mark Ordan. I also go back to what I referred to and Mack described in more detail. This company, for it existence, did not have, in my opinion, anything like a good dashboard to be able to look at the factors that contributed to the results in its ambulatory practices and other places in the organization. Several months ago, again, long before I got here, there was a strong effort to create a data analytics so that we could really look at all the financial movements in our practices to think about the comparison with what best practices are versus what's employed elsewhere. I don't know how you can move results without those analytics. Those analytics didn't exist before. They were first rolled out starting about a month ago. So I'm just trying to give you and everybody an understanding that we're just running differently. We -- it's very hard to drive your car with no dashboard and no windshield.

And actually, I would say, I admired what people were able to do without that. But with that, we can look at schedule and look at a host of things and be able to move the needle, where in the past, all you could do is go in and wish people well.

So it's just -- I can't put numbers to it now. I look forward in the coming quarters to putting numbers to it. But from my experience elsewhere, that's what gives me confidence that it's going to be different here.

Our next question is from Kevin Fischbeck with Bank of America.

Great. I was wondering if you could provide a little bit of color on payer mix in the quarter. It sounds like you're saying that there really wasn't a major change in there, but any difference in payer mix between the core NICU business and the other services that you provide in the hospital? Any changes there potentially impacting payables trends over time?

Kevin, it's Charlie. No, we haven't seen anything like that. Mark Richards mentioned that looking at the mix in the quarter, it looks like fluctuations are out pretty steady mean over the last several years, and that, indeed, was what it looked like. So we didn't see anything in there that looks like a change in trends. And the trends for the past probably 4 or so years as in our payer mix. And keep in mind, for Pediatrix and Obstetrix, we're really looking at a largely binary mix between Medicaid and nongovernment. It's been on a slightly favorable trend, generally flat, but slightly favorable. For this quarter over last quarter, it just looks a little bit unfavorable, but there are fluctuations around that norm. So we're not in a place here where we can see a change in trend. We'll see how things develop, but it really looks like a normal fluctuation.

Okay. I guess any update exactly on the payout rate? It sounds like that was normally normal updates. And anything to think about as far as Medicaid rate updates in the current environment?

No. Nothing to call out.

Okay. And then, I guess, maybe, finally, when you think about the cost cuts that you guys are talking about kind of ramping in the future quarters, how much more is kind of debt to be realized versus where the Q3 amount realized is?

Well, a good amount. I mean I guess the witness of the organization is a decent amount of it was in was in non-payroll expense. So we're able to eliminate a lot of things without chipping away at the organization and -- but obviously, many cuts were made before. So I think that in -- that there are a host of opportunities in nonpayroll areas well beyond consulting. In terms of the size of the organization, we've made changes that -- as far as the changes we made are done, and I would expect it to have done. So you'll start to see those in the fourth quarter and beyond.

Our next question is from Ryan Daniels with William Blair.

Nick Spiekhout on for Ryan. I guess, so I think you kind of touched upon this at the start of the call, but historically, you pointed to kind of like historically 3% growth, maybe a goal of getting that kind 6% area. I know you said that's from prior management, but I was assuming like what would be like kind of the moving parts to kind of get to that mid-single-digit level that mostly targeting organic? Is that going to be a little bit more through acquisition? And then I guess like what kind of birth rate assumptions would be in that general area to get to that area?

I can't give you a precise answer, but let me try to help. I'm Mark. I -- we expect a choppy birth rate. We don't expect it to be up or materially down. So with that as a background and not being able to predict any better than you can what the effect of COVID might be. But putting those 2 things aside, I think it's all of the above, meaning that we are very focused. We are very -- we have a series of regional leaders and regional presidents that report up 2 terrific operating executives who report directly to Mack and to me. As Mack said, we have a very flat organization. So to be able to work with our practices and our hospitals to look for new opportunities, which I would call organic growth within the system, we're all -- and I think we have a terrific team to do that, to meet the heads of our Mid-Atlantic group or group down in Texas. They not only have a great understanding of operations, they have a terrific relationship with our hospital leaders. And again, I'm only bragging about them, not about me. I arrive on third base. So I'd say that, that gives us a huge opportunity on organic growth.

