Welcome to the MEDNAX 2018 Second Quarter Earnings Conference Call. As a reminder, this conference is being recorded. I would like to now turn the conference over to our host Charles Lynch. Please go ahead.

Thank you and good morning, everyone. I'm going to quickly read our forward-looking statements and then 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 press release or quarterly report on Form 10-K or in the Investors section of our website located at mednax.com. With that, I'll turn the call over to our CEO, Roger Medel.

Thank you, Charlie. Good morning and thanks for joining the call to discuss our results for the second quarter of 2018. Today, we announced a number of definitive steps that mark the acceleration of our corporate initiatives, shareholder friendly planned uses of our capital, and the building blocks for our strategic operational and financial direction over the coming 18 months and beyond. Our operating results for the second quarter marked the sixth quarter in a row of meeting or exceeding our forecast. They also reflect the positive impact of the corporate, operational and growth initiatives which we began discussing back in 2017. I want to discuss the announcements we've made this morning and put our results for the second quarter and for the first half of 2018 as a whole in the context of the broaden financial and operational improvement targets that we announced in our press release this morning. But first, I think it's an appropriate time to reintroduce so to speak who we really are at MEDNAX. With all of the noise surrounding our industry and our company in the recent past, I think some of that may have been lost. Next year will mark our 40th anniversary as a company. Over those four decades, we have been an organization of clinicians with a mission to take great care of our patients. Today, we do that in many more ways than we did when we started, but our mission has never changed. What has changed over the years is the capabilities that we have built to follow that mission and in my view what we have built is strong, sustainable and yet still not fully realizing the potentials in front of us. That's what I'd like to talk about today with you related to our three primary clinical…

Thanks, Roger, for your comments. And as you reminded folks in your prepared remarks today, MEDNAX is an organization committed to improving the quality of care and taking great care of the patients every day in every way. I am proud to be a part of that and will be here to ensure a smooth transition of my successor. With that, let's get to our review of the second quarter. Our consolidated revenue growth of 8.7% reflected acquisition-related growth of 5.5% and same-unit growth of 3.2%. Within the same-unit revenue growth, volumes contributed 1.9% while pricing contributed 1.3%. On the volume side, we saw growth across all of our service lines. In radiology, our first acquired on the ground practice, Radiology Alliance in Tennessee, rolled into our same-unit pool, and same-unit volume growth between the practice and vRad was very strong. Beyond that, the greatest contributors to our volume growth were anesthesiology, our other neonatology related services, primarily newborn nursery care and maternal fetal medicine. Within neonatology, NICU days increased by 0.1%. Similar to the first quarter, our volume trends also reflected contributions from organic growth initiatives which included both expansion of services and contract wins at our existing practices. Most of this activity was within neonatology and other pediatric services, maternal fetal medicine and anesthesia. Pricing growth was largely driven by modest improvements in managed care contracting and increases in administrative fees received from our hospital partners. These help to offset a modest headwind from payor mix, which was unfavorable in anesthesiology and slightly favorable in neonatology and other pediatric services. Net-net, payor mix trends reduced pricing growth by about 70 basis points, slightly favorable to what we saw in the first quarter. On the cost side, practice salary and benefits expense was $621 million or 67.8% of revenue…

Thank you, Vivian. Operator, we can go ahead and open up the call for questions, please.

We have a question from the line of Kevin Fischbeck with Bank of America. Please go ahead.

Great. A few clarification questions. So, I guess, Vivian, just kind of picking up where you left off there. So when you think about Q3, you're kind of saying you lose $5.5 million of EBITDA run rate, you got $10 million of extra expenses related to those doctors, so let's call it a $16 million drag, but you're also saying you're getting $6 million of G&A savings and $10 million of operational improvement, so that largely offsets that contract. Is that the way to think about Q3?

Well, sure. That was the only two things happening, right? But as Roger spoke about a lot and we've spoken through the first half of this year, we still have some of the headwinds that we are dealing with in the normal business related to the macro trends out on payor mix and other things. So we are taking the appropriate steps to really offset those impacts with some of these initiatives, both on the G&A side as well as on the operational side. But those are certainly not going to be totally accretive, given that you have some of the other headwinds.

Okay. So I think it's the minus 3%, minus 8% EBITDA growth in Q3. That's kind of more what the fundamental structures are causing. These other things are kind of offsetting is the way to think about it?

