Pediatrix Medical Group, Inc. (MD) Q2 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you very much for standing by and welcome to the Pediatrix Medical Group's Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, instructions given to you at that time. [Operator Instructions]. And also as a reminder, today's conference is being recorded. I will now like to turn the conference over to your host, Mr. Bob Kneeley. Please go ahead.

Good morning and thank you everyone for joining the call this morning. Before I'll open call up to Dr. Roger Medel and Karl Wagner, I do want to read a brief forward-looking statement. 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. Forward-looking statements are based on assumptions and assessments made by Pediatrix's management in light of their experience and their perception 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 Pediatrix 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 Pediatrix's most recent Annual Report on Form 10-K, including the section entitled Risk Factors. Now let me turn the call over to our Chief Executive Officer, Dr. Roger Medel.

Thank you, Bob. Good morning and thanks for joining our call today to discuss our 2008 second quarter results. We are representing a company that continues to grow and one that is on track with our strategic expansion. I want to discuss several items today as part of this review of our operations and growth strategy, and Karl Wagner will provide a detailed review of the quarterly results and our guidance for the second half of 2008. I'll begin by talking about the area of greatest investor interest during the past three months, which is volume at our neonatal intensive care unit. Throughout the second quarter, we saw continuation of the same unit volume decline that have started late in the first quarter. For all of the second quarter, our same unit NIPU volume declined by 1.4% and we continued to see lower NIPU volume through the month of July. We're now out at a point at which we've seen five consecutive months in which same unit NIPU volume was lower than the prior year. Based on the information that we've gathered from our hospitals, this decline in volume coincides with a lower level of work at our hospitals. Other variables have remained relatively constant. The percentage of babies born at hospitals were the factors who're admitted to our neonatal intensive care unit remained stable at a rate of 11% to 12%. Length of stay is moving around within a range, but is also essentially stable. As you know, a volume decline like this just haven't happened in our history. And so, while there's considerable and understandable speculation about the possible reasons for lower volumes, at this point it hard for us to identify a specific cause with any certainty. We have seen reports suggesting that birth in several of our large states are down in 2008 versus 2007 and that corroborates with what we're seeing in our hospitals. I want to be careful though to avoid participating in any speculation of factors leading to fewer births. So while I can present to you our volume results, I can't provide any definitive cause at this point in time. This was a good quarter for growth from reimbursement with same unit growth of 4.4% which left the principal factor behind overall same unit growth of 5.1%. We continue to see better Medicaid reimbursement from Texas associated with the fee schedule increase that was effective September 1 last year and we are seeing improvement as a result of our ongoing managed care contracting efforts. There has really been no change to our approach to managed care or to the results we have achieved from this approach. We are also growing through acquisitions. We completed fourth quarter physician group practice acquisitions during the 2008 second quarter and so far in the third quarter, we have added Georgia Perioperative, our second anesthesia practice as well a maternal-fetal medicine practice based in Atlanta. With transactions closed to-date as well as what we see in the pipeline, we're confident that we will meet our target of investing $70 million to $75 million of our capital in accretive base business acquisitions. Let me remind you that we consider base business to exclude anesthesia. So this target does not include any additional anesthesia acquisitions. When you look at the reasons these practices are joining us, we think we are in an environment that favors our proven national group model as a solution to problem, facing physicians today. We're seeing groups drawn to us by the opportunities for research and education. That was the case in Tampa Bay, with the second quarter acquisition of one of the nation's largest independent pediatric-cardiology practices. They see the benefits that accrue from being part of a national group that can conduct research and continuous quality programs in this sub-specialty. In other cases, the practices joining us are looking for an administrative partner that will help them to manage their growth. That's true for our most recent acquisitions, a one doctor maternal-fetal practice as well as our largest acquisition this year, the anesthesia group practicing in the Piedmont system in Atlanta. To be fair, the Atlanta anesthesiologist joined our group for both reasons; clinical initiatives and administrative support. They see the opportunity to work with our positions in Fairfax, as well as other anesthesia groups, to identify best practices and enhance their existing quality initiatives. We're excited about the Georgia anesthesia practice. We've begun the process of integrating this group, and introducing our approach towards managing the administrative side of hospital-based practices. As we said in press release announcing this transaction, we expect this group to contribute approximately $0.03 per share annually to our earnings. In time, we expect that as we manage the operations of this practice and our all anesthesia practices that we acquired, that we'll see incremental improvements through operations and therefore the margins at those practices. There are investors who might be seeking some pivotal points at which critical math would lead to better margins. I don't think it's going to happen that way. Rather as I said, we've built a platform, we expect to see incremental improvements in margins and we expect those improvements to come from higher collected revenue on those practices that we acquire, specifically from better contracting and better collections. We have significant precedence through their expectation which is the performance of our core business throughout the decade. The increased efficiency of our base business over time being most of this decade is the result of continuous improvements of constant evaluation of processes through improved efficiency. While it's early, what we are seeing in anesthesia confirms our expectations. We expected to see incremental improvements as we establish processes for anesthesia, as we learn more about the specialty including staffing, contracting and collections. On the contracting side, we've negotiated with several of the Fairfax managed care payers and we expect that we'll see reasonable rate increases, I think in time and with more experienced anesthesia contracting, we will have a better stance of continued opportunities for contacting improvements. On the collections front, we're close to finalizing an agreement for the license to patients' account information system that will serve as a platform for all of our anesthesia branches going forward. And we hope to see efficiencies there as we rollout that system. I'm sure that we'll continue to get the question about specific margin targets and we'll answer them the same way we've answered the questions throughout the decade. We hope to improve margins on this business. The indications are that there's opportunity to do so and rather than working over just specific targets, we're going to look constantly at how we can do things more efficiently. I hope that these comments restore some of your attention to the long-term growth opportunities at Pediatrix has. We have a sound strategy. We're executing on our strategy and we remain focused on the attractive long-term opportunities that are available to us. This will be a good time to turn the call over to Karl, our Chief Financial Officer, for a review of the quarter's financial results. Karl?