In terms of tuck-ins, same thing. We have a terrific sales and business development team that's out there. They've established long relationships with practices. It's not completely under our control because somebody has to decide that they want to sell, but I think it's more that they see that we are totally focused on this business and that it's all of us. So recently, the team has been working on an opportunity, a major opportunity in MFM. And it was all hands on deck to make sure that the practice was comfortable when we think about the future of the practice, think about what we can do to make the doctors and other clinicians as happy as possible. And that involves just about everybody working together to make it happen. I got to get involved when it was already 99% done so I could look like the hero. But we all will work on it. So I'd say it's going to be a combination of organic growth. and tuck-in acquisitions and with our eyes open to other areas in women's and children's health that we think can be added accretively.

That's definitely a very helpful color. And then kind of you discussed how internally, you've been making a lot of investments in new improving analytics and things like that. I was wondering if we get -- will we get to an area where, as you improve that, you'll provide The Street with a little bit more, I guess, specific data on volumes, NICU patient dates, things like that?

Well, I think it's always been, Mark's, in my practice in our past slides to disclose as much as we possibly can. So of course, as we tell you that we're doing these things, and they should bear fruit, then I think we owe to you to tell you to what extent they are bearing fruit. So we'll -- yes, as we're very confident of the progress we'll make in close of this.

Now some of the spending that Mack described, I still think leads to financial improvements, but very importantly, a lot of these things are just things that we must do as leading clinicians to make sure that we're always at the cutting-edge practices. Practices don't only want to join the first rate company, and hospital is the only 1 to partner with a first-rate company. We would not have gotten this Memorial Health System contract if it weren't for our reputation and working on volume. So I will tell you that when I talk about areas that we're going to cut spending, I notably didn't include things like research, where I think it's vital for us to be a leader in that area.

And we have a physician, who is our Head of our clinical services in the compant, Dr. Curt Pickert, and he's still a business person also, but when he says, "Hey, we need to support our doctors and other clinicians." I listen really carefully. By the way, he reports directly to me. And -- but I think that, that is a sincere selling tool to hospitals and our practices because they know that we're doing the right thing. And they're only going to want to be part of a company that's doing the right thing, that's focused on it.

So I'm not -- I don't want anyone to think that we're cutting in areas that are going to affect quality, because we're not. We'll find other ways to cut. We'll turn off every single light bulb before we do that.

And next, we'll go to Pito Chickering with Deutsche Bank.

A couple of quick questions back at this point. Following up on the $270 million EBITDA 2021, I would understand it excludes the COVID impact, if that's possible to model. Maybe I missed it, but can you break out what is the split from an organic revenue growth assumption versus M&A to get to that number?

Do you -- I apologize. It's Mark, but could you like maybe move a little bit back from the phone. It's coming through garbled. I'm not getting your question.

Can you hear me better now?

100%. There we go.

So just a follow-up on the $27 million of EBITDA in 2021, which I understand excludes from the COVID impact, if this is possible to model. Maybe I missed it, but can you break out what is the split between organic revenue growth assumptions versus M&A to get to that number?

Yes. We -- I think Mark made a comment earlier that when we think about the ways to get there, it's all of the above. So look, we're -- there's a reason why we don't have specific financial guidance. Just like every other company, we're going into the fourth quarter and going through our budgeting process, and we'll be a lot more granular as we move into 2021. But I think going all the way back to earlier this year when we started to discuss that financial profile, it was based off of a multiple factors between the opportunities for organic growth and the opportunities for acquisitions, the opportunities for cost improvements without any specific line or contribution from each of them. So I think we're still thinking about it the same way in a holistic fashion without a specific contribution from XY or Z.

And let me add. One of the reasons I said that, and I was so declarative about it is I was reacting to things that I read. And I understand the reason for the things I've read, but I think that there is a thesis out there, which I totally understand. If you -- if the birth rate is going down and you're not really growing and you're just going to sit in there, how are you going to get to $270 million. I totally get that.

So my point was, hey, I don't think we're not growing. I know that we're going to run our business better than we have because of the focus that we -- that's been enabled. So the reason that people think that $270 million might have been believable in the past but they don't believe that now, I'm saying, "hey, the things that you're focusing on do not have a whole picture."

So $270 million wasn't a new number. It was a number that had been out there that I think people pre-pandemic and before everything else said, yes, that's an achievable number, and obviously, excluding radiology. And I'm just reaffirming that the things that we have in place now and what we're looking at going forward, absence of birth rate calamity or pandemic calamity, I think we can get there. And by the way, it's November. We have many months ahead of us to make the changes that we're talking about.