No, no. That includes, like I said, $0.12 to $0.13 related to the impact of Southeast, one of which, as I said $5 million to $6 million or roughly $0.04 to $0.05, is related to the lack of the contribution from SAC. And then the other one is the one-time cost of winding down related to the physicians' compensation that we'll be paying in the third and the fourth quarter. And so, that's another $10 million or roughly, like I said, $0.12 to $0.13 that impacted our estimate for the third quarter.

Okay. But I was just kind of also saying that these cost savings would be non-operational, or at least non-normal type benefits or tailwinds. The fact that you have two things add to the equation is saying that they offset, then that would be the way to think about the quarter?

Well, no. But you still have – if I would have taken those out, we would have a positive EBITDA growth similar to what you've seen by candidly in the second quarter.

Okay. So is it...

Yeah. You had offset to the operational initiatives that we had and the G&A initiatives. So you wouldn't have had positive EBITDA growth similar to the second quarter.

Okay. And so then with Q4, I think you're saying that that $10 million of salary expense and then kind of the $5.5 million of EBITDA losses is also the way to think about that drag in Q4 related to that business?

Yes. Yes.

Okay. So you're going to have, call it, $33 million of headwinds related to that in the second half. So when we think about that related to 2019, you had $11 million of positive in the first half, $33 million of negative. You have kind of a $22 million drag in 2018 and that's basically what the drag will be in 2019 as well? So although there is a first half, second half dynamic, the drag from that contract in 2018 is going to be pretty similar to the drag in 2019. So these cost savings you're putting through will start to fill up more fully next year. Is that the way to think about it?

Absolutely. Yes. Right, because you have to – and you use the math right, Kevin, which is you have to back out the one-time cost for the physicians that we're paying through the end of the year, which obviously goes away for 2019. Yes. So we do expect to get back to growth given that we would have had – we excluded these items certainly in the third and the fourth quarter, but again in 2019, the operational initiatives and the lack of some of these one-time items for SAC, we're definitely expecting to have positive margin and positive growth.

Okay. So if I understand the cost savings correctly, 2018, $35 million of operational improvement and $25 million of G&A in 2018 which gets you to $60 million and there's another $60 million incremental in 2019, gets you to the $120 million. Is that the right way to think about it?

Yeah. I mean some of these are on a run rate basis, so, yes, that's absolutely right.

Okay. And then, I guess, last question. So you mentioned that – I think you said in 2019, it sounds like you're kind of expecting still in that kind of 2% to 4% organic growth revenue and you expect to get some EBITDA margin improvement in 2019. Now you're doing that, I guess, with this incremental $60 million of cost savings. If you didn't have this cost savings in place, would you still be able to get margin improvement on that kind of organic growth or do you need to kind of (00:40:17) what the cost structure each year to deliver that?

Yeah. No, we need to look at our cost structure to deliver that. As I said to you guys before, in order for us to expand margin on a same-unit basis, you have to get way north of 3%. I used to say 3% years ago, and now it's close – it's not quite 4%, but it's certainly way north of 3%. And so we would definitely have to be looking at that to get margin expansion.

All right. Great. Thank you.

Next question will come from the line of Brian Tanquilut with Jefferies. Please go ahead.

Hey. Good morning. Vivian, Roger as well, just a follow-up to that. So as I think about all the cost cuts that you've laid out, I get the G&A side, but as I think about the other expense lines in your P&L, I mean it's basically salaries and benefits, right? So how do you find that much? I mean what exactly does MEDNAX need to do to realize these cost savings target?

Yeah. Well, a lot of it is staffing. A lot of it is working on the anesthesia side, working with the hospital to make sure that their operating rooms are utilized efficiently. The operating room is the most expensive part of the hospital and also the most profitable. And often to have an operating room open without a patient in it happens and it becomes very expensive for us to have an anesthesiologist who is sitting there waiting for the next patient to come, which never comes. And so we have – our Surgical Directions team has put together some proprietary algorithms that we can go to the hospital and talk about. Heat maps that show what times, and this is all based on historical utilization of their operating rooms and we can identify what times different rooms should be open, et cetera. And often we can save the salaries of two or three anesthesiologists in a large hospital and maybe add one nurse anesthetist instead. So, that's one area, is the staffing area which can be very important. There are other things like renegotiating hospital contracts. There are things like asking for stipends or going with a different load or different mix of caregivers, et cetera. So it's a combination of all those things. But we have been very effective and believe that given our Surgical Directions team and the leadership that they – the information that they have provided us, we think we still have some additional room for efficiencies.

Hey, Roger, just to follow up on that – sorry, go ahead, Vivian.

The other thing, Brian, to look at is that there are revenue opportunities given what Roger said in the prepared comments related to a realignment of some of organic growth initiatives and so we're pretty pleased with that.