Thank you, Roger. Good morning and thanks for participating in this discussions of our 2008 second quarter results. The next few minutes, I want to run through a discussion of our second quarter numbers and the updated guidance that was issued this morning, before opening the call to your questions. For the three months ended June 30th, our net patient service revenue increased by 15% to $257.7 million. Growth from acquisitions completed during the previous twelve months accounted for about two-thirds of our growth this quarter. Same-unit growth from reimbursement, the patient volume was 5.1% for the second quarter over the comparable prior year. We continue to see positive reimbursement, which is principally from better managed care contracting, including the flow through of modest annual increases that we now negotiate as part of many of our contracts. In addition, government reimbursement is slightly better as a result of the Texas Medicaid increase that went in effect, September of last year. Same-unit volume for all our specialties was up slightly at 0.7% and a result from higher volumes at our office-based practices. As Roger discussed, same-unit NICU volume was down 1.4% for the second quarter, primarily due to fewer births at our hospitals than in the prior year. Overall, our practice-related margins were affected by several factors, including lower NICU patient volume, the impact of acquisitions, including anesthesia and an increasing number of office-based practices acquired during the past 12 months. Office-based practices have higher practice-related expenses, both salaries and benefits as well as supplies and other expenses, relative through our hospital-based practices. That's just the nature of that practices. As a result, the margin shift can be attributed to acquisitions both anesthesia and office-based is expected. We are pleased with how our acquisitions are performing relative to our models and we are generating the results that we expected when we bought these practices. Our profit after practice expense was $96.5 million for the second quarter, up 9% from the prior-year period. The profit after practice expense margins declined by 229 basis points to 37.4%. Our operating income was 62.5 million for the second quarter and was up 6% from $59 million, non-GAAP for the comparable 2007 period. For 2007, that non-GAAP number excludes expenses of $1.8 million associated with the stock option review, and for the rest of this discussion, I'll refer to the 2007 second quarter on a non-GAAP basis. Our press release this morning contains a detailed GAAP reconciliation table, and that's available on our website at www.pediatrix.com. We continue to see positive leverage from our management of general and administrative expenses, which continue to grow at a rate that is below the revenue growth. For this period, our G&A expense as a percent of revenue declined by 28 basis points, when compared to the 2007 second quarter results. After-tax income from continuing operations was $38.2 million for the second quarter, up 4% from $36.8 million for the prior-year period. On a per share basis, earnings from continuing operations was $0.80, based on a weighted average 47.7 million shares outstanding for the second quarter. This compared with earnings from continuing operations of $0.74 per share on a weighed average 50.1 million shares outstanding for the comparable 2007 period. During the 2008 second quarter, the gain calculation related to the sale of our metabolic screening lab was revised, resulting in a loss from discontinued operations of $1.2 million for the period or $0.02 per share. Net EPS was $0.78 for the second quarter, which compares to net EPS of $0.75 for the 2007 second quarter. Our weighted average share count for the second quarter was down by approximately 2.5 million shares which reflects the impact of three share repurchase programs; one completed at the end of 2007, one completed in the first quarter of this year, and a modest benefit from the share repurchased completed in June. Our share count for the 2008 third quarter and subsequent periods reflect the full impact of the most recent share repurchase program. Cash flow from operations for the second quarter was $57.3 million. During this quarter, we used our excess cash and credit facility to purchase $100 million of stock and invest $41.1 million in practice acquisitions. At June 30th, we had cash and cash equivalents of about $14.2 million, down from year end as a result of acquisitions, share repurchases and reductions in accrued payables as a result of incentive compensation payments. Accounts receivable were $148.6 million and our day sales outstanding were down slightly both sequentially and year-over-year. On the liability side, we ended the quarter with approximately $57.5 million outstanding on our revolver credit facility and we had less than $1 million other debts including capital leases. To provide a quick summary of our results for the first half of the year; our net patient service revenue was $503.3 million, up 16% from $434.2 million for the first half of last year. Operating income was $114.5 million and income from continued operations, which excludes results from metabolic screening laboratory that was sold in early 2008 was $70.3 million. Earnings per share from continued operations was $1.46 for the first six months of 2008, based on the weighted average of 48.3 million shares outstanding. This compared with operating income of 94.7 million shares... of $94.7 million income from continuing operations of $60.7 million or $1.21 per share from continuing operations based on 50 million shares outstanding for the first half of. Through June 30th, we've invested $47.6 million in physician group practice acquisitions. Since then, we've acquired our second anesthesia practice and a maternal-fetal medicine practice for a combined purchase price of $45.8 million, which brings our total acquisitions spending to more than $93 million year-to-date. Finally, I will go through the guidance that was announced in this morning's press release. As we said, we're now expecting to earn between $0.84 and $0.87 per share for each of the third and fourth quarters of 2008. We've built in contributions from acquisitions and share repurchases that have been completed to-date as well as our estimates for base business acquisitions that are expected to be completed throughout the remainder of this year. Our estimates do not include any contributions from additional anesthesia acquisitions. Our same-unit guidance assumptions for each period includes a 2% to 4% growth from reimbursement-related factors. In addition, the guidance assumed that same-unit NICU patient volume will decline by 1% to 4% when compared to the prior year for each period. I want to thank you for your patience as we walked through this financial and operational overview. At this point, I'll turn the call back to Roger.

