Pediatrix Medical Group, Inc. (MD) Q1 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the MEDNAX 2016 First Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. And I would now like to turn the conference over to our host, Mr. Charles Lynch. Please go ahead.

Thank you. I want to read our forward-looking statements and then I'll turn the call over to Roger and Vivian. Certain statements and information during this conference call may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by MEDNAX's management in light of their experience and assessment of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate. Any forward-looking statements made during this call are made as of today, and MEDNAX undertakes no duty to update or revise any such statements, whether as a result of new information, future events or otherwise. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the company's most recent annual report on Form 10-K and its quarterly reports on Form 10-Q, including the sections entitled Risk Factors. In today's remarks by management, we will be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this morning's earnings press release, our Quarterly Report on Form 10-Q, or in the Investors' section of our website located at mednax.com. With that, I'd like to turn the call over to our CEO, Roger Medel.

Good morning and thanks for joining the call to discuss our results for the first quarter of 2016. I want to talk about those results and then talk about our strategic outlook for this year. For the first quarter our revenue growth accelerated to almost 18%. Same-unit growth was just over 2.5% or 3.5% without the effect of parity and our EBITDA growth accelerated to 12%. We completed four practice acquisitions and we've continued to add to our pipeline a fine letters of intent. Looking at that pipeline and other discussions we are having, I am confident that we will have another very active year in 2016 as we were to use our capital for acquisitions across all of our specialties and business lines. We've also had some major clinical achievements earlier this year we published the results of our 100,000 babies campaign. From 2007 to 2013 across 330 neonatal intensive care unit caring for over 420,000 sick or premature babies. We measured the outcomes of using our clinical data warehouse and CQI protocols to reengineers the delivery of the neonatal intensive care. In the paper we demonstrated that this campaign resulted in significant improvement in all critical areas of neonatal care; higher use of breast milk, lower incidents of infections, [indiscernible] prematurely and enterocolitis, and in very low birth weight infants, a decrease in mortality of 22%. I can't say how proud I am with this achievement and we are already moving forward to additional campaign like this one using our scale and data to take better and better care of our patients. Now in terms of our strategic outlook for this year, I think it’s important to start with what we look like today. You may have noticed that there is new logo at the top of our press release this year. It says MedNet Health Solutions Partner. That logo represents how we position our company over the past few years. We added to our existing specialties. We have added new specialties. We have added new services lines like FLA medicine, consulting and management services organization. And I will tell you how these additions all fit together. What it comes down to is that we are still the same company we have always been. For more than 35 years now we succeeded by looking what's going on in the world around us and adapting to change. And the healthcare industry is changing fast these days. We held our annual meeting of medical directors a few weeks ago and we focused on change. Changes in the business of medicine and changes in the practice of medicine and how those two things are converging. One of the key note speakers we invited to this year's events was Dr. Victor Dzau, the President of the National Academy of the Medicine which was formerly the Institute of Medicine. Dr. Dzau has been a champion of the MMM which he spoke about at length. When you look at what's happening in healthcare, the MMM is meant to give providers goals with the next wave of change. What it says is it's not enough anymore just to provide great care. We need to be able to improve the health of a whole population of patients. We need to bring down the per capita cost of care and we need to focus on the patient experience. And in case anybody didn't think this matter that's also how we are going to get paid. The way we've changed at MEDNAX is in the same direction. I can't think of a better demonstration of population health that our 100,000 Babies Campaign. When we started this Campaign long before the world talked about population health, but the concept was the same back then. When you focus all of your efforts on taking great care of your patients, good things happen; especially if you are doing it across 100s of the neonatal intensive care units at the same time. But today we are also thinking about the whole continuum of care for a population of mothers and their children from conception all the way through adolescence and how we can add value every step of the way. So we've been adding new service lines in a lot of markets and we'll keep doing that in partnership with our hospital customers. On the cost side, we can prove that better clinical outcomes save money. In the paper we published on the 100,000 Babies Campaign we calculated that just the decrease in central line infections resulted in accumulative reductions in the cost of carry for those patients of $58 million. We also acquired vRad because we believe that telemedicine has benefits across the board including cost. It is far more cost effective to access to 100s of radiologists on call instead of having to recruit some specialty trains additions to re-study at just one hospital. It also improves outcome. And in the operating room changes in workflow and scheduling can improve on time starts, streamline the operating professes, enhance patient safety and save hospitals 100s and 1000s of dollars a year for operating room. So today we've got a consulting arm that can do just that for our hospital partners. Our efforts towards enhanced recovery after surgery can also improve patient outcomes while at the same time, we do [indiscernible]. These programs add to the value our end of physiologists already bring to our hospital partners and they benefit everyone involved through better outcomes at a lower cost. Finally the patient experience isn't just about political care. It's also about their operations starting when it supposed to start. It's about all the caregivers communicating and making sure the operating room is a safe environment. And it's about quicker and easier recoveries after their operation is over. All of the value programs that we are rolling out through our anesthesia practices, patient safety, simulations, collaborative workflow consulting help to improve the patients experience in the operating room and beyond. The patient experience is also about helping them find out whether they are eligible for insurance coverage when they show up at the hospital. And it’s about helping them figure-out how to handle the higher and higher amounts of money they are responsible for after their discharge. We bought MedData and then Alegis to help patients when they are admitted and after their discharge. These two acquisitions are just the beginning of a bigger management services offering that we can provide to our hospital partners and to outside physician groups. And we will continue to invest here as well. When I think about how we grow is that we've got a lot more points of connect with our hospital partners. When people have talked in past couple of years about bundling a lot of that meant trading off a subsidy here for our new contract there or something along those lines. What we can do today is take great care of our patients but then also talk to the hospital about saving money in the operating room or helping get their patients insurance coverage or getting better with their collections or thinking about fellow medicine solution. The way I see it that's how you get thicker relationships with your customer by bringing value to them across the board and that is our definition of bundling. What all this means is that if we've got different logo under our name it’s not just the new logo it's the tip of the iceberg of everything we have done to change and adapt to the world as we see it. We've been putting together all these pieces of jig-saw puzzle and they all support each other. They also all start with taking great care of our patients, which is at the heart of everything that we do. The nice thing is the way the healthcare world is changing and ways that we had changed means that we have more and more ways to do just that. We've got more diversified. We've got more ways to grow and each step of the way, we are becoming a real health solution partner to our physicians, hospitals and health systems. And that is our vision for the future and how we will succeed and continue to grow. With that let me turn the call over to Vivian Lopez-Blanco, our Chief Financial Offer. Vivian.