Yeah, and then Roger, just it was very clear in your prepared remarks that you were communicating that we're not pulling back on physician comp, right? So it's a staffing strategy, but does this require you basically or does this hinge the hospitals agreeing to the moves or strategies that you want to roll out?

Well, I mean it is a partnership. But what we're demonstrating to the hospital is a way for them to save money and to be more efficient in their provisional services. We're not asking them to cut back on any services. We're saying that sometimes a hospital will say, there is an open operating room that we want to leave open for an orthopedic surgeon who has promised on Thursdays to bring those 12 patients and now it's 10 o'clock in the morning, he's done one patient and he has no more patients to bring to the hospital today. And meanwhile, the OR is open and its staff and you got circulating nurses and you got surgical techs and all these people running around and the equipment anyway. So it's not about cutting services. It's about just providing them more efficiently and that actually has worked very well for us.

And just two clarification questions really quick ones. Number one, Viv, when you talk about EBITDA margin expansion, does that include or exclude Southwest (sic) [Southeast] physician costs?

No, that will exclude that.

Okay, got it. And then last one, Roger. You talked about pulling back on M&A. Does that include radiology as well or are we still saying, we're pulling back on anesthesiology for now given valuations or has that expanded into radiology? Thanks.

No, I wouldn't say that, and I would not say we're never going to do another anesthesia acquisition either, okay? I don't want to send that message. The multiples in anesthesia have gotten to a point where it's just not workable. And so where we can find lower multiple deals that make sense for us and there won't be obviously a whole bunch of those, but there are groups that we're speaking with, there are smaller groups who are more appreciative of some of the other benefits that we bring and so we're talking with them. On the radiology side, we're finding the same thing. There's been a couple of private equity firms that have jumped into that specialty and we are finding that with the larger groups that the multiples have gotten out of hand and we're not going to play that game. Having said that, we have a pipeline where the multiples – there's benefits to vRad and some other benefits to be had from the practices that we have already acquired and those play a role in attracting practices. And I will also tell you that I expect to close a neonatal deal – a nice neonatal deal before the end of the year, so we can continue to grow to go down that path. We'll have that as well. So we're not shying away from anything. We're just saying we're being more cautious and more strategic about what acquisitions we look to complete.

Awesome. Thank you.

Our next question will come from the line of A.J. Rice with Credit Suisse. Please go ahead. A.J. Rice - Credit Suisse Securities (USA) LLC: Hi, everybody. Thanks for the question. First of all, I think this is probably a straightforward one, but I feel like we all at least ask it. So the way the Southeast has played out, has that had any impact in other markets either with your existing customer base or your new contract efforts? And also I'd ask the same with your physicians both with your existing contracted physicians and with your ability to recruit physicians?

We have not seen or heard from any other hospital that has anything to say about that. We have very carefully listened and tried to keep track of what's going on. And so the answer is we haven't. There are some – this is under litigation, so I don't want to talk about it very much. There are some things about this specific hospital that make it, I would say, pretty unique. So at this point in time, that is not anything that we're seeing. On our physician groups, there's talk – a physicians' talk and one said something to the other and there are groups and whatever, but it's the same answer. We've had lots of conversations with our doctors and we explain what's going on. Some positive things that happened here, I know that we're focused on the financial hit to the company and that's a big deal, I get it. But it's also true that we have stood by the side of our physicians that our physicians have felt like they have a group that has – and a partner that has stood by their side. We paid them until the very last day of their contract and we're giving them their six-month severance that they were entitled to according to that contract. We fought – it was an ugly fight. We fought with them. We brought their points. We believe that the hospital has, which is of course again not something I can talk about too much, but we believe the hospital has wronged us and has wronged the group. And so we think that there are some positive things that have come out of this, not financially, but we're demonstrating to our physician partners another reason why they want to partner with MEDNAX because when it came time to stand by their side and this is as you can tell a big expense that we have decided to put in place for our physicians, we did exactly that. And so we have also gotten a number of calls and comments from our physician partners across the country saying basically, wow, way to go. A.J. Rice - Credit Suisse Securities (USA) LLC: Yeah. It's good. Okay. We've had the benefit of the cross-selling initiative in the women's and children's area in facilities where you managed the NICU. It seemed like that got started talking about that in the fourth quarter of last year, which happened also to be the time when we saw a re-acceleration in your same-store growth. How big a factor has that been in contributing to the pickup in same-store growth that we've seen?

