Pediatrix Medical Group, Inc. (MD) Q3 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the MEDNAX 2016 Third Quarter Earnings Conference Call. During today's call, all phone lines will be in a listen-only mode. We will have an opportunity for a question-and-answer session later on. [Operator Instructions] And as reminder today's conference call is being recorded. At this time, I would like to turn the call over to our host, Charles Lynch. Please go ahead.

Thank you, operator. Good morning everyone. I'm going to read our forward-looking statements and then I'll turn the call over to Roger. 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, Dr. Roger Medel.

Thank you, Charlie. Good morning and thanks for joining our call to discuss our results for the third quarter of this year. 2016 continues to be one of our busiest years ever for acquisitions. During the third quarter, we acquired five practices for a total of 12 practice acquisitions of the year-to-date. We added three Anesthesia practices, expanding our footprints in the West to Nevada. After the quarter, we acquired our eighth anesthesia practice this year and to-date we have expanded our physician population in anesthesiology by more than 20%. Our pipeline remains strong and I am confident that we can close additional anesthesia practice acquisitions this year. We also acquired a pediatric ophthalmology practice in Texas, an MFN group here in Florida. In the areas of women and children's care, we continue to see opportunities to work strategically with our hospital partners in expanding the service capabilities they offer. MEDNAX is uniquely positioned to do this on a national scale and there are an increasing number of markets where we're partnering with health systems to build out a continuum of services from conception through childhood care. I see this as a solid opportunity for growth both on an organic and acquired basis. As I just told last quarter, we closed our acquisition of Cardon Outreach this summer. This acquisition provides MedData with a unique set of services for our hospital partners that focus on patient experience. Establishing eligibility for Medicaid, for insurance coverage for patients while they are in the hospital, making it easier for physicians and patients to communicate and helping patients navigate the bill they will receive after they are discharged. As we've been integrating Cardon's sales and marketing efforts with MedData's, we've seen good receptivity from our hospital partners and I think there are significant opportunities for growth through cross-selling. At vRad, operating results were in line with our expectations as we discussed last quarter and we continue to take positive steps in addressing the growing needs of our customer. Our first priority has been physician recruiting. For the year-to-date, we have now recruited more than 150 radiologists, which puts us on-track to exceed 500 radiologists by year end and we're continuing to recruit new physicians. Many of our newly recruited physicians are still going through the onboarding process, but out of that total, as of today, we have nearly 400 radiologists actively reading for vRad. This compares to about 375, who were online when we reported our results at the end of July and it’s a number that we expect will increase steadily throughout the winter. From a timing standpoint, the onboarding process is still a challenge as it takes months to complete the state licensing and hospital credentialing needed for teleradiology services. As a result, we're still in the process of building vRad's network of reading physicians to the size we think we will need. I expect that will continue to be the case through the remainder of this year and into 2017 and our guidance for the fourth quarter of this year includes our outlook that we will continue to be working above our physician capacity. But overall, we've made good progress so far in working through the challenges that we face at vRad. At the same time, I still believe that telemedicine will play a significant role in the practice of radiology in the future and that vRad will be a valuable asset to us as we move down the path of building a broader radiology business at MEDNAX. As I have said before, we do expect to acquire our first on-site radiology practice before the end of this year. In my view, MEDNAX brings a unique value proposition to these groups and that we can provide not only practice support, but also teleradiology capability through vRad that can enhance their efficiency, provide subspecialty access, and help them grow and remain competitive. Now, looking at 2016 as a whole, we have had some challenges. We have made strategic investments in newer areas. We've had to learn a lot about these businesses and make adjustments that had impacted our growth this year. But I believe we have made good early progress to position vRad for additional growth in the future. At the same time, I fully believe that all of the investments that we have made over the past several years put us in a strong strategic position of a true solutions partner for our hospital and health systems and provide significant opportunities for long-term growth. Across all areas where we provide services women and children's care, anesthesiology, radiology, management services, we have developed the capabilities to improve the care of patients to do so with greater efficiency and to enhance the patient experience in the healthcare system. Particularly in the management services, we've created expanded opportunities for cross-selling our services, which I am optimistic, can add to our growth in the future. As we've been able to do all of this while maintaining a very strong financial position with amply access to capital through our own cash flow and modest debt level. This is particularly important given the strength of our practice acquisition pipeline as we look forward. We have significant opportunities to this capital to work in practice acquisition. And I expect that we will continue to be very busy on that front as we wrap-up this year and look into 2017. As a result, I believe that we maintain the ability to generate traffic, revenue, and EBITDA growth beyond 2016 and that our expected growth in the second half of this year is not reflective of our longer term expectations. With that, let me turn the call over to our CFO. Vivian?