Thanks, Roger. Good morning and thanks for joining our call. I want to give an overview of our operating results for the first quarter and provide additional details in a couple areas. For the first quarter our net revenue increased by 18% to $753 million. 85% of this growth came from recent acquisitions. Our acquisition of vRAD in May contributed just under half of that growth as the practice acquisition and our acquisition of Alegis contributed the remainder. Looking at our same-unit metrics, same-unit revenue increased by 2.6%. Excluding the impact of parity in 2015 period, same-unit revenue increased by 3.6%. On the volume side, same-unit volumes increased by 1.5%. Our NICU days were up 50 basis points. We saw growth in our anesthesia volumes and other pediatric services primarily new born nursery and pediatric cardiology also contributed the volume growth. While maternal-fetal medicine volumes are flat year-over-year. On the pricing side, we recorded roughly $6 million in parity revenue in the prior year quarter or $0.02 per share in EPS that did recur this year. Excluding the impact of parity from last year's first quarter our net same-unit revenue growth from reimbursement related factors was 2.1%. Impacting this growth was roughly a 50 basis point shift in mix towards government payors compared to the first quarter of 2015. On a sequential basis though, our payor mix shifted favorably by about 40 basis points compared to the fourth quarter of 2015. Our EBITDA increased by 12% to $144 million and our EBITDA margin declined by 100 basis points to 90.1%. With this margin decline partially reflecting the impact of the parity revenue in last year's first quarter that did not recur this year. Looking at some of the components of our EBITDA first our profit after practice expense for the first quarter was $234 million, up 19% year-over-year. Profit after practice expense margin improved slightly by about 35 basis points despite the impact of parity. This primarily reflects a favorable impact from the mix of businesses we've acquired in the past year. Second our G&A expenses were 12% of revenue, an increase of a 130 basis points over last year. This increase reflects the higher mix of G&A expenses at our non-practice physician services and our non-physician service company. Below the EBITDA line our interest expense was $14.5 million, up from $3.3 million last year. This increase is based on higher average borrowings primarily reflecting the notes offering we completed in the December of 2015. The difference interest cost between our senior notes of 500.25% and our revolver of at roughly 2% impacted our EPS in the quarter by roughly $0.04. Our first quarter net income was $67.9 million compared to $68.7 million last year and we reported diluted earnings per share of $0.73 versus $0.72 in 2015. On non-GAAP basis, adjusted EPS of $0.87 grew by 5% over the prior year. For the quarter weighted average diluted shares were $93.1 million down about $2.2 million share from the same period in the prior year due primarily to the repurchase activity we undertook in the first quarter of 2015. At the end of the quarter, accounts receivable were $466 million, an increase of approximately $21 million as compared to December 31. Day sales outstanding were 56 at the end of the quarter, up about 1 day from December 31. Last quarter, I discussed how our DSOs were impacted in the fourth quarter by coding personnel shortages related to the transition to ICD-10 coding during late fall. As we took steps to resolve our staffing needs and add coding resources our DSO peaked January of this year at 58. And since then has improved consistently by approximately 1 day per month. We continue to generate star cash collections and I am confident that we will continue to see improvements in our DSO through the second quarter. For the first quarter we used $33 million to fund operations, down from use of $54 million in last year’s first quarter. Our total net outstanding debt was $1.4 billion at March 31, up from $1.3 billion at the end of 2015. This increase was related to cash use for operations, acquisitions completed during the quarter and the repurchase of $59 million worth of share completed under our ongoing authorization to buy back stock to offset those impact of our equity compensation programs. Moving on to our outlook for the 2016 second quarter, as we announced in this morning’s press release we expect that our earnings per share for the three months ending June 30, 2016 will be in a range of $0.89 to $0.93. And that our adjusted EPS will be in a range of $1.04 to $1.08. We are also introducing a quarterly outlook for EBITDA, for the second quarter of 2016, we expect that our EBITDA will increase by 8% to 12% compared to the second quarter of 2015. The range for our second quarter outlook assumes anticipated same year net revenue growth will be 1.5% to 3.5% year-over-year, including approximately 0.5% on favorable impact on pricing from the decrease in parity revenue from the 2015 second quarter. Excluding parity revenue from both periods are non-GAAP measures, our second quarter outlook assume same year net revenue growth will 2% to 4% year-over-year. Our second quarter 2016 results will also be affected by the anticipated impact of our senior note offering in December. The difference in interest cost associated with this offering at 5.25% coupon compared to the cost of our credit facility borrowing at roughly 2% will impact our second quarter by roughly $0.04 per share all notes being equal. Additionally, our second quarter 2015 results included approximately $0.01 per share from Medicaid parity net of the impact from incentive compensation and income taxes that will not reoccur in the second quarter of 2016. Now I will turn the call back over to Roger.