Okay. Fair enough. One question birth trends. Have you seen any differences with the ages of the pregnant mothers you're seeing in your practices? Are we seeing that teenage pregnancies are done quite a bit due to COVID. Just curious what you've seen specifically with teenage pregnancies.

So if I understood the question correctly, are we seeing different types of mothers in the practice? And I would say not. I think we're seeing the same sort of mix of maternal patients that we've historically seen.

We have a very important area in the company that looks at quality and looks at trends in the business and led by somebody who's very data-driven and passionate about this. So we try to see it as something, if there's something that we're missing. So we haven't -- (inaudible). I ask her all the time if it's something that we see. So we're not on the business of claim high to ball. But -- so we do look at it carefully. And then look the anecdotes that are out there are interesting. We'll see.

Okay. And then last one, looking over on free cash flows and (inaudible). Can you just help us think about sort of where the free cash flow generation for the core business at this point? You're looking at cash flow from ops. You (inaudible) is definitely been pressured for the term charges. As you think about sort of free cash flow, whether it's cash flow from ops or CapEx. Going forward, how should we think about the conversion from EBITDA to cash flow?

Yes. It's -- I think you're just talking about what percent of EBITDA we can pull through into GAAP operating cash flow and free cash flow. We've generally looked at that in a broad sense in the past. And I think the parameters we think we've thought about in the past still applies for pediatrics, which is that a fair rule of thumb is to think about us pulling through somewhere in the range of 60% to 2/3 of our EBITDA into GAAP operating cash flow.

And beyond that, our CapEx requirements are fairly minimal for continuing operations, though it should be, I would say, comfortably under $20 million a year. So those are the parameters you should think about. And I don't think they changed dramatically post the sales of anesthesia over reality.

And our next question is from Ralph Giacobbe with Citi.

Yes. So can you talk about maybe discussions with physicians and staff at this point? Any turnover, if you can give us a sense of churn or if that's stable and if you're looking to add? And then previously, there was a push more into service lines connected to NICU and women's services. Is that still a focus? Or is it more focused on sort of the core entity at this point?

Let me take -- start the first 1 because -- and then Mack can add to it. I've had the opportunity, Mack much more than I have, to meet with a lot of our physicians and nurse practitioners around our system. And there is -- there's 2 things that I'd point to a great level of enthusiasm and also a real interest in helping. I don't -- I call it an (inaudible). John Lloyd is 1 of our neonatologist in Texas who has been enormously helpful to me as I think through what we should be doing to better support our practices. This is kind of unique and it's fantastic that people who are part of our organization want us to succeed. And they want to be as helpful as they can be to enable our success. And obviously, if we're listening, it's going to help us, and it's going to help them. So we've seen a lot of it. I'm very grateful to Mack for opening these doors for me so that when we go together, he can explain what the acronyms need and then I can listen and try to understand it better.

And I'll let Mack talk about the other subspecialties. He'll pronounce it better than I do. So go ahead.

Yes. No, I would agree, Mark. I think the people are enthusiastic about the focus on women's and children's services. I think that's a very uniform response that we're getting as we're talking multiple practices across the country. With regard to service lines within pediatrics, we do a couple of things. One is we certainly want to pay attention because there is specialty-specific focus that's important. The specialists want to talk to other specialists, neonatologist, just want to know what their partners are doing across the country.

As to pediatric surgeons that, we had a discussion with some pediatric surgeon -- surgery leaders yesterday about exactly this thing. But it's also important to think about the whole. So we're not thinking that we want specific pieces of pediatric from internal care, but we do want to continue to help facilitate discussions within our specialties. But thinking about the specialties, cross talking as a whole is really important to our success going forward. And we're building time and energy to make sure those things happen.

Okay. That's helpful. And then I was hoping, in your prepared, I think you talked about normal managed care pricing. Maybe just remind us what that typical rate is? And is there any opportunity there? Or are you seeing maybe incremental pressure there?

I wouldn't point -- it's Mark. I wouldn't point to any change. Along with focus, we focus on our relationships with our payers. And there's no -- again, there's no trend there that I could point to. We have a great team that's focused on our managed care relationships. The leader of that team comes from the payer world. So it's great to have somebody who speak their language and appreciates what they do and the care they use. So there's no change that we point to, but there's always going to be, with any relationship like that, they will be 2 sides to it, but I obviously do that coming into it. But again, it goes with a focus that we can focus on those relationships and work as partners with our payers.

And we have a question from Gary Taylor with JPMorgan.