Good morning and thanks for joining our call. I want to give an overview of our operating results for the third quarter and provide additional details in a couple of areas. For the third quarter, our net revenue increased by 15% to $828 million. 90% of this growth came from recent acquisitions. Our practice acquisitions contributed roughly two-thirds of that growth and our acquisitions of Cardon Outreach and Alegis contributed the remainder. Looking at our same-unit metrics, same-unit revenue increased by 1.4%. On the volume side, same-unit volumes increased by 1.1%. Anesthesia, neonatology, other pediatric services, and radiology contributed to that growth, partially offset by slight declines in maternal fetal medicine and cardiology volumes. Our same-unit NICU days were up 1.3%. On the net reimbursement side, we saw a slight improvement in managed care contracting that was somewhat offset by the changes in mix of radiology services at vRad. Excluding the impact of parity in the 2015 period, same-unit revenue increased by 2.5%. On a net reimbursement side, we saw modest improvements in managed care contracting and modest flow-through of price increases, partially offset by the unfavorable impact from parity revenue that did not recur this year. After excluding the impact of $3 million of parity revenue from last year's second quarter, our net same-unit growth from reimbursement-related factors was 2.7%. During the 2016 third quarter, our payer mix was unchanged compared to the 2015 third quarter, but increased approximately a 130 basis points on a sequential basis. Our EBITDA increased by 7.7% to $181 million. Our EBITDA margin was 21.9% compared to 23.3% last year. When we provided our guidance for the third quarter EBITDA growth, we anticipated that operating trends at vRad would negatively impact that growth by three to four percentage points and vRad's actual operating results for the quarter were in line with that expectation. Looking at some of the components of our EBITDA; first, our profit after practice expense for the third quarter was $275 million, up 10.6% year-over-year. Profit after practice expense margin declined by 120 basis points, primarily related to vRad and the mix of businesses we've acquired in the past year. Second, our G&A expenses were 11.3% of revenue in Q3, an increase of 19 basis points over last year. Our interest expense was $17.2 million, up from $6.2 million last year. This increase is related to the incremental interest for the notes we issued in December of 2015 and higher average borrowing. The difference in interest cost between our senior notes at 5.25% and our revolver at roughly 2% impacted our EPS in quarter by roughly $0.04. Our third quarter net income was $96.5 million compared to $90.8 million last year and we reported diluted earnings per share of $1.04 versus $0.97 in 2015. Included in our net income and GAAP EPS is $10.6 million or $0.11 per related to the settlement of a certain tax matter. After excluding this income tax benefit, our effective tax rate for the third quarter was 39%. On a non-GAAP basis, adjusted EPS was $1.09 compared to $1.10 last year. For the quarter, weighted average diluted shares were 93.1 million, down from 93.6 million shares from the same period in the prior year, due primarily to the repurchase activity we undertook during the first quarter of 2016. At the end of the quarter, accounts receivable were $487 million, an increase of approximately $42 million as compared to December 31. Days sales outstanding were 54 at the end of the quarter, in line with the end of second quarter. For the third quarter, we generated $196 million in operating cash flow, up from $172 million in last year's third quarter. Our total net outstanding debt was $1.8 billion at September 30th, up from $1.3 billion at the end of 2015. This increase was primarily related to the acquisitions completed thus far in 2016. At the end of the September, our available borrowings under our credit facility were approximately $836 million. Moving on to our outlook for the 2016 fourth quarter, as we announced in this morning's press release, we expect that our earnings per share for the three months ending December 31, 2016, will be in a range of $0.88 to $0.92 and that our adjusted EPS will be in a range of $1.04 to $1.08. The range for our fourth quarter outlook assumed anticipated same-unit revenue growth will be 1% to 3% year-over-year. For the fourth quarter of 2016, we expect that our EBITDA will increase by 3% to 7% compared to the fourth quarter of 2015. In general, the timing of completion and contribution from acquisitions will always have an impact on our EBITDA growth rates across period. In addition, we expect that the unfavorable impact to our fourth quarter EBITDA growth from vRad will be similar to what we saw in the third quarter of 2016. Within that guidance range, we have incorporated an expectation that vRad's financial results will be slightly higher than the second quarter rather than reflecting a more pronounced upswing that we would expect based on normal seasonal patterns. Our fourth quarter 2016 results will also be affected by the impact of our senior notes offering in December 2015. The difference in the interest costs associated with this offering at 5.25% coupon compared to the cost of our credit facility borrowings at roughly 2% will impact our fourth quarter by roughly $0.04 per share. Finally, our fourth quarter outlook assumes an effective tax rate of 39%, which includes the expected increase from a change in our annual earnings mix between states. The 2015 fourth quarter rate was 35.8% and included the favorable impact from certain discreet items that did not recur in 2016. Based on our expected pretax income in the fourth quarter, this increase in our tax rate will impact our earnings per share by roughly $0.05. With that I'll turn the call back over to Roger.

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

Thank you. [Operator Instructions] Our first question today comes from the line of Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.

Great. Thanks. It sounds like you guys are making some progress on the vRad labor side, but you indicated that's probably going to drag into 2017. Do you have any more color about that? Is this like a Q1 issue, or first half issue, or is this continue -- we think there will continue to be some pressure throughout 2017?

Well, we think it’s a progress that we're making. So, it's an evolution we definitely will see more physicians coming online to read during the fourth quarter, but we think it will drag into the first quarter.

Okay. But hopefully keep -- it shouldn't be a big issue after Q1?

We expect that by the end of Q1 that we should be more or less [Indiscernible].