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

[Operator Instructions] And our first question comes from the line of Ryan Daniels with William Blair. Please go ahead.

Yeah, good morning. Thanks for taking the question. Roger I am hoping that you could provide a little bit more color on the integrated solution offering you are offering to hospitals at this point and kind of I guess a little bit more detail on the recognition among your client base of those offerings a year into the one MEDNAX strategy. And then number two what the pipeline looks like in different conversion rates are looking like for those integrated solutions.

Yeah, I would say that we are making progress with our hospital partners certainly through our MedData acquisition I think that they are the ones that are really leading that charge. And so you know what we started out with by just simply being a revenue cycle management company has converted into much more of a solution having to do with early outs eligibility improve particularly on the Medicaid side. So we think that there is a lot of growth along those lines. One of the things that's interesting to us is that as more and more people are eligible for Medicaid hospitals because Medicaid is a poor payor, 10% less money is trying - in building up that infrastructure for Medicaid. So that's an area - one of the areas where we can really help our hospital partners and have in fact done that already. We are looking at other possibilities in this management services area and we believe that there are other opportunities to make other acquisitions in this area that we will be able to be successful at. So you know I think that everything is going down the path that we sort of laid out for us. And we are very happy with our acquisitions and we think that we will continue to show some significant growth in that line.

Okay. Perfect. And then another different question. Just looking at the novel part the drug payment model looks like anesthesia practices would see some pretty market increases I think was about 50% positive change. And I know that would probably more for your outpatient areas or pay management. But curious if you had any thoughts on the potential impact to MEDNAX if that actually goes in to place?