Yeah, it's an important one. And as I said earlier, we're in 17 different subspecialty of the pediatric and maternal world. And what we find is that a lot of our hospital partners are asking us – we've won a number of RFPs particularly in this world. And we believe that there is still a significant amount of growth to be had there, not only in neonatology, but one of the internal growth things that we put together is well baby care. And we're probably only caring for about half of the well babies that are born in our hospitals. We'd like to see if we can double that. And so, yes, that plays a significant role. A.J. Rice - Credit Suisse Securities (USA) LLC: And just my last thing. When you were giving your prepared remarks, Roger, you talked about sustaining sort of the low to mid-single digit same-store growth. So I guess we had, had in our mind you're going to anniversary this pickup in growth in the fourth quarter, but it sounds like with what you see today you have confidence that it'll continue at least through the intermediate term.

We do. We do. A.J. Rice - Credit Suisse Securities (USA) LLC: Okay. All right. Thanks a lot.

Yeah.

Our next question will come from Chad Vanacore with Stifel. Please go ahead. Chad Christopher Vanacore - Stifel, Nicolaus & Co., Inc.: Thanks so much. So just to put a pin in the cost-saving initiatives. On the operating expenses, it looks like you're expanding your 2019 operating expense savings by about $45 million, but $40 million is due to fewer physician contracting. Is that correct?

No. No. That wouldn't be correct. Chad Christopher Vanacore - Stifel, Nicolaus & Co., Inc.: All right. Then, Vivian, then maybe you could parse out what kind of operating synergies you expect there?

Yeah. And so, it's all of the above on the operating plans what Roger just talked about. It's really staffing initiatives, it's stipend renewals, it's revenue opportunities, it's reduction of premium pay; it's all of that, Chad. Chad Christopher Vanacore - Stifel, Nicolaus & Co., Inc.: Okay. How should we think about what's a good run rate for OpEx as a percentage of revenue going forward given those initiatives?

Well, I mean again I am hesitant about talking about that percentage because there's a lot of moving parts there. What we can say is that and I'm going to try to give you guys some guidelines there to bring your models is that without the impact of Southeast, we're definitely expecting margin to be increasing. And so, we're expecting the margin increase and we're expecting the growth similar to what we saw in the second quarter. And as you saw, that EBITDA growth was roughly 6%. And so, that's what we can say to that. These initiatives were intended to kind of offset some of the headwinds that we're seeing in the macro environment. But again, given the momentum that we see on the top line, we do expect the margins to expand. Chad Christopher Vanacore - Stifel, Nicolaus & Co., Inc.: Okay. Do you want to maybe frame the margin expansion? I mean in 2016 you were running above 20% EBITDA margin, 2017 with the change in business mix and maybe a bit of slowdown, you were running a little under 18%. Now, we're a little under 17%. How should we think about margins given the new business mix?

Yeah. I mean I don't want to quantify that at the moment. Because like I said, I can't predict the headwinds related to payor mix and some of the burst and all of that, but I do think that you'll see some margin expansion. Chad Christopher Vanacore - Stifel, Nicolaus & Co., Inc.: Okay. And then just share repurchase, you get $500 million authorized. You said you expect to exercise some near term. Any change, you want to quantify that a little bit more?

Yeah, yeah, thanks for that question. Yes. So we do expect in the near term to probably execute on about half of that, so roughly about $250 million. Chad Christopher Vanacore - Stifel, Nicolaus & Co., Inc.: Okay. Excellent. And then just one more quick question. Your range of tax rate being up by about 100 basis points from the prior estimate. Why is that?

Yeah. I think we had a shortfall in the equity exercises given that that now based on the accounting rules runs through the P&L there given just the drop in the stock price. So as you know, we typically have the big vesting there in June. Chad Christopher Vanacore - Stifel, Nicolaus & Co., Inc.: All right. Thanks for taking the questions.

Next question will come from the line of Ralph Giacobbe with Citi. Please go ahead.

Thanks. Good morning. Just want to come back again on sort of the cost side. I would think the visibility on the G&A, the $40 million pretty locked in. I guess my question is, the $80 million, when you say sort of operational improvement and you've sort of alluded to the fact of kind of going back and asking for subsidies and revenue opportunities that you see. I guess it just seems like we don't necessarily know that those are locked in or are they? Can you give us a sense of that $80 million, how much do you have to sort of workflow versus how much do you have visibility on today?