Yes, and I think Kevin, this is Vivian, that you're going to see gradual improvement in that. So, it's not just one quarter, it's just gradual because the physicians come online; you'll see those improvements throughout the year.

Okay. And then I guess I mean the whole problem started because you were seeing really strong demand. Has the inability to staff kind of impacted people's willingness to kind of -- to contract with you or are you still seeing that same demand out there and they're perfectly okay waiting for your capacity to catch-up?

Yes, just to remind, volumes were up 23% year-over-year in February and for the first half of 2016, they were up by 16%. Some customers that weren’t able to service, have tried to in-source, I'll say their overnight read, but we think we can bring that business back as we add more capacity. The competitive environment remains fairly thin. So, we see fewer competitors than we have seen in past years. We're hopeful -- one of the first things we did obviously when we realize the problem that we had at hand is we just stop selling. There wasn’t any point in trying to sell more business when we weren’t able to service the business. And so we are slowly starting that sales process back again and so we believe that when we have enough capacity to service those lines that we will continue to see growth in our vRad business.

Okay. Last question. I guess we talk about the pricing, you mentioned that there was a slight improvement in managed care rate. I mean is there something pressuring managed care? I guess why aren't we seeing something low single-digits at least versus kind of like the modest number that it sounds like you're seeing?

When we talk about Kevin, it's all-in, so it’s the P mix effect, its managed care pricing, its contract revenue, and its modalities. So, it's everything. So, what I said before is that you do see some variability in the contracting throughout the year and so we did see some of that in the third quarter, but we're still negotiating contracts and getting rate increases. But at the end of the day, there will be some variability with that. We're on our work plan for the year.

All right. So, you're getting consistent rate increases, it's more of a mix issue?

Well, it's variability in that and the timing of negotiating contracts. So, it's not something that's steady throughout the four quarters of the year and yes, we are getting favorability on pricing on our contracts, yes, and some of them, we renegotiated and have escalators in them and they come in at different times as well.

Okay, great. Thanks.

Our next question will come from line of Ann Hynes with Mizuho Securities.

Thanks. I just want to ask about Q4 guidance because -- I guess the EBITDA growth rate guidance is 3% to 7% and I think you said the vRad impact will remain the same at 3% to 4%. So, is there anything else in there that you want to call out that's causing the deceleration like, for example, is the hurricane impacting volume for October in Florida?

So, good morning, Ann, this is Vivian. So, yes, there's some variability -- not so much, I mean the hurricane would have had some slight impact, but that it's also what I said in my prepared comments, some of the contributions from our acquisitions do vary from quarter-to-quarter and just some of the seasonality of our business from the third quarter to the fourth quarter. So that would be impacting the overall growth rate.

Okay. And I get a question a lot about your same-store EBITDA growth, because I think there's some perception that maybe it's not growing, but if you back out -- I mean the math I do if you back out maybe with the vRad impact is that it is growing at least low single-digits. Can you confirm that?

So, we don't get into the specifics regarding that and so I typically don't break that out. But what I've said, on the margin perspective, because we do see pressure from margins when you have the same-unit not north of 3%, but obviously there's contributions from same-unit.

All right. And then I guess my last question is you do have a strong balance sheet so I guess two quarters in a row, there's been some disappointment with guidance. Would you consider a share repurchase at these levels? Thanks.

Yes. Thanks for that question. Actually we do think that given our full pipeline that we would rather put our money at work by acquiring practices and we're particularly encouraged by the reception that we're getting as we fly around country and meet with some radiology practices and their ability to see what we see which is the strategy of putting these on-the-ground practices together with our teleradiology practice and the benefit and the value that that brings to the existing practices. So, having said all of that, the answer is right now given the fact that when we acquired practices, we're not only acquiring the profitability that comes from those practices, but also these practices come with a tremendous amount of cash flow. And for us right now the focus is going to be on completing as many of these acquisitions that we can from our pipeline.

Next we'll take questions from the line of Ryan Daniels with William Blair.

Yes. Thanks for taking the questions. Roger, a bit of a tactical question for you as a follow-up to your comments there. I'm curious how you think about the acquisition pool in radiology and balancing that against the challenges at vRad. It seems like if you do do as many of those deals as appear in the pipeline that it could actually exacerbate some of the pressures you're seeing as you try to service some of those internally-owned accounts. So, how do you balance that growth potential with the growth potential of kind of pure outsourcing at vRad?

We don't see a lot of conflict. On the contrary, what we see is complementary provisional services through these practices whether -- by providing weekend coverages for them or night time coverage for them, or by adding a subspecialty coverage that they don't currently are able to provide for their hospitals on a consistent basis. Retirements -- as physicians retire covering vacations, I mean there are number of opportunities that we see by brining both of these models together. In addition one question that we get asked is hey we have 40 radiologists practicing at XYZ Hospital. On their days off, can the younger crown work for vRad and provide that back up that you might need. So, for us, it’s a very complementary business and we don't really see much of a -- we're not about going into a hospital and displacing existing groups and kicking them out, that's never been our model from neonatology to anything else that we do. So, we're pretty encouraged by the reception that we get.