Hi, Ryan its Vivian. So, yeah, I mean it’s - as you said its more for the paying centers because obviously for the you know hospital piece it’s not impacted. So, you know there could be you know certainly some - you know positive, you know impact from that.

Have you guys tried to calculate what the impact - that would be?

Yes, I mean it’s just not its positive, but it’s not as material. There is still working on the calculation.

Yeah, as you pointed out we estimate that any impact would be concentrated in our paying which are small part of

Yeah, it’s only a piece of the medication. So it’s not - it’s positive or happy that is going to occur for that from that perspective but it’s not something that going to be that material for overall you MEDNAX.

Okay. Understood. Thanks. I will hop back in the queue.

And we do have a question from the line of Brian Tanquilut with Jefferies. Please go ahead.

Hey. Good morning, guys. Roger, as we think about the acquisition arena, I mean, NAPA obviously traded to private equity. So how are you thinking about the opportunities set in front of you in terms of buckets, you know big deals, mid-size deals and small deals. And then if can just give us some update on your comments from last quarter and the radiology practices that you are looking at.

Yeah. You know we looked at that and obviously we did not end up owning that. You know, we think that there are plenty of opportunities for growth. I mean, I have got - I don't know half a dozen LOIs in - I have a dozen LOI in our pipeline. They include anesthesia practices, basically all of those faculties that we are in. So, we are not having any trouble getting these deals sourced and getting LOIs in place. And I believe we will close most of these deals. So, the opportunity that we see is that now we have more areas of growth than we have ever had in the past. So, in the past where we were focused on neo technology or anesthesia, or neo technology and anesthesia now we are looking at radiology and we are looking at maximum services and we are looking at telemedicine. So there is a number of additional opportunities for growth and so we are pretty, comfortable that we are going to have a pretty good year and continue to grow. So, on the radiology side, we are talking to a number of radiology practices. We believe that we will have our first hospital based radiology group onboard. But before the end of the end of the year and there is a lot of practices that are interested in talking to us and we think that will add yet another potential avenue of growth for us.

Okay. Thanks for that Roger. So to follow-up on that Vivian, as we think about the returns on these acquisitions they are different specialties and as you go outside of the hospital practices, I mean how should we be thinking about your return on invested capital for say a non-hospital practice, or a non-hospital business versus your traditional acquisition target.

Yeah, and so honestly in the anesthesia space because you know does the multiples have been moving a little bit higher on that. You know it will be more comparable to that. You know again it's changed. It's shifted some of the components on the P&L but like you said on the return on capital, it's closer to that but what Roger said, they are pretty high-growth businesses and we are very happy to see organic growth that MedData has contributed and then certainly vRad as well. And so you know we are happy with that and it will be similar to what we've seen in some of these anesthesia practices. You know on the radiology side, that Roger is talking about, those - it's a little soon to tell on that but again we are - we think it's attractive because of the higher organic growth that these businesses have as well as, you know complementary the services that we provide to the hospitals.

Okay. Got it. And then last question from me. Do you mind sharing with us any thoughts or description that you can give us balance billing practices for your anesthesiology business?

Yeah, you know we just don't do that much balance billing as you may know you know here in Florida. There was a bill that get passed this year about balance billing but - you know due to hospital relation we already suppress balance bills - balance billing for most commercial patients. And so in anesthesia, we estimate that the maximum risk cash payments would be approximately $55,000 per year. In pediatrics we estimate that the potential risks are about $40,000 so the total combined maximum impact would be less than $100,000. It is by the way similar legislation being contemplated in California and we don't even balance Bill in California. So any such legislation would really have no impact on MEDNAX.

Got it. Thanks guys.

Yeah.

Thanks Brian.

And we do have question from the line of Kevin Fischbeck with Bank of America. Please go ahead.

Great. Actually just wanted to clarify the 55 and 45 was the Florida down side?

Yes.

Yes.

Okay. And I guess, when we look at the guidance for Q2, I guess, you are looking for a little bit lower at least the midpoint seems have revenue growth versus what you saw in Q1. Is there any reason to think that, you know sequentially actually slow up for that just leap year not being in Q2?

May be are you looking at that ex-parity because..

Ex-parity, yeah.

Ex-parity, I don't think it’s really lower but we did have you know we did have a certainly [indiscernible] days were really good last year in the second quarter. But I don't really think it’s slower when you calculate that its two to four, you know and then 1.5 to 3.5.