Thanks Karl. Let's go ahead and open up the call for questions, operator. Question And Answer

Certainly. [Operator Instructions]. And our first question comes form Art Henderson with Jefferies & Co. Please go ahead Arthur Henderson - Jefferies & Company, Inc..: Hi, good morning. A couple of quick questions for you. On the share buyback,, do you currently have an authorization in place now or are you fully... is the authorization fully used up?

We completed our share repurchase that was approved by the Board last quarter in June. We don't currently have any share repurchase program in place. Arthur Henderson - Jefferies & Company, Inc..: And Karl, what should we be thinking about in terms of a share count say for the next quarter to use? Obviously it's going to go down. You have had quite a few share repurchases today. Is there any guidance you can give us on that?

We haven't given a specific number. I think when we filed our Q specific as to what we bought back. We actually bought back not quite 1.9 million shares last quarter and we didn't start to buy back until we had announced the program in late May. So, most of it came through in June. Arthur Henderson - Jefferies & Company, Inc..: Most of it through June. Okay. Also, I know there are some things going out with Medical right now as far as delays in payments and potential 10% decline in payments out there. Could you talk about what that may mean for your business in terms of just 10% were to go into effect? What that would impact Pediatrix at all?

Yes 10% reduction Medicare payments actual went in place on July 1st. There are a lot of initiatives to try and get back to be reversed, one of which was through the course of this point is that conjunction was denied by the courts but they are still moving forward, they telephony [ph] medical associations are still moving forward to see if they can get that done in another way. And the Legislature seems to be looking to that to see if they are able to do that. But until they tap a budget, it won't be addressed. We believe when they pass budget only to reductions in that category may go away, being told. It's not a big number for us. Any impact on that included in our guidance. Arthur Henderson - Jefferies & Company, Inc..: Okay it is in your Guidance?

As far as payment delay; California did delay payments for Medical at the end of June, as they were running out of funds and that it tied up at the end of the fiscal year, but they do have a fund to pay start in July, to receive... well receiving payments. I think the big question on Medical right now is there is point in time of budgets in out path that it may run out of reserve funds that they have set aside right now. But that's not that they won't pay, it's just the time when the payments will come in. So that is something we're watching, we're hopeful out of budget that we don't know at this point, so we don't know when that will not occur. Arthur Henderson - Jefferies & Company, Inc..: Okay. that's helpful, and then one last question and I'll get back in the queue, 57.5 million under revolver. Is your intend to use cash flow now to pay that back or you're comfortable with having that on the balance sheet for a while?

Well we'll always go and use our revolver in an out. That will discuss some operations running up and down and we will use the revolver when we need to do acquisition. So as you can expect after, the end of the quarter and when we did the acquisition in Atlanta we bought some more than we have paying that down through operations throughout the month of July. So I just kind of go up and we're comfortable having that on books for acquisitions early Arthur Henderson - Jefferies & Company, Inc..: Okay. Great. Thank you and nice quarter.

Thank you Art.

Thank you. And our next question comes from Will Bonello, with Wachovia.

Good morning guys.

Hi Will.

Just a couple of questions; I guess the first thing is just again on the NICU volume. It sounds a little bit maybe I am just getting too cute in reading you, but it sound a little bit like you're hedging and saying it's not a 100% worse. I guess, just if you could elaborate a little bit more on our comments in length of stay and percent of admit. Is that at all part of it. I just couldn't quite tell what you are saying?