No, I appreciate that. Maybe I didn't ask the question well, but I'm thinking if you acquire a number of the radiology practices and then do start providing that overnight, weekend subspecialty coverage, that's only going to increase the volume burden on vRad at the exact same time where you're kind of struggling to staff vRad up and postponing new sales. I'm curious doesn't it just exacerbate that problem a little bit.

I see, okay. No, sorry, I see your question. Well, no, obviously, we're going to model that out in a way that makes sense to make sure that we service our customers -- existing customers before we add any more from the practices. But like I said, I think that part of the opportunity we see is that some of younger physicians practicing in these on-the-ground radiology practices have asked if there would be an opportunity for them to actually read for vRad during their time-off you. We'll have to careful and thoughtful about how we add that, but we see that as an opportunity.

Okay. And then final question on vRad and I'll hop off. Just how long is the typical kind of sales pipeline there? Meaning that when you really do start to ramp-up sales again, how long will it take for that to reflect in net new customer acquisition? Thanks.

I'm going to say probably four to six months, I don't really have that figure in front of me, but a safe guess would be in the six months period.

I mean Ryan are you asking to get to where they were before of should basically just -- because they are -- right now we're adding new customers, just not at the rate that we had been. So, I think that you'll see that progression throughout the year depending on what happens with volumes at the hospital and things like that as well. So, there's different aspects to that.

Okay. Sure. No. That's helpful color. Thank you.

Next, we'll take question from the line of Ralph Giacobbe with Citi.

Thanks. Good morning. On the -- just going back to the pricing side, again, you cited the mix shift I guess radiology serving as a pressure point. Is there any way to parse that out and give us a sense if you exclude that what it was in terms of the contribution to the drag to same-unit pricing until you say you're willing on the volume side as well? Because I would think the vRad side had a positive impact there.

Yes, I mean so net-net, it's not that big of number to the same-unit, but I hate to give out specifics, but it would be in a range of less than 50 basis points all-in for the pricing impact. But again that number varies because there's other things going in different ways, P mix being one of them, but yes, that radiology would be roughly that.

Okay. That's helpful. And then just considering the guidance for next quarter midpoint implies your EPS down year-over-year and you certainly mentioned some of the pressures and the continuation of the pressures. And Roger you mentioned in your prepared remarks that you don't think it's sort of reflective of go-forward and opportunities you have. So I guess the question is when do you think you can sort of flip and start growing EPS at this point? And maybe more importantly, could you give us a sense in terms of how do you think about a framework over longer term sustainable EPS growth target for the company at this point?

Well, we have said in the past and we are sticking with that clause that we believe we can grow EPS in the north of that 10% number. And so we still believe that. We think in the double-digit, it makes sense and we expect that as early as -- in the first half of next year, we will be able to continue down that path.

With that said, of course, I have to put on my CFO hat and say that obviously you have to adjust for things like tax rate that really is not reflection of what's happening in the operations of the business and interest, which we're going to let a lot of it this year. But nonetheless, you have to look at that because we have had -- as I mentioned to you guys because I wanted to set the expectations correct that we have our -- tax rate has gone up.

Okay. All right. That's helpful. And then one last one. Just a point of clarity on the vRad side, and maybe I missed this, and just want to be clear. So, I understand the positive side of all the volume in the incremental scans coming to you. Is it you're getting all of those scans or is sort of the offset that you're getting the lower acuity scans?

So, yes, we're getting some -- I think we talked about that in the last quarter, the mix of the business is changing as it relates to CT scans moving to x-rays. We're getting -- we still have CT scans, but there's more volume on the x-ray side and on the final side of the x-ray, which is kind of where you wanted to get to. With that said, it's not a straight math calculation because obviously it takes less time to read the x-ray than it does the CT scan. So, there's -- its different factors impacting the overall pricing aspect. It's not just math -- straight math.

Got it. Helpful. Thank you.

Next, we'll take questions from line of Brian Tanquilut with Jeffries.

Hey. Good morning, guys. Roger, Vivian, question for you on pricing again, sorry to drill down this again. But as we think about the pressure that we're seeing in some -- in some states on out of network rates, are you seeing any pressure at least initial discussions on in-network as you kind of like lose that leverage or at least the leverage to use the out of network strategy as a way to negotiate in-network rates? Is that an issue that's coming up right now?

So, no. And honestly we have heard about that and so we actually have been talking to our folks here in preparation for the call because I think I wanted just to make sure that there wasn't anything out that I hadn’t heard, but we've always said to you guys and I still say we don't really have a lot of out-of-network business, we don't think it's good for the patients, hospitals, and all that. So, we're specifically not seeing that.

Let me just say we've never build a business by being out-of-network. We don't think that makes any sense. It's not good for the patient, not good for our hospital partners, and it's not good for us. So, we do have some out-of-network business. It’s a small non-material amount and we're not -- like Vivian said, we're not seeing that.

Okay. Got it. And then Viv, as we think about guidance and obviously this quarter for Q4 your guidance is below three. What do you think the sell-sider, the Street is missing in terms of modeling your numbers? Because it seems like we have always been over shooting the numbers that go into your guidance. So, as you look at 2017 without looking at you giving guidance, I mean what do you think we immediate to be cognizant of as we think about modeling?