2.4 and 3.6 in Q1?

Yeah, but its 4 is the high end of the range.

Yeah so...

That's why I gave you a range.

All right. But I guess mid-point, leap year would explain it.

Okay.

And so the commentary about multiple of deals and being able to do deals. I guess, it sound to me a little bit like we should expect to see more [indiscernible] non-anesthesia deals going forward, I just wanted to see if that was the right interpretation of how you're thinking about the pipeline, I guess, still strong - it seems like you move in different direction. I just wasn't 100% sure as investors how we should think about that. If you have any more additional color, I understand the commentary about how it's more important to focus on quality and deepening the relationship broadly, but I don't know if you have any more color on that strategic direction. Is it a big shift or if it's just on the edges?

No, I wouldn't say that at all. We've got a bunch of deals that are anesthesia and pediatrics related, in our pipeline there maybe one or two - probably one deal in the pipeline that's related to management services. But the bulk definitely of what we're looking at with the LOI s that we have in the pipeline are all clinical.

Physician services.

Okay, great. And then last year, you guys kind of talked about how you reorganize the company to focus little bit more on selling the entire company, focusing on potentially cross-selling contracts and things like that. Just wanted to see if you had any update on the success that you might be having there?

Yeah. I mean, I think that we are having some significant success. I mean, we haven't really talked about it, because a lot of this deal take some time to get put together, you're awarded a contract and now you have to work to get it put together in that. Our plan was that at the end of the year to sort of come up with global analysis of how well that program has worked. I can tell you that our fastest growing segment right now are OB hospitalist, and that's our internal growth, we're probably the largest group of OB hospitalist in the country right now, we probably have 15 OB hospitalist practices that we own right now and we probably have four or five others and gain that's all internal growth deals that are in - that were - get ready to put together. It takes a while to recruit the physicians and it takes a while to get the program going and all of that but you know that's just one example of how the program is working and it's our fastest growing segment right now.

Okay. Great. Thanks.

And we do have a question from the line of Gary Taylor with JPMorgan. Please go ahead.

Hi, good morning.

Hi, Gary.

Good morning, Gary.

Hi. A couple of questions, so one just going back to the EBITDA guidance for 2Q the 8% to 12%, is it fair to say biggest swing factor sequentially there is just how payor mix pays out sequentially.

Yeah, that's certainly a big factor and then of course have you know always the parity overlap which is less in Q2 or be it right, but still some of that lingering but yes.

Okay. And then just first is our model which I guess I relevant maybe only to me but - in the first quarter gross margin beat by 4 million but G&A was 4 million higher than we thought 12% in the quarter. I had in my mind that we are trying to targeting 11.5 for the year or that you were kind of thinking in that range maybe I am not remembering that correctly but have you talked about kind of where G&A you think sticks up for the year.

I mean honestly I think it will be in 11.5% to 12% range, so you know I can't look at it as precisely but I don't know if you are looking at it. You've taken out depreciation and amortization because that's you know that 50 basis points or so in there but. But - yeah, in that range Gary it’s going to be, I think, part of what I am trying to introduce with that two is that the margin has shifted, you know gross margin is improving because of these, you know different mix of practices that we have both vRad and MedData and but it does impact top incomer as you know. So there is a little bit of a shift of that.

Got it. And then finally, you had alluded to again, you know, higher organic growth in the vRad and MedDate. Is there any more color or quantification or help you kind of give us around that?

Sure. In terms of those ...

Yeah, so we look at that so for both, you know MedData and vRad they are in the - their volumes are in the high single digits?

Okay. Great. Thank you.

And we do have a question from the line of Ralph Giacobbe with Citigroup. Please go ahead.

Thanks. Good morning. Just going back to the term margin question. You know, one QC lower. You came in - still little bit lower, I guess than we had barred. Is that just a function of the business mix coming on having inherently lower margins. It is a function of new deals just being lower but ramping up ultimately two corporate average. Just trying to get a sense of how we should think about normalized margins going forward given net change in mix of the business?

Yes, so it’s similar to what I was mentioning to Gary. So there is a little bit of shift on the margins on the gross profit side, you know, positive net because of the vRad and MedData and then below the line they have higher G&A as percentage of their revenues and so you are looking at some shift related to that. So I think it will settle out in the 11.5% to 12% and so depending on what volumes do then you're going to see some of that margin constructing like we have seen. And then of course basically I'm trying to breakout the amortization because that is the big number for these non-physician type of practices because they are so large and just the accounting side of that.