As far as the admit rate goes, our admit rates write in where we continue to see that there is really no change, it's remained very steady over the periods. We got Roger Medel length to stay. Is it something that bounces around quarter-to-quarter up and down and while on a comparable basis from a year ago it's a little bit lower, it's within the range that we have seen over time. So that's going to have the fluctuations every quarter. It has some impact to it but predominantly, what we saw was a reduction in imports at our hospitals and that kind of traffic and we've seen growth at the hospitals we're in. So just to be clear, I mean we saw that reduction reimbursed not like we're seeing increases in reimburse in hospitals in reduction and patients days. We did see a reduction in both of our hospitals during this quarter, but just to be clear there is a movement in stay which every quarter has some impact, but just has hadn't the focus in the past. But it is in range that we would expect it to be at.

Okay, so the predominant impact is still the reduction reimbursed?

Yes.

Okay, and then just on the cash flow, it's down a little bit a year-over-year. I'm having trouble sort of balance sheet data you gave, figuring out where that why that is?

On a year-to-date basis, it's down for a couple of reasons. One, we're not getting the growth in bonus accruals that we got. So when you look at the cash flow which will be in our 10-Q, you'll see not the same, you'll see more of money spent on a reduction and payables during the year than we saw last year because of the fact we're not increasing our accruals. In addition, we've made higher tax payments this year as we've gone through, and so our taxes were up a little bit. So, that's why we are seeing an offset.

Okay. And then the reduction in the accruals, can you just expand on that a little bit with?

It's not really a reduction any accrual for bonuses. Just last year we had a significant growth over what we had paid in the prior year and right now, we're running it about the same rate form the accrual standpoint.

Okay.

So, in last year in the first half, I accrued say $50 million on I think, it was $90 million in payments and this year it's roughly $50 million on what we paid a $110 million in bonus payments. So, there's $20 million flowing there.

Okay. So you're literally... that's why I just wanted to make sure you're paying out more or so far you've paid out more bonuses than you had last year?

Yes, we paid out more in the first quarter from incentive comp than we paid out the prior year. But as you know, our bonuses are paid in the first quarter predominantly.

Okay.

So our run rate for bonus accrual is about the same as prior year.

Okay. I think that makes sense. And I think, you might have mentioned this but I want to be perfectly sure, no... still no evidence of any payer mix here?

No, I don't know if we said that actually. But no, there's no change in our payer mix.

Okay. And then, I guess just one more thing on the volume and I'll have a bit. When you guided through the revised guidance for the quarter, at that point you were sort of seeing a 2%, you ended up seeing sort of a 1.4%. It sounds like we should not read anything into that. You're not seeing any sort of improvement in trend as the quarter progress?

Throughout the quarter, week to week, the numbers kind of bounce all around. So one week we'll see at the below the 2% we had guided last time, and then in another week, it'll be... it'll be minus 0.5%. So, it just kind of bounces around. So, at the point we gave the guidance the 2% last time, it was that all we're running, these came back but weeks in there, we're worse than that.

Okay. Okay, thank you.

Thanks.

Thank you. And our next question comes from Kevin Ellich with RBC Capital Markets.

Good morning guys. Thanks for taking my questions. Karl, I was wondering if you can tell us how much the Texas Medicaid raid increased impacted pricing for the second quarter?

I don't know, if we've typically given up the Texas Medicaid increase, as a percent of breaking that up separately. It is a component but obviously broken out separately in the past.

Okay. And then is it, hope so--

We do expect -- we had the last couple of quarters been out of that 2% to 4% range. We're going to start overlapping partly through the third quarter and into the fourth quarter. So, I think we'll be pulling back into that range, and we'll expect we'll be in that range for the year.

Okay, and your 2% to 4% guidance includes the annualization of when you lap it?

Yes.

Does that affect? Okay, excellent. And then, given the medical issues that we just implemented, what's the outlook, or have you guys identified any other problematic states where reimbursement for Medicaid could get cut?

We really haven't seen anything, and as you can expect, we're looking at it very closely. I think the real question's going to be what's going to happen next spring when the legislatures come back in place. I know, a lot of states are having struggles with their budgets. So, going into this spring of '09 we'll be watching it very closely again. But for the rest of this year and going into the first half of '09 I mean, it appears things are going to stay relatively stable excluding California. As we said last quarter, we had some slight upticks in a couple places that will offset from those California decline. But I don't think we are expecting anything next year from an uptick standpoint and when the legislature is coming in the spring, we'll be looking at it very closely.

Okay, that's helpful. And then you said that your year-to-date acquisitions spend is like I think around $93 million?

That's correct.

How much of that was coming from the base business?

We don't break that out separately.

Okay. I had to try. And then just wondering how the anesthesia pipeline is looking. I know you guys are in pretty active discussions. Do you think we could get one or two more anesthesia deals closing by the end of the year?