Yes. So, and I know that we've had some discussions with that -- with you guys about it. So, thanks for bringing it up. I think some of it related to some seasonality in our business. If you go back the years, Q4 is usually lower than Q3. Some of it depends on how the calendar days land, it's not always the same number, it's only the same variance, but certainly a piece of it related to that. So, I think you got to keep that in mind. All else being equal, that was something that does impact us some three to four. And then now, in our portfolio, like our said, there's some variability with contributions from acquisitions et cetera, but that's more of our own positioning. But the seasonality does impact the ramp-up or ramp-down of third and the fourth quarter.

Got it. And then last question for me, Roger, you talked about capital deployment, right? And in the past I think Vivian has mentioned that and certainly there's -- or at least there's a goal to spend roughly $1 billion a year towards acquisitions and buybacks. So, as we think about the remainder of the year and 2017 and you look at the pipeline, I mean number one, do you still think that's a good number to be thinking of? And then second what do you think seeing in terms of the competition for deals in radiology, especially since we just saw a teleradiology -- a deal get done with private equity recently. So, what's the backdrop there, both of the on-site and the telerad side?

Yes. Well, I'm going to answer the second question first and let Vivian answer the first one.

Yes. Okay. I'm happy to do it.

I think the radiology -- I think the advantage that we have with radiology is that we own vRad and I see that as a significant competitive advantage because there's only one vRad. There's only one company that practice in all 16 states. There's only one company that has 75% to 80% of their physicians that are sub -- boarded in all of the sub-boards and radiology, pediatric or musculoskeletal or breast imaging or whatever. And so we think that -- and one of the reasons we vRad when we did it that we saw the uniqueness of that practice and our ability to create value by bringing the local practices together with vRad. As I travel around the country and talk to the different radiology practices, I'm encouraged by the confirming of that opinion that we had that these -- a number of these practices that we meet with are seeing the same kind of benefit and the opportunity to bring practices together. So, I mean we'll always have competition. We have seen in the past when we decided our enter radiology and other practices that -- areas that specialties that others have decided to do it as well, but I think that we're in pretty unique position given the asset that we have which is unique and non-reproducible.

So, on the close to $1 billion deployment, we have been doing that and we have -- as Roger mentioned in his comments, have a great year on acquisition spend and we don't think that will end in the fourth quarter. We will some continued spend. So, we're pretty encouraged on the deal flow here. And so I don't think that will be an issue to get to close to that number Brian.

All right. Got it. Thanks, guys.

Thanks.

Next, we'll go to the line of Gary Taylor with JPMorgan.

Hi good morning.

Good morning Gary.

Just a couple of questions -- a lot has been covered. I just want to make sure I understand going back to a couple issues. The guidance for the 4Q, I do understand tax rate headwind year-over-year and the financing expense headwinds year-over-year. So, this is the first time in some time I think you have guided the 4Q down sequentially and so I'm just wondering to understand that a little better? And I guess we had presumed that potentially was some additional vRad recruiting, onboarding cost, et cetera, but I want to make sure that that's correct or if there's anything else you would call out in the sequential guidance?

Yes. And -- so I don't know that -- I agree with that, I do think we've had like I said fourth quarter typically is from a seasonality perspective when we look at some of our drivers like average day expense and some of the days. Typically it is somewhat lower and so there is seasonality in our business from the third to the fourth quarter. Now, again, given what we've done sometimes with acquisitions that could potentially then offset that. Like year we had a really large contribution right because we had done vRad.

Okay. So, in the last five years, I think earnings have been up, but maybe I'm not thinking about the sequential acquisition build. So, nothing else, though, outside of seasonality that you would call out? You're --

No, it's usually the days like I said, for whatever season we do see some seasonality in the senses et cetera, but you can go through that with Charlie because I do think that has impacted the growth rates.

And can I clarify one comment? I want to make sure I heard it right. I think you said that as vRad came into same-store that put a 50 basis points pressure on reported pricing/mix factors. Did I understand that correctly?

You did and that's why you see, I hate to give out, because I said it was the range, I said it was not than 50 basis points. That's on the pricing said. Obviously, on the volume side, it did have a positive impact because as I said in my comments, they did have positive volume.

Okay. You said 50 bps.

Yes, exactly.

Two other quick ones. Can we -- I mean given that obviously vRad has been an issue, and the mix has been issue, can you give us a sense of what you're seeing? I'm really interested in both for vRad and the revenue cycle business what kind of volume growth in vRad and maybe this makes more sense to talk about what kind of revenue growth in the revenue cycle business. Are you willing to provide any more detail on those two segments?

Well, I mean on the revenue cycle business, we are excited about the growth proposition. As Roger said, they have been coming in the higher single-digit and we do believe that there's going to be -- as he mentioned, cross-selling opportunities and there -- that -- take a little while for that to show up on the P&L, because there's ramp-up time with these implementations and all that. But we're pretty excited about that opportunity and they have had good organic growth. Again, given their size, hard to move the same-unit needle for all of MEDNAX, but that sector is really a pretty exciting one.

