Pediatrix Medical Group, Inc. (MD) Q1 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the MEDNAX 2019 First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to the Vice President of Strategy and Investor Relations, Charles Lynch. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to our first quarter call. I'll quickly read our disclosure statement and then turn the call over to Roger and Stephen. 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' 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 section entitled Risk Factors. In today's remarks by management, we will be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this morning's earnings press release, our annual report on Form 10-K and in the Investors section of our website located at mednax.com. With that, I'll turn the call over to our CEO, Dr. Roger Medel.

Thank you, Charlie. Good morning, and thanks for joining our call to discuss the results for the first quarter of 2019. Our adjusted EBITDA and EPS results were in line with our guidance ranges after adjusting for discontinued operations. On a high level, our revenue growth was challenged by volume trends, but our focus on cost management helped to offset these trends. We remain on track to meet our stated target of $120 million in annualized EBITDA improvements by the end of this year to offset the revenue and cost headwinds in our business. We also have been buyers of our own stock. For the year-to-date, we have bought back $100 million worth of shares, including $79 million we bought during the first quarter. Looking across our service lines. Volumes increased modestly in most of our women and children specialties. In neonatology, the underlying trend of births at the hospitals where we provide services remained negative, but our volumes increased based on rate of admission into the neonatal intensive car unit and length of stay. We also continue to expand our newborn nursery services, a focus area of ours for growth. Our payer mix in women and children services was also positive in the quarter, continuing the favorable trends we saw during the second half of 2018. Finally, we remain acquisitive in this service line. And in the first quarter, a great neonatology practice in Georgia joined MEDNAX. Based on our pipeline, I expect that we will have additional acquisitions in women and children services in the near future all at favorable multiples. In anesthesiology, volumes were down modestly, but our payer mix was effectively unchanged compared to last year. We continue to progress on our practice optimization plans. During the quarter, we began the rollout of robust clinical resource management technology across our practices, which will enhance their ability to schedule efficiently, to optimize the use of clinicians' time and to control premium labor costs. This rollout will continue through most of this year. We also have made additional progress in changing the compensation structure on a number of practices, moving clinicians to a model that create equitable risk-sharing and provides them with a first dollar incentive either to grow their practice or to operate more efficiently or both. To date, a number of our larger practices have shifted now to this model, and I have been encouraged by the feedback that we have received and the engagement of the physician leadership at these groups. We will continue to have these discussions across our anesthesia organization either as practices come up for renewal or, in some instances, even between renewal dates. Lastly, revenue growth in radiology remained solid driven by both organic growth and acquisitions we completed during 2018. We will continue to pursue acquisitions in this service line either on a tuck-in basis within our existing footprint or to expand our geography. We also announced this morning that we are meaningfully expanding the scope of our transformational initiatives, and we will be doing this in partnership with best-in-class third-party resources. We have been working with these partners to look closely across all of our functional areas and to identify opportunities for IT investments, process improvements and enhancements of the services we provide to our practices. We discussed our first commitment last quarter, which was focused on the rollout across our anesthesia practices of a powerful scheduling and clinical resource management tool. At the time, though, we also discussed that we will contemplate more such investments on both the practice and the corporate side of our business. Based on the work we have done since then, we are now actively ramping up additional projects, and Stephen will provide more details of what we are planning to do. At a strategic level, we believe these projects are a natural progression from the practice level and operational initiatives we have undertaken over the past 18 months. Most of them entail investments in information technology resources that can streamline and improve the efficiency of what we do for our practices as well as improve our data analytic capabilities. Consequently, we believe the benefits can be not only financial but also measurable in terms of improving the working environment for our physicians and continuing to enhance their ability to take great care of our patients. In terms of our expected capital allocation, I anticipate that we will continue to pursue a balanced approach toward internal investments, acquisitions and share repurchases, most of which we would expect to fund through internal free cash flow. In our view, this balanced approach gives us the flexibility to direct our capital towards what we view to be the highest-return opportunities. Lastly, I want to point out that after a formal search process we conducted with the help of Spencer Stuart, we did announce that our Board of Directors nominated two individuals, Carlos Migoya and Michael Rucker to stand for election to our Board later this month. I look forward to the addition of these new directors, and I believe our Board has been thorough and thoughtful in identifying nominees with extensive leadership and health care experience who can represent true assets to our organization. As we progress through the coming quarters, our focus remains on our goals of stability and consistency in our operating results. I believe that our primary internal focus, complemented by our partnership with tremendous third-party resources, can yield benefits to our organization not only from a financial standpoint but also from the standpoint of optimizing the working environment for our clinicians, enabling them to continue to take great care of our patients. With that, I'll turn the call over to our Chief Financial Officer, Stephen Farber. Stephen?