It's that our desire, as we had said earlier in this year to try and get two done this year and that's still on our plans. So we are working through that. We didn't have an expectation that we will get three done this year. So that's scheduling on our plan. We want to be delivered as we move forward and not trying to do too much too quick. So but the pipe line is good. I mean we like our pipeline going into '09. Basically we are seeing the practice that we were talking to at this point. So I am really happy with the way that's developing anesthesia.

Okay and then with the integration process with Fairfax in Georgia. Since Fairfax coming up on 12 months now, has your increase in estimates... or how much is going to add to EPS changed at all? Could it be a little but more accretive than what you guys first expected.

I mean we are not go to giving EPS numbers on Fairfax. We are happy with the growth we are seeing, growth that we have expected. In the fourth quarter, they'll start rolling the same-unit number for us. And we're happy with childcare factors performing. I'd say in general they are performing little better that what we had for the first year budget.

Okay, excellent. Thanks guys.

Thank you and our next question comes from Brooks O'Neill from Dougherty & Company Brooks O'Neill - Dougherty & Company: Hey good morning, I have a couple of questions. Roger you mentioned all of the factors that you believe are influencing your same-unit patient volume growth in the NICU. Do you believe there is any thing you can do to influence that growth yourselves or are you pretty much constrained by what happens in the hospitals themselves in terms of volume trends.

No.I believe that we can influence some what by putting together transport programs to bring in babies from outlined hospitals, that may not have neonatal intensive care units that I believe, might be the greatest opportunity. We always have done that of course and that is one of the programs that we have put in place and we acquire new practices as well. But we are going through a very special push right now and our review of what we are doing and a more formal program to be put in place that are in a more national level to see if there are ways that we can improve transfers from babies who are born outside of our units into a household. I think that's the biggest thing, we can do this to bring in you guys. Brooks O'Neill - Dougherty & Company: Sure. Maybe you could comment as well on any impact you believe you can see from the other practices that you have affiliated with around... at neonatalogists in terms of the work you're doing with pregnant moms and what not. Is that having any positive impact in the markets where you have overlapping coverage?

Well, definitely. I mean you know the... the perinatalogists of course, is the backward integration strategy, that as you know we've put in place some years ago to try and get more babies into our units. The cardiology is also positive, but perhaps I would say not as positive as perinatalogy. By the time the cardiologists get called, the baby has already been born, and most... on that... those children are in hospitals where they don't have any neonatal intensive care unit, where of course we would then transport those babies to our units. But if they're born in hospitals with NICUs, they'd just ... it wouldn't increase the number of admissions to the neonatal intensive care units. They would just get transferred into that NICU. Brooks O'Neill - Dougherty & Company: Sure. And then, Karl, just to be sure I'm tracking your guidance. Would it be fair to say that the low end of your reimbursement expectations in the low end of your NICU volume would correspond to the low end of your EPS guidance and vice versa in the higher end?

Yes, I think that that's an appropriate way to look at it. Brooks O'Neill - Dougherty & Company: Okay, good. And then last but... would it seem reasonable for us to assume that additional share repurchase authorization might be a consideration, going forward or should we not think about that at this time?

You know I don't think there were considering any additional theory purchases at this point in time, I think like we always do towards the end of the year, we'll look at how much we have spent in acquisitions and what our cash position is like, what our projections are like for the coming year and we'll make those decisions later on in the year. But there is nothing that we are contemplating right now. Brooks O'Neill - Dougherty & Company: Great and then, I guess one of the question is in terms of the commercial reimbursement, I think Roger you mentioned that you are continuing to see the same kinds of trends that you have seen in the past. Is that in the range of that thing 2% to 4% you are just seeing just overall on national basis in terms of the commercial side or is it better then that?.

Well what we are seeing from a reimbursement standpoint, our managed care on contracts, when we negotiate each year is better than that, as you can imagine what we did spend in the year we need to cover everything to get it back to that 2% to 4% range. So we are seeing not better than that on the contracts we will be negotiating. In addition we are having, a lot of success with the payers in working through multiyear contracts, have escalators built in rather than having the... get an upfront number and then nothing for few years to really negotiate. So that's what we can help from process as well. The message there is you know we have got a lot of questions about cutting back on reimbursement and payers' cutting back and there is some concern about that. As far as we are concerned, we just aren't seeing it and we are being... continuing to be successful with our strategy of getting those contracts renegotiated.

And our next question comes from Sundeep Singh with Deutsche Bank.

Hi guys. Good morning, thank you.

Hi, good morning.

Just a couple questions here; the first one has to do with anesthesiology. I think just recently a larger hospital-based company announced its entry in anesthesiology through management services agreement. I'm just curious to get your thoughts on what are you seeing in the competitive landscape within that space as well as how does your kind of strategy changed in light of newer public companies possibly entering the space?