And then last one if we think about what vRad looks with these newly recruited physicians on-boarded and we start getting into the second half of next year and moving into 2018, conceptually what do we think vRad looks like in terms of volume and revenue growth?

Well, I mean it's hard to predict that at this time, but again, we have said that we were looking at some mid-single-digit for them all-in. So, we're hoping we can get back to that. But again it's too premature to tell, so we're not going to put that in at this point, but we're making good progress with them, they did have a great quarter on recruiting physicians. It does take time for them to be really as productive as we'd like and with their shift of services for moving to x-rays, you got to get them productive on reading those, which you want those to be read at a faster rate given the reimbursement from both of those CTs versus x-rays. So, there's a lot of moving parts, but everything is moving in the right direction at the moment.

Okay. Thank you.

Our next question is from John Ransom with Raymond James.

Hi, good morning.

Hey John.

Let me just go back to an issue on anesthesia. So, first of all, have you guys -- and I don't recall, but have you guys ever disclosed your total network mix across all your businesses?

I don't believe we've ever disclosed it, but I can tell you it's just very, very, very small.

Okay. And, again, the concern that I hear from investors and this is a bit arcane is that some of these hard caps on out-of-network rates, particularly for anesthesia as a multiple of Medicare are giving payers license to unilaterally reduce in-network rates. And I think we understand commercial rates are 4x to 5x Medicare rates in general. So what's the mechanism to prevent -- or how does this work inside baseball to prevent some payer from going in and well, out-of-network rates are now limited to 175% of Medicare, so now here's your shiny new 125% of network rate for in-network. That's the concern I hear and it's a new issue at least for me personally to try to figure out and I just would be interested in your perspective on it.

Yes. So, like I said I had heard that so we talked to some of our folks that are out there dealing with these negotiations day-to-day. And they just haven't that pressure in our -- in the book-of-business that we have for anesthesia. So, I don't know what else to tell you on that other than we just haven’t seen it in our geographic -- with our geographic concentration. I don't know if other folks are saying that, but we just haven’t seen it John.

And you don't have enough exposure in say California to worry about that particular state?

Right.

We -- I don't think we have any exposure in California for anesthesia.

Okay. And then my second question would just be on your anesthesia group, do you have a number that would kind of break out in your mind and inpatient surgeries versus outpatient surgeries and in particular freestanding outpatient surgeries? Are you -- as part of what's going on with anesthesia, as the surgeries migrate from hospitals to freestanding, is that something that you feel like you're up against it a little bit in terms of that trend or is it something I'm worried too much about?

Well, I mean we have -- I mean don't remember the actual numbers, but we have -- we do have a mix of all of that. And we have had in hospitals where we're at, we have -- where they have seats, we have that business too and we have outpatient business. So, I mean--

I can look that number.

We have a variety of that. I mean we can look it up and share with you guys. We haven’t really -- we don't really focus on that.

I mean we're just in a cycle where hospitals are reporting basically flat outpatient surgeries and these freestanding ASCs have been reporting high single-digit, low double-digit rates. Now, we haven't seen a lot of press this quarter, so we'll see what if that trends normalizes. But it just seems like ever since high co-pay plans hit a threshold, we've seen this acceleration into all national lower cost settings. So, I didn't know if that's something that was on your radar to worry about.

Let me just add to that we -- every one of these practices that we buy, typically has both in-hospital and outpatient facilities that they cover. So, but I can -- Charlie can look up that number and give you a more intelligent answer.

Yes. But I mean it does vary from quarter-to-quarter just so you know, because I do think we have talked about that. So, -- but like Roger says, we can get it, because we know we have.

Yes. All right. And then just last couple for me. Again, sorry so beat the seasonality horse, but what we see is surgeries are massively -- I mean every year fourth quarter is a bigger, bigger, bigger number for surgeries because of co-pay people get their co-pays through their co-pays. I'm not aware of any particular seasonality with babies. So, other than just timing of M&A and one fewer weekday and is there something else that's changed with seasonality in your business or is this just a funky year with M&A timing and maybe vRad is playing a bigger role than it will going forward.

I think you're right. I mean it's what you said, there's nothing more to it than that.

Okay. And as you guys have deployed a ton of capital I think the thing -- the last thing I hear on your socket that's hard to parse is you've deployed a ton of capital. It's hard to break out organic growth versus return on capital, but just generally speaking when you deployed this $1 billion what kind of returns were you looking for? How do you measure that? How are these deals tracking against your returns expectations? And I'm talking anesthesia, your two IT acquisitions, vRad, I mean this -- big jump up in capital deployment. How is it tracking versus your expected hurdles?

Okay. So, as you know, I say to you guys from time-to-time, we do look at these deals retrospectively and really on a deal-to-deal basis and so overall, the deals are performing well. Now, that doesn't mean every single one we'll be hitting the pro forma estimate that we have for them, but overall, they do okay. Again, obviously impacted when you look at our return on invested capital rate that's been impacted by some of the multiples that have been paid not only because we've done a lot more anesthesia deals, but in some of the pricing on that. But again, overall John, we do have pretty good discipline here of looking at the performance of the deals. Of course overall, they are doing well. There's some that are not doing what we plan, but overall the return is what we expect.