So, Ralph, this is Vivian. So we have specific plans for each one of these practices and so we do have visibility into it. And it is real because we're really – we're executing on it now. And so, if you look at the run rate for the year as we talked about the year-to-date $13 million and what we said on the third quarter that we're expecting another $10 million, I mean these things are happening and there's a specific management system to it. And so, they're not all related to stipend negotiations. A lot of it is related to efficient staffing models as Roger mentioned and reduction in premium pay, et cetera. So we do have a good line of sight into that. I don't know, Roger, if you want to add anything to that.

No, I agree. I mean, look, I think that we obviously wouldn't be sitting here giving you a number if we weren't comfortable that that was a number that was reasonable. Obviously, we are going to try to beat that number, but we get on our weekly reports and we've got our team focused on this. It's what we've been talking about doing for the last three quarters. We put a plan in place for every practice. There are people responsible to make this happen. And we feel that it is definitely an achievable number.

Okay, all right, fair enough. And then just want to go back to the commentary, you talked about the fourth quarter and I think you said same impact in the fourth quarter as in the third quarter. Just wondering does that mean fourth quarter you'd expect to be down 3% to 8% off of the 4Q base, is that the context of those comments?

Yeah, so that's the dollar number that we gave you. So just again to give you guys some guardrails to help you with what you're going to estimate there. But I don't want to get into the percentages because it might not be similar, right, it's just a different base, but the dollars are similar which is what we try to give you a guidance on. And so the impact of Southeast we expected to be similar in the fourth quarter.

Okay, all right, got it. That's helpful. And then just as we think about next year and again I know you don't want to guide next year, but it sounds like from what you're saying in terms of sort of stability certainly on the same-store top line and some improvement from the cost side and from margin expansion, I mean is there any reason for us not to think that you'd be able to do sort of at least the mid-single-digit EBITDA growth off whatever the base is this year?

Yeah, that's exactly right. Yeah, that's a reasonable expectation.

Okay. All right. That's it for me. Thank you.

Thanks.

Our last question will come from the line of Ana Gupte with Leerink Partners. Please go ahead.

Hey. Thanks for fitting me in. Yeah, the question – the first one I had was about your anesthesia payor mix pressures and so the hospitals have been reporting better pricing growth which they attribute to service line improvements, improved acuity and inpatient. Some of them like ATA even (00:59:37) talking about commercial mix optimization in inpatient and then the health plan side we're seeing more of a push toward ASC. Is that likely – is that playing out at all as you see procedures and demand for your services and might that become eventually a tailwind for you at some point?

Yean. Well, we reported what we saw. We hear some of those same comments and we also heard births were up, some people were talking about that. We just report what we have and what we see. We're hopeful that that will come true for us as well and we welcome that. But right now what you have is a very accurate picture of what our financials were for the second quarter.

Okay. And then on the efficiencies that you're talking about, the $40 million, can you tell us a little more about the breakdown between what you're doing at overhead versus at the practice level? And as you go beyond 2018 into 2019, what the runway for that is? Is this kind of capped at $40 million? Do you think that's conservative? And what the specifics on what exactly you're doing there?

Yeah, Ana, hi, this is Vivian. So we kind of did try to give you some bases of how much is roughly in G&A. And so we had said in G&A we were expecting $25 million this year in 2018. And on a longer term basis, 18 months or so, we were expecting it to have a 10% reduction or so which gets you to based on the base (01:01:22) that we were talking about when we did that that was based off roughly around $40 million or so. So, that would be the G&A component of that. And then as we've said for the operational plan saving initiatives, we're expecting $35 million of that to be 2018 expectation and then we're getting to $80 million in 2019, so that's related to the operational plan.

I just got a sense though that there was lot more runway, I mean am I missing something? When we talked last, Vivian, is this kind of the most achievable that you have a detailed plan already outlined, but there's more to go here.

Well, sure. I mean we've said $120 million, so I'm considering that pretty respectable here for the total now. Is that going to be the end of it? No, I think we're absolutely on the right track regarding continuing to look at the operations as Roger said and identifying ways to operate more efficiently in some of these pressured reimbursement environments with combination of staffing models and anesthesia with nurse anesthetists and physicians and reduction of premium pays, I think that will continue. But I think we're pretty comfortable with this number and we think it's doable.

Okay. Well, that's it for me. Thank you.

There are no other questions in queue.

Okay. Well, if there are no other questions, let me thank everyone for participating this morning, and we will look forward to speaking with you next quarter. Thank you, operator.

And ladies and gentlemen, this conference will be available for replay after 12:00 P.M. Eastern today through August 23, 2018. You may access the AT&T Teleconference Replay System at any time by dialing 1-800-475-6701 entering the code 452060. International participants, dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, access code is 452060. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.