Okay. I guess I was just talking broadly from like when I look at EBITDA margins over the last several years and granted there is always moving parts including parity that's been restricting at a little bit as well. But we sort of hover around this kind of 23% range the last several years. Again, as we go forward when we look at - I understand and certainly appreciate the changes between G&A and salaries, but just from the total margin perspective should we think of margins stable at that level or because of the new business coming in are they inherently lower margins that we should make about going forward.

Yeah, I think in the 22 - 22.5% range will be respectable, so I think that it shouldn't - that's what we are targeting for. Again given what happens with the organic growth and all that but 22 - 22.5% that what we look at. Again like you said first quarter is not a good indication of the rest of the year as there is less base other expenses.

Sure. Okay. Fair enough. That's helpful. And then can you give us a little more sort of color on the anesthesiology growth specifically I think in the press release you specifically said there was sort of strong growth, so I was hoping you could sort of spike that out like you just did sort of on the vRad side and MedData side. Can you give us a sense of what anesthesiology volumes were on a same-unit basis and maybe what percentage of volume does anesthesiology make at this point.

Yeah, so pretty you will - you will continue to see the progression of that in our publics filings and so anesthesia is roughly about 40% - 39% to 40% of total revenue for the company and they did have you know a really good growth rate. In the core it was roughly up over 3%.

Okay. Great and then just last thing just to clarify. The 40% revenue I know you've given on the revenues stat. Do we think revenue and volume in the same way or is the revenue perk different like - so should we think a 40% revenue 40% volume is roughly the same way to think about the volume component of anesthesiology...

Well, no, I mean it's volume and pricing all in, right. You will have to look at both. But when I was talking about the three, it's over three it's all in.

Okay. We could maybe follow-up online, all I am looking for is just the percentage of volume that anesthesiology makes up. Is it also 40 the way it is [indiscernible].

I'd have to go back and check that. I don't remember off the top of my head.

Okay. That will be follow-up. Thank you very much.

And we do have a question from the line of Chad Vanacore with Stifel. Please go ahead.

Hey, good morning all.

Hey, Chad.

So just thinking about how any potential effects of zika virus, how could that potentially impact volumes of anything about maybe fewer births to more neonatal care. Have you guys put your brain to thinking about that?

Well, I did gather up some statistics. You know in the United States there has been a total of 388 cases that have been identified. Most of them travel related. I can tell you that at MEDNAX we have had no net new cases in the United States. Across our maternal field medicine practices, we are not aware of any cases. And data from Puerto Rico, you know we have seen in six of our NIC use in Puerto Rico. We have seen three babies born to mothers who had tested positive for the Zika Virus. All three babies tested normal, heads of conference by head ultrasound. We are monitoring one additional pregnancy who is now at 34 weeks but so far as per protocol her head or the baby’s head ultrasounds are normal. So we have not seen any incidence of macro [indiscernible] in the United States and certainly not within the units where we provide care or Puerto Rico for that matter. I don't know, you know, I think the CDC I am working from memory here but a week or 10 days ago, I think the CDC issued a statement that tell you know potential mothers that they did not need to worry about the Zika virus for the time being. Now that's a direct quote but it was something along the lines that that wasn't consideration for potential pregnancy at this point in time.

That is great color, Roger. Thanks. Thinking about uses of case so what you see as a better use of cash flow right. Is it still share repurchases or debt repayments?

Well, my better use of capital our acquisitions - money to work - our acquisition not only bring you earnings but they brining in cash flow and they bring you relationships with hospitals et cetera. So to be my number is the cash, to continue to acquire that.

Okay. And then just thinking about the vRad performance I know you touched on it but how is it performing compare to budget to right now?

It's performing actually a little better than budget. We think that that was a great acquisition for us. Their revenue is growing we like what we are seeing there and we like the opportunities that we believe that's going to offer as we get into the hospital based businesses of radiology to provide back-up and opportunity for growth to those hospital base practices.

Okay. That's it for me. I will jump back in the queue.

Thank you.

And we do have a question from the line of Whit Mayo with Robert W. Baird. Please go ahead.