And I think people are still a little confused on vRad and just say you get over-the-hurdle with your staffing and it gets back to steady state like you think approximately what percentage of the EBITDA is in the third quarter versus the rest of the year? I mean it wasn't clear to me that the third quarter was such an important quarter for you until the issues last time. But as we think about that business on a steady state business and I think it was $50 million or so in EBITDA when you bought it, how do we think about allocating that on a seasonal basis?

So, it did have some ramp-up, but I think what we've said, it impacted the third quarter close to 4% and we do think it's going to on the EBITDA growth rate and similar percentage in the fourth quarter.

But does it do 40% of its EBITDA in third quarter normally? I mean is it that big seasonal effect because of doctor vacations?

No.

Just as an example it's not that high.

No, I don't think. I would have to go back to that John, but I don't really think that there's that big seasonality. I mean obviously in the summer, there's some, but I wouldn’t say it's to that magnitude.

Okay. All right. Thanks so much.

Now, to the line of Chris Rigg with Susquehanna. Please go ahead.

Good morning. I just wanted to come back quickly to the mix in the radiology business. I mean, when we think about the shift from CT to x-ray, I mean if I guess to use sort of a baseball analogy -- what inning do you think we're in terms of when this is sort of baselined into -- or sort of in the run-rate when we're not going to see this pressure on a quarterly basis?

Well, I mean the mix is hard. It's hard to project. I mean I think they have seen business moving in that direction. But like I said before, I think that they will obviously improve that with the productivity, right, because it just depends on the number of x-rays reads you can do for our versus what you do for a CT scan and then how the physician is getting reimbursed. And so it's just a lot of those moving parts. I do think the business is moving more towards finals and specifically then on the x-ray side. But I don't know. Like I said I just think that that's going to have volatility from quarter-to-quarter.

Okay. So, just it's not really a trend, it's just going to move around quarter -- you're just saying it's a quarterly thing, it's not going from one -- from where we are today to -- it's not going to persist for some period of time?

Well, I mean there's some -- well, the results aren’t going to persist, because right now, they are in an evolution trying to get these docs to be productive. So, like I said, once you get some of that settling, then I think you'll find that having some of these final x-ray business, they will be able to make more profitable because of the efficiency of the read process. And so there are several moving parts to it. But yes, I do think there has been a trend towards more finals business that will be typically more x-rays, but it's just not one thing is what I'm trying to say Chris. There's a lot of different business dynamics that go with it. And again the efficiency of the read from the physician perspective would definitely impact that a lot.

Understood. On the NICU side a couple of the hospitals have sort of said they have seen some weakness in terms -- in terms of lower Medicaid volumes generally. Is that consistent with what you guys have been seeing?

Not -- I mean not really, no. No.

Lower Medicaid volumes?

Well, fewer Medicaid deliveries and I'm wondering if that has translated into anything on your side.

No, we haven’t really seen that, no.

Okay. Okay. And then just getting back to this out-of-network dynamic. Obviously, this is the question that a lot of us get all the time and I know you said it's not a very small percentage of revenue, but does that mean it's sort of like 2% or 10% or just some parameters would probably be very helpful for all of us on the call.

It's -- I can tell you it’s a lot less than 10%. But again, it's not something that we basically want to do. We don't keep it up, because it's just -- it's not a part of our business, it's very small.

Right. And then just one follow-up on that because these are questions that I get all the time. Even though the out-of-network is small in its totality is it heavily skewed towards the anesthesia business or is it about the same level across all the businesses?

I would have to look at that. I think I would think it's about -- I mean, again, because we used that only when we can really negotiate with the payer in that market. I would -- if I went back, I would tell you that it probably varies, but it's just a very small percentage for us. I don't know how much more to tell you guys. We've been saying this for years, we don't believe that its good practice to have out-of-network business and it hasn’t been an issue for us and it’s a very small percentage.

Understood. I appreciate your color. Thank you.

Onto the line of Gary Lieberman with Wells Fargo.

Good morning. Thanks for taking the question. I guess maybe to stay on the NICU business, can you talk about general trends that you're seeing there and maybe comment on any increase or decrease of what you're seeing with Zika if anything?

No, nothing to report as far as the Zika Virus is concerned. Our admit rates are within the usual ranges and our length of stay, which are the other -- the two variables that we look at are also within our historical ranges. So, nothing to report on admission -- admit rate or length of stay.

Okay. And then make just coming be back to the -- to vRad. I think you talked about it, but are you continuing to see the trend towards final read? You said last quarter as being one of the -- one of the issues that you hadn't expected and was putting pressure on labor. Is that continuing to be the case or do you now expect that you're for the most part going to be doing the final reads?

Yes, so I don't know if you had been on the line, but yes, we just talked about that. It’s a trend that's continuing and I think again, as these physicians get onboard and they are trained, I think the productivity there will improve and so will the profitability of the final x-ray business.

Okay, great. Thanks a lot.

Thank you. Next we'll go to the line of Chad Vanacore with Stifel.