Yes we saw that. It looks to me like and I don't ... I haven't spoken with anyone of the company, so I don't have any information other than what I read. But it looked to me like it was more of a management services organization that they were had acquired. It didn't look like they have acquired any groups of anesthesiologists. It doesn't affect us at all. We have our strategy in place. We are very confident in what we're seeing, we're getting a lot of interest from a number of different anesthesiology groups across the country. We're very excited about our position and so, I don't, that doesn't have any impact on our strategy; we're moving forward.

Okay. And then just a second question is, as I look back historically, I think in terms of top-line growth, the company has typically relied on acquisitions for roughly 5% to 6% of your overall top-line growth. Is there anything as we look into your pipeline, anything or any reason to believe that this could change in the future, in terms of contribution from acquisitions?

Well, our contribution of acquisitions this quarter was two-thirds of our growth came from acquisitions and one-third came from selling it. All that's again depends on timing of deals. But also form a top-line growth with the anesthesia practices being much larger; they're going to add more to that top-line number from a growth standpoint when we do those acquisitions, so that's helping accelerating that number as well.

And then just the last one I had was, I think Karl you mentioned in terms of the lower margins due to three things, lower volume, acquisitions, as well as the office space practices. Can you just give us the sense for just contribution from each of these. Is it a third is coming volume or how should we be thinking about how each of these three impacted overall margins, just from a --?

Yes I would say it's probably in the order that we went through and the NICU volume down is part of biggest impact our margins. Then the anesthesia practices as we've talked about in our lower margins, we expect to bring those up over time as we implement improvements in those practices, but they are impacting margins again and the office-based practices we have set over time, their margins or lower. They've a lot more costs to run an office with personnel as well as supplies. So, that's... as we have done more of those deals, it's brought down this year as you look at our models for the last year, we've seen more of the office-based practices in the acquisitions that we've done so that has impacted margins.

Okay, thanks very much.

Thank you. And our next question comes from Rob Mains with Morgan Keegan. Your line is open. Rob Mains - Morgan Keegan & Co., Increase.: Thanks, good morning. I might want to parse the guidance just a little bit more here Karl. The 24% pricing, is that for each quarter you'd expect to be in that range?

Yes, I do expect each quarter to be in that range. Rob Mains - Morgan Keegan & Co., Increase.: Okay, and then can I infer from the comments that you've made about how you're seen NICU volumes bounce around. That the range that you've given here, negative 1% to negative 4%, you've kind of seen that maybe on a weekly basis and those are the parameters that you used to set a level of guidance?

I would think the level of guidance that we've put out there was something that unless things were to change pretty dramatically, we were comfortable with the low end of that we would be at or above that. I don't want to get into commenting on every single week's numbers and what that is, but it was more of function of... we've seen bounces around, from March until now, and we just wanted to be comfortable that the range we were giving on the low side, it would be unusual for us to see something below that. Rob Mains - Morgan Keegan & Co., Increase.: Okay, that's fair enough. And then, the volume slowdown you are seeing is in the NICUs, it's not in the office-based specialties?

All office-based specialties, we are seeing growth in our specialties, both pediatric cardiology and maternal-fetal medicine. Rob Mains - Morgan Keegan & Co., Increase.: Okay. Did you have the same volume drivers in MFM as you would neo-natology?

I'm not sure. I mean in some ways the volume drivers would be the same, but also in the maternal-fetal medical practices and a lot of places, if you can bring physicians in, they are able to add to the volume because there is a need for the subspecialty. And as we add physicians, we can grow volume. So it's more of adding locations and physicians that allow us to grow that practice because there is a need out there that's, not being completely filled. As we've said in the past, it takes a while to find some of these maternal-fetal medicine physicians as there is been a desire, a lot of hospitals to employ them over the years as well, and it's a pretty small subspecialty as all of ours. So, you know that's kind of the... what is causing the growth in there, even though driver would be worse.

I'll also add to that, Rob, sometimes we see the growth in maternal fetal medicine, counsels' et cetera, related to more malpractice issues than birth. So, there's been a bad case in a hospital, all of a sudden you start getting a bunch more obstetricians asking the MFN's to come in and sort of care for the patient alongside of them. Rob Mains - Morgan Keegan & Co., Increase.: Okay. So, just... that makes sense. So, Karl, are you saying that some of the MFN practices, you've being adding doctors in addition just doing acquisitions that you announced over the lat few months?

Yes that's correct. Rob Mains - Morgan Keegan & Co., Increase.: Okay, That's good to know. Thanks a lot.

Thank you. And our next question comes from Nicolas Jenson [ph] with Raymond James & Associates.

Hi, guys, how you doing this morning?

Good.

Good morning.

Quick question. Back to drill a little deeper on the length of stay issue, one of the larger hospital chains was talking about, they had some revenue pressure in any quarter from manage care companies trying to force. NICU stays down. So, I was wondering if you guys are seeing anything along those lines or has that been an issue with why it was down slightly year-over-year?