I just wanted to go back to the 4Q, just for a second. I know you're not giving guidance, but I think Charlie had said sort of think about at least sort of the starting point coming out of 3Q as the $73 million minus the CARES Act funding. When we look at the restated financials for 2019, there was pretty sharp step-up in EBITDA from 3Q to 4Q. And it's just been, obviously, a number of years since we've been able to see this business on a stand-alone basis. So is that level of seasonal pickup, is that normal? Or was there something G&A was down a lot, I see, but there something else in the fourth quarter of 2019 that just made that a steeper ramp. Should we think about that sort of ramp, obviously, subject to how the pandemic might impact 4Q?

Yes. Gary, it's Charlie. That is a specific unknown as we go into the fourth quarter from the third, any consequential changes related to the pandemic. And obviously, that's why we don't have financial guidance for the quarter. What I would say is that historically, in a normal seasonal pattern based on the nature of our business, the fourth quarter from a top line perspective and, therefore, into EBITDA, would generally have a slight downtrend from the third quarter. And that's over multiple years that we look at it. And for us, internally, we can see when there are different distortions that might move that separately.

The second point is that because you're looking at this call from last year, there are also different items, either on the cost or revenue side that kind of represents some true-ups and the like as you go into the end of the year, and they tend to sort that trends off and on as can deal flow. So it's 1 reason why we wanted to make that point related to your development of a model coming from Q3.

Number one, we don't have perfect knowledge of the magnitude of CARES funds we might receive this quarter, and we'll call those out. And #2, in a historically normal environment, we would generally anticipate that our fourth quarter top line and EBITDA would be comparable or slightly less than the third quarter.

That's helpful. And if I could, just 1 follow-up for Mark. Just trying to get back to some of the disconnect between your outlook and the Street models. Maybe you could speak to this. So if we look at 2019, the EBITDA in continuing ops is the $264.5 million, but the presumption is, I think, for most is that just looking at continuing ops, that would have been down from 2018. We don't know that number, and that would have been down, including acquisitions. And I know, obviously, your guys' goal is to turn the company around, but I think the disconnect is trying to bridge what that organic decline looked like or what we're guessing that looked like without perfect transparency and trying to measure that gap to where your go-forward is. So I don't know if there's anything else you could provide on kind of thinking about how the organic growth or decline in this core business has played out that would help us. Or -- yes.

I mean, Charlie can talk about the past more. And so Charlie, do you want to talk about that a little bit, and then could, I had mentioned comments that -- which are going to be similar to what I've said, but I have to put a finer point. Well, why don't I go ahead?

Look, the -- I don't mean to sound preachy. The nature of the turnaround is it doesn't go on a tight schedule, but the nature of the turnaround of CEO is you're open and you're honest. So I'd say that I see a host of things here that give that -- that give me the ability or give us the ability to toggle what we do. And I think that we don't have a longer lead time to do that. These are immediate things that are seated in front of us.

So again, it's less that I'm pointing to a specific number, because if it was, I just give you guidance. It's saying that I think that we have the ability to achieve that, and I think that we're doing the things to achieve that. So I don't link it with what happened in 2018 and 2019. As much as I look at 2020 and I look at what affected us in 2020 and where we are right now and who we have on our team right now. I don't know the people who are here in 2018 and 2019 and what they were doing day to day. I know what was going on in 2020 very well. And that would give me a lot of confidence in what we can do in 2021.

So again, it's a big guidance. If I had said, a steady state, I'll connect the dots, we give you guidance. All I'm trying to say is that I have a high degree of conviction that we can get there. And I just want to be careful, and I'll say what I said before. The reason I have high degree confidence is because the team that Dr. Medel and others put together, this is not where we're -- I'm trying to take a team that's great and dedicated to what they're doing and enable them to focus more and make quicker results, a flatter organization without sidelines. And I again, thinking from my past, that really bears group. In my past, the turnaround person, you come in the soft level. I like that because I like to buy low and sell high. I see this playing out here. And I think, again, absent a trap door some place because of a birth rate or COVID, we look out there. So I did not look at 2018 and say, how can we get to 2021.

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

Well, look, we appreciate all the questions. We appreciate all the interest. I hope that we're not frustrating you by not being able to be more precise. I hope that we are the opposite of frustrating you by like showing you how we think, how we're running the business and where we think we are heading. And we look forward to posting you on our progress going forward. Have a great weekend.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.