Excuse me. Hey, thanks. Maybe just a first on vRad can you just remind us when that falls into the same store account. And I guess the co-related to that question is that's about 6% or 7% of your business now wouldn't that have some upward push on your organic growth by about a point or so?

That will be in the third quarter.

Yeah. It will be third quarter but you know won't be a complete quarter. So there will be in the third quarter and yeah we do think it will have some positive impact I am not going to specifically say what but you are not far off from that point. But because there volumes have been pretty good but, we do expect to positively impact the organic growth.

Got it and my second question Vivian since I brought it up and you may not like it, but on malpractice streams, can you just walk us through the factors driving the favorable developments and why that should continue to be a tailwind for the foreseeable future.

So, I do like the question because it's been very - it's been a very positive trend and I know there were some report out, I don't know, if it was yours or someone else's regarding that. But we see this positiveness and I don't see any reason why it won't. A little bit about how our program works which is why I think we've had a lot of success and that we do have a you know a formal claims committee process that includes not only lawyers but it includes our physician and each one of the specialty to review a claim and again - so there is the clinical merits of a claim in addition to just legality of it. And so we do think it's a core competency of our management and really we managed not only the legal side, but we managed the clinical side of it and because we do have also a network of physicians, if we are seeing anything that's potentially a trend or whatever we have training opportunities for that. So I really believe that that's going to continue because the program continues to always have tweaks to it and as a matter of fact now we are bringing in the vRad component of it as well. And so we will have the radiology piece. So we just don't see that that will - that that will be changing any time soon. I mean our experience, the way we actuaries look at that and obviously we have our own actuaries, but we also have our auditors actuaries that look at our claims every quarter as a matter of fact and basically you know the month factors and everything is that is used, you know continues to somewhat be closure to the companies experience because of - I don't want to get too much into the details of this. But there are industry standards and then there is you know performance of your own trends and so we are looking at the components of that really at every quarter and our claims have continued to be favorable. So I just don't see that the - that's changing.

No, that.

Don't be [indiscernible] me.

No, that's helpful. I appreciate it.

And we do have a question from the line of Chris Rigg with Susquehanna Financial. Please go ahead.

Good morning. Thanks for taking my questions. Just wanted to, you know when we figure out same store revenue growing in the 2% to 4% range, you know normalized for parity. What - does that lead to sort of stable same store margins or can you grow what grow margins at 4% may be some contraction activity. Just trying to get a sense for how we should think about the cost structure relative to the same store growth? Thanks

So what I said in the past is that you know anything north of three, you know gets to be, you know good on the margin. Because especially in, you know, neonatology side, you know where is you know big fixed component of - practice cost namely the physician services right piece of it. So anything north of that we like as we start to see some positive impact on the margins.

Okay. And I know this came up sort of been around about very early but when we think about, you know multiples across the acquisition multiple across the sort of various stylus that you guys are looking. Can you just sort of rank, you know, if you - want to give a specific numbers were the highest multiples are right now versus where, you know you see in the lowest multiples? Thanks.

Well, historically and continues to be that way, the lowest multiples have been in the neonatology field and those have stayed down around the historical levels and the highest multiple has been on the anesthesia side.

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

Yeah. Somewhere in between.

Okay. Thanks.

And we do have a question from the line of Dana Hambly with Stephens. Please go ahead.

Thanks. Good morning. Roger you've talked now, several times you mentioned the Ob hospitalist program and I probably should know more about it. Just give us a sense of how big this market is? Do most hospitals have this program and you're taking that business or is it just - it's really new and it's something that could be at every nick you that you operate?

Yeah. No, it's really new. It started because hospitals were looking at their med-mal expenses and basically the idea there is that if you have a hospitalist which is really an Ob hospitalist, this is just an obstetrician in the hospital 24 hours a day and you have a mother in labor and something happens where you need to intervene immediately and do an emergency C-section. You don't have to wait an hour before the private obstetrician to drive in from their offices etcetera, etcetera. You have somebody there that can intervene immediately. It's also very helpful for the nurses who don't feel like they are alone taking care of a pregnancy because the obstetrician is again in his or her office 48 minutes away and the nurse is trying to read the fetal monitoring strip and she isn't sure and starting - and just provides a whole important backup to mothers and labor and I think it's a lot safer way to run the delivery service to have an constitution present in the house when [indiscernible] what they are seeing - hospitals are seeing are, these cases can be incredibly expensive from medical malpractice standpoint. A bad baby case is probably one of the worst nightmares that a hospital administrative can have from MEDNAX standpoint. So they are seeing some significant benefits there, but in addition to that what they see that because they - the hospital is offering this service the lawful constitutions are switching their patterns of referral and bringing more patients to this hospital that has that service available for them. So the benefit for the hospital is number - is two. Number one, you know less med mal-exposure but number two more business because more constitutions in the community are electing to bring their patients here. And what we have seen again we started from scratch. It's probably been two or three years since we started our first OB hospitalists program. It was the request of one of our hospitals. And again today we probably have 15 or so of those programs across the country and we've got four and five that are in the hospital that we are signed up for and ready to start providing care within the next whatever couple of months.