No, and I don't know what they could do to control that anyway. No, the answer's no.

Okay, and then on the S-chip, it's possibly up for a new home maybe after the election. We are wondering if you guys have monitoring, any discussions around that would be great? Thanks.

Yes, we're monitoring the S-chip, I mean what's going on with that. Right now the expectation has been that will come up after the election. There is some thought that could actually come up before that as a political move, kind of, bring that issue up to a forefront again. As we talked about in the past, one of the things... one of the biggest concerns for us in the S-chip program, which is currently a small piece of our business, is that there aren't appropriate safeguards in the program to prevent people that has commercial insurance and are available in managed care plans. Two, there's nothing in the program to prevent them from moving to S-chip, which should be a lower reimbursement for us. All of the legislation that was in the last round of trying to get changes in the S-chip program had language in it that would work to try and prevent crowd-outs, as we would call, out of managed care plans and move them into S-chip, which I think the government should be striving for based upon the way their budget is at this point, to not put up more of those people on the government when they have access to commercial plans. So, provided that language stays in there, we're comfortable with the direction that's moving. But we'll monitor very closely.

Okay, and then lastly on the Medicaid front; are you, excluding Texas Medicaid and then I guess the negative impact from the California; is the business flat? Is it 0% to 1%, negative 1% to 0%; Can you give me your thought on that? Thanks.

Weare looking at our Medicaid business to be flat. We don't expect to see any more questions coming from into the Medicaid programs where the states budgets are this year, there really weren't many prices that you could even talk about something from a pricing standpoint. We'll see what goes into next year as the budgets I think are going to be tough next year. But I think that legislators have been... found it very difficult to look at physician compensation is the place because of the issues. One of the issues California is facing is access to care for their patients. That's one of the reasons there has been a lot of pushback on the Medical program to reinstate the cuts for equity price [ph]

Thank you very much. Good quarter..

Thanks.

Thank you. And our next question comes from Gary Taylor with CitiGroup.

Hi good morning. Most of my questions been answered. Wanted to go back to volume just for a moment. Roger you made a couple of comments about a couple of your larger states looking like there has been decline in births year-over-year. Is there any thing else geographically you can give us there? Just about what kind of ... what variance there may exist between state or markets for you up versus you're down or maybe just example of some states where volume is better than others. Anything else that you can do kind of help us geographically.

Yes. No I mean a part of problem is ... a big part problem that we're having Gary, is that we are seeing a volume move from quarter-to-quarter and from state-to state. And so while overall volume is definitely down, there are states where the volumes is as flat as a good part of our Atlantic region is up and we might have seen volume up during the second quarter or during the first quarter in another state, it's down. So we're not seeing any why or reason or any kind of geographic concentration. We're seeing it go up and down and it's just hard for us to pinpoint exactly what is going on.

Okay. Can you maybe talk a little bit about, I guess what's kind of intriguing about what's happened here? As if you look over the last five years, if you look over the last decade, we have a number of births that has grown a little better than 1% and lots of years in the 90s when overall births in the U.S. were negative yet in NICU day's and your NICU day's in particular we are going in that 4% to 5% range. It must suggest that the hospitals that you're affiliated with, so to speak, because you're staffing the NICUs have really been able to take some market share in terms of NICU days and potentially burst over that period because you've just grown consistently faster than the birth would imply. So, as you look at it now and the hospitals you're working with are showing lower birth rate. Is there anything that would suggest that they maybe losing some share or that you may be losing share or just that share isn't growing as fast as it once was, because it just seems like your birth rate going from 1 to 0 or 1 to negative 1, doesn't swing your volumes from plus 4 down to minus 2.

Gary let me remind you know births don't have happen in a linear fashion..I mean a big part of our growth has been related to the fact that we are... a lot of our hospitals are in the sunbelt. I mean there are... the populations of birth may be classic... there is a...there are areas where there is significant population growth and so we have enjoyed the fact that we have a lot of our hospitals are in those sunbelt areas. We have no reason to believe that we have lost any market share, that our hospitals have lost any market share as we look around. I mean then there maybe one specific situation where our hospital was created or was built across a street from our second hospital, but that would have no impact on our business. So we have no reason to believe that we have lost market share over that any of our hospitals. You know that the hospitals are really much.

Thanks. Just kind of an administrative kind of question. Did you keep the street revenue pretty handedly in our own estimates pretty handedly. Is there a year-over-year same-store revenue comp or an quarter or an acquired revenue number in the quarter. Was that something someone else had already asked for in the call? Somebody asked something similar or I thought you feel you wouldn't provide that but, is there either one of those two numbers we could have just kind of hit the revenue run rate, a little better going forward?

Well we cannot give you specifics. Our revenue for the quarter, we saw revenue growth of $34 million during the quarter and of that $23.2 million of it was from acquisitions and the rest from same unit.