Hey good morning, all.

Hey Chad.

Good morning Chad.

I want to retread some well-trodden territory here. So, just thinking about vRad services, have you seen any changes in demand from hospitals and is it the demand there but just not able to fill it yet or is vRad just lacking the economies of scale and to step-up?

No, no, no. The demand is there. Again, we -- as I told you before, we saw during the first half of 2016, a 16% rate increase in volumes. And we thought the sales process once we realize that we were going to have a problem fulfilling our obligation. We have, since then, at a much lower rate restarted our sales process with some extended times when we can begin the coverage. So, we're selling -- we're saying now we can help you, but you have to wait until February of 2017, that kind of stuff. And we're seeing continued interest and continued ability to sell into the next year. So, no, I think that the interest is still very much there.

Okay. Then just as a follow-up what percentage of increase in staff are we talking about to get vRad to the optimal level to backfill this demand?

Well, we saw 20% increase during the first quarter or the first -- and in the month of February, we saw 20% increase in volumes. So, if that continued, we would need to increase our population by 20%, right. We were at 400 -- or under 400 physicians. We think we'll be at 500 by sometime -- by the end of the first quarter or something like that or the current volume and the volume that we project we would have by the end of the first quarter that probably is the right number. Now, as we continue to see and continue to grow, obviously, we will continue to recruit at the same time.

All right. Thanks, Roger. That's good color. Then just thinking about the revenue cycle management business, especially Cardon that you just added that was the bulk of the addition is to this quarter, what kind of margins for these physician practice acquisitions should we be thinking about, or should we be thinking about this more as an internal bolt-on?

So, again, we are not going to talk about any specific margins on these businesses, but -- and it's not -- it's still a much lower percentage of the total MEDNAX business, but we're excited about the topline growth of it, because we do think that that there's a lot of opportunities there and I do think there's opportunities there as well for improvement of margins as we proceed with some of these cross-selling opportunities and some synergies that we're doing just integrating some of these business.

All right. I think that's it for me. Thanks.

Thank you.

Moving now to the line of Dana Hambly with Stephens.

Thanks for getting me in. Roger, just on the conception to child care strategy, just wondering if it there's a market where you're providing the full continuum or what kind of type of penetration do you have within the existing footprint where you are providing that full continuum? I'm just trying to better understand the market opportunity.

Yes, we see that as a real opportunity for us. Our hospital partners continue to ask us to help them with either -- whatever their needs are, it could a pediatric emergency room, it could be pediatric urology, it could be OB hospitalist services, it could be maternal-fetal. So, it depends on the specific need of the hospitals, but they are currently turning to us more and more and asking us for help with whatever specific services they might. And we see that as a significant avenue -- a continued growth for us.

Okay. And then Vivian, on the fourth quarter the contribution from acquisitions to the fourth quarter revenue is that -- I know you talked about the timing of acquisitions. Should we think of that as comparable to what was in the third quarter or more or less?

Yes, I mean more or less. Like I said, our same-unit guidance is one to three and the remainder is coming from the acquisitions. So, yes, more or less, it will be similar.

Similar. Okay. Thanks very much.

And we'll go to the line of Whit Mayo with Robert W. Baird.

Hey. Thanks. Just a couple quick ones. Back on vRad, when you acquired that business I think it was earning margin in the low 20s and presumably, it's lower than that now. Just was wondering if you would be willing to share where it's tracking currently?

Well, you're on the right track, but I'm not going to give specific numbers, but given that it's impacting our EBITDA growth, yes, I mean, obviously it's lower than what we expected when we acquired it. And so we're hoping again, it's all of the discussion throughout this call that it's moving in the right direction to get back on track where it was. But yes, it has been impacted obviously with these challenges and business related to additional cost on the physicians on the recruiting side as well as on the productivity pay side.

Yes. Let me just remind you what we talked last quarter which was number one an increase in competition to our physicians to get them to work overtime in providing these region. So, if there are schedule to work whatever eight shifts every two weeks, now we're asking them to work 10 or 12 shifts and we're paying extra for them to work those shifts. And then we also buy contracts, have some turnaround time that we specify to with our clients. And if we're not able to provide the turnaround time within those parameters, then there are some penalty built into that. And so all of that we hope will go away by the end of the year.

Got it. And maybe just two quick ones. Just malpractice, Vivian can you just remind us how that's trending now?

So, we've had really good experience with malpractice throughout the year. It's really not any given quarter phenomena. Throughout the years we've had a very good experience because we believe we have a very good process to manage those claims with our claims committee that's comprised of different physicians in the specialty. So, I wouldn't say that that's changed, it's just been -- it's been a good favorable trend throughout the years.

Okay. And just one last one. Parity revenues from the prior year I have $1.5 million. Is that number still accurate?

That number is obviously accurate.

Perfect. Thank you.

There are no further questions in queue at this time.

Okay. If there are no further questions, then let me thank everyone for participating this quarter and I look forward to speaking with you next quarter. Thank you, operator.

With that, that does conclude our conference for today. And we thank you for your participation for using our AT&T Executive Teleconferencing. You may now disconnect.