Great. Lot of information. Thank you. And then on the - congratulations on the 100,000 Babies Campaign and I know obviously the goal is to improve health and lower cost but it’s just thinking about from more of a greedy business perspective is this something, you know, when you publish these - these get published. I know [indiscernible] last year, do they help in the either recruiting efforts or contract wins even studied that all?

Well, there is - clearly are some seller benefit, you know from recruiting the idea that we - you know are able to provide our physicians with the opportunity to do this kind of research to have the access to the medical education and the quality of programs and all of that. You know - I don't know that we could ever quantify that but it certainly helps with your image and not just in - you know with recruiting but with our hospital clients. You know the other thing that it does is it helps us when we - we like to do. It is presenting information to our peers when we get ready to renegotiate our reimbursement you know with the different payer where we are quick to bring up you know all of other things that we work on - from a quality from a patient quality stand point.

Thanks. Last one, Vivian let's remaining on the share authorization?

Well there we have - the only one we have opened at the moment is the ones that is ongoing for the dilutive impact of our equity program. Since - what we did this year is that we have you know front loaded that. And so we don't expect to do any more under that program and so you know that's obviously and estimate but that one is ongoing authorization.

Okay. Great. Thank you.

And we do have question from the line of John Ransom with Raymond James. Please go ahead.

Hey, I am sorry if this has been asked I jumped in a little bit late but is there anything to think about with your back half EBITDA margins its different than your front half EBITDA margins. I believe your guidance implied some uptick to get there unless I am doing the math wrong? Thanks.

Well, remember John that the first quarter you can't - the first quarter is always lower, so maybe that's kind of what you are thinking about. But we do think that there is - what the number I was quoting was for the whole year, so just if you do the math, you're right. There is going to be some higher number along the way to get to the 22 or so, 22.5 like I was saying earlier on the call.

And are you seeing any change, I know your margins going to move as you buy more anesthesia which has lower margins but are you seeing any material change in what I would call kind of same division EBITDA margins up or down?

No. I mean, it's just a function of - I think what you said it’s more of the mix of the practices.

Okay.

If it's anesthesia versus neonatology, maternal-fetal you know, that thing not because of the division or anything like that.

And just lastly as you guys look at - you mentioned you might buy your first hospital already alleged you practice this year. What's that marketplace look like in terms of supply? Who you are competing with? How are the multiples compared to anesthesia? How does the margins compare that sort of things. Thanks.

Well, we think that there are a number of practices that are looking at their options. I don't know that specifically I could name any competitors for these practices. I am sure there will be. But you know for the time being I would say that we don't have an idea of where the multiples are going to go. Obviously that will depend upon how many competitors there are and what - how far others are willing to go. But I am sure that you know that there are significant opportunities here. I can tell you that the uniqueness that we have is vRad and the fact that we can now say to these practices you don't have to provide 24 hour a day coverage of all the sub-specialists in-house. We can do that. We can help you. We can enhance the coverage opportunities or as you grow you don't necessarily have to hire all of these additional specialists. And so you know we are the - we are the only ones who will have that and the whole IT, the technology that they have got in place and the investments that they have made. So I think we have a pretty - it sounds to me having met with a number of radiology practices that we have an attractive competitive advantage there.

Great. And the margins, what are the - how do they compare that in neonate and anesthesia?

You know I don't really want to talk about that.

I mean we haven't gotten that you know far along in these diligence yet. So I am not prepared to speak to that [indiscernible].

...So I am not talking margins.

There are a lot of things that wife told not me to talk about but as I am talking about them anyway. I thought we have the same relationship but I guess not. All right thank you.

Thanks Jay.

[Operator Instructions]

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