Perfect. And then final question, just on looking into next year and this would probably be something if you did see S-chip expansion in '09 it could likely, really have more impact in '10 than on '09 I guess but if you look at some of the crowd-out estimates from the GAO or the CBO or whoever, without sort of the protective language. Do you have any expense on what type of revenue shift that might cause? Is there any way at this point where you could kind of say worst case, it could shift our peer mix a couple of points or any thoughts on quantifying what that could be?

Yes, I mean, we don't really know what that's going to be I mean I think one of the things that's going to be an issue in the S-chip program going into next year is while they want it expanded, the states have to come up with their share of the money to expand the programs. So, just because the Federal government gives them the ability to do that, doesn't mean they're going to do it. So, going through this budget cycle, and the issues that the states are facing, I don't know in the short term that you're going to see significant expansion in the S-chip programs, from a funding standpoint.

Unless they can kind of loophole ways to create some matching funds or something but--?

They are matching funds in the federal government. Yes, they really have to find a way to get that.

Okay, thank you.

Thank you and our next question comes from Dawn Brock of JPMorgan

Good morning.

Good morning.

Good morning.

I just want to talk a little bit about anesthesiology? And bit about anesthesiology, and you're thinking on the build-out of the growth arm. You've done two platforms-setting acquisitions, they both had critical size, they were in great growth markets with attractive demographics. Is it fair to think that you might look for another one or two target's like this to set culture? And then tuck-in from there once that culture and the electronic data and billing systems are in place? Is that a fair way to look at it?

I think you know our strategy is to do both things. We're looking for tuck ins that might fit our current groups and we're also looking for larger groups that may help us to establish beachheads in different parts of the country. So, I think our strategy continues to be, to look for both things. It just makes sense for us to continue to acquire larger practices and tuck-in smaller ones as they become available.

Roger, are you looking for something in specific, I mean, both those Fairfax and Georgia Perry operative, really had they were well regarded in the industry again kind of just had very, very similar growth characteristics. Is that what you are looking for somebody who is going to be able to kind of just establish a culture or a platform for you that you can grow up originally and then maybe you'll take on practices that might need some more help once you've got it to offer?

Well, absolutely. We're looking for great practices and these are two great practices. They are, I can't begin to tell you the positive feeling that I have accrued to us from bringing these two practices on board. I mean we get a number of calls from groups across the country saying hey, if these are the kinds of practices that you are bringing on board, we want to talk to you about it. So, these are two practices that have wonderful reputation in great markets that are in growing areas, that are in hospitals, that have had very significant long-term relationships with their hospitals. You know, that we're very lucky to have been able to have brought on board and we're going to continue to look for those practices that are great reputation in growing areas with great hospital relationships, longstanding ties to the community. And then, as I said, as we bring those onboard, we'll continue to look for smaller practices that we can add to our local large practice.

Great. And I know it was rather serendipitous that they both ended on the same kind of electronic billing and collection system. Is that the system that you plan to go with or are you working on something more proprietary?

Yes. Their billing and collection systems, they are not on the same, billing system. Actually, we are still staying and as Roger said in this call that we've decided where we want to go from our billing systems standpoint and negotiating the contract. But currently they are both under different billing companies. What they are on is they are both on the same clinical system.

Okay.

The hospital has implemented and Fairfax has been on it quite a while, and Atlanta recently got on it. So, I think there is going to be some really good discussions between the two practices about how best to use that from a clinical standpoint in their own practices. And how to use them combined to improve the care across both practices and how they look at different parameters when they are evaluating the care of their practices. That being said, I'm not sure from my clinical standpoint that we're going to be able to make determination of what systems use. I think our focus over the next few years has we add practices is going to be how to it take the different systems out there and get information out of them, for both the billing purposes as well as for clinical research purposes. It's just... it's a product that is well ingrained within the hospital and the hospital puts in place, and is used in other than just ER. It's used in the recovery area, and pre-op area. So, I don't think it's something that we're going to be putting a system together like we were able in neo-natology and like the EMR we are putting in place for pediatric cardiology and maternal-fetal medicine practices. I think it's going to be less like that and more interfaces to pull that out of that.

And that's what--?

That is what we want. The database is what we're interested in. And we're fortunate that both of these hospitals are using the same clinical system, and that of course... it gives an advantage. But at the end of the day, what we're interested in is just the data.

Absolutely. Okay, thank you. That was really helpful.

Thanks.

And thank you. There are no further questions in queue. Please continue.

Okay. If there are no further questions then thank you for listening this morning. Operator, you can go ahead and terminate the call.

Thank you, ladies and gentlemen. This conference will be available for a replay starting today at 12 noon. That will run until August 22, at midnight. You may access the replay service by dialing 1-800-475-6701 and entering the access code of 954423. Once again, that number is 1-800-475-6701, the access code is 954423. That does conclude your conference for today. Thank you very much for your participation, and for using the AT&T Executive Teleconference. You may now disconnect.