Thanks, Roger, and good morning. Thanks for joining the call. I'd like to touch on a couple of items within our first quarter results and our guidance; then spend some time on the meaningful changes to our scope of transformational activities; and lastly, talk about cash flow and uses of cash. As a first comment, you can see that we have reclassified MedData's result as discontinued operations based on the progress to date and our ongoing sale process, and we're now presenting and guiding to results for our continuing operations. To help bridge our results to your models, we've provided first quarter revenue, adjusted EBITDA and adjusted EPS results for both our continuing operations and MedData in our release this morning. And as you'll see in those tables, on a consolidated basis, Q1 was in line with our guidance ranges for both adjusted EBITDA and adjusted EPS. I'm not going to comment much further on the MedData process except to say that it continues to progress in an ordinary course of fashion. In terms of the first quarter in general, our top line results were slightly below what we had forecast internally, but our cost activities were effective such that adjusted EBITDA was a little bit ahead of the midpoint of our range. I do want to call out a few puts and takes and how they relate to our thoughts on the second quarter. Within women and children services, our NICU day growth was fairly good at just over 1.5 points. As Roger mentioned, this is a function of upticks in both the admission rate and length of stay, while total births at the hospitals where we cover the NICU were down a little less than 1% versus last year. As we've talked about a lot in the past, that underlying birth trend is what we watch most closely as the key driver of our NICU points as opposed the quarter-to-quarter gyrations around admit rate and length of stay. Our paramedics is also modestly favorable, which reflects a positive mix in comparison to women and children services and no headwind in anesthesiology. So the between NICU volumes and anesthesia paramedics, those were 2 positive variances from the general environment we had anticipated as part of our budgeting process to formulate our outlook for 2019. On the flip-side, anesthesia volumes were modestly lower in the quarter, yielding same-unit revenue growth that was within the range we guided to for the quarter. On the costs side, we continue to progress on our ongoing operational and shared service initiatives, and we're still on target against the broader goals for improvement that we set last summer. Cost trend remains a significant headwind for us even more so in a challenging revenue environment, and the complexity of our organization doesn't lend itself to broad levers that we can pull. That said, we did see some level of deceleration in the first quarter with most of that reflecting our own actions. To that end, I'll talk in more detail in just a minute about how we've expanded the scope of our transformational activities to supplement our plans through this year and next. Below the adjusted EBITDA line, I want to highlight that we've now completed a full refresh of our debt structure. We issued an additional $500 million of 6.25% senior notes during the first quarter, adding on to the issuance we completed in late 2018 and paying down our revolver earnings with the proceeds. In total, the 2 yields were $1 billion senior notes. We also amended of our revolving credit facility, reducing it from $2 billion to $1.2 billion and pushing out the maturity to 2024. So as of today, roughly 80% of our borrowings are fixed-rate debt. We've extended all of our maturities out to between 2023 and 2027, essentially an average of roughly 6.5 years. Related to that, one last item I'll point out is that we incurred roughly $1.5 million in onetime interest expense in the first quarter related to these refinancing activities mostly from the write-off of deferred debt issuance costs. This flowed through our interest expense line and had about $0.01 impact to the adjusted EPS that wasn't contemplated in our guide. Turning to our guidance, I'll start with the second quarter. For those of you keeping models, our outlook for adjusted EBITDA from continuing ops of $125 million to $135 million does not include the roughly $11 million in MedData EBITDA in order to bridge to what your previous estimate might have been. Also, as a reminder, similar to the first quarter, we are comping against a contribution to EBITDA in 2018 from the North Carolina anesthesiology contract that won't recur this year. For Q2 of 2018, this amount was roughly $6 million. This will be the last quarter where we're comping at that contract. In terms of any fundamental changes to our outlook, I spent a fair amount of time last quarter walking through the major components of how we arrived at our full year adjusted EBITDA forecast. I'm not going to revisit all of that, but I do want to touch on any changes we've made in our forecasting, which is a very detailed bottoms-up process. For the second quarter, this mostly relates to revenue, and we're anticipating same-unit growth of 0% to 2%. This range takes into account our thinking about external trends in volumes and mix and rate. It's also informed by our Q1 experience. As I noted, we had positive variances in the first quarter related to NICU volumes and anesthesiology paramedics, but the immediate future is difficult to argue that those will persist based on our view of our end market. As a result, we're giving more weight to our broader views of birth trends and payer mix trends and to what we saw in the first quarter. This yield to Q2 outlook of same-unit revenue growth is maybe a little below what you might have anticipated, but that's some of the thinking behind our process of developing that range, and I hope that's helpful to you. Finally, we've also revised our range of adjusted the EBITDA for full year 2019 to exclude MedData. But to be clear, that adjustment is purely arithmetic. As we noted last quarter, our initial range included and expected $45 million in EBITDA from MedData over the course of the year, and the only revision we've made is to reduce our existing range by that $45 million. The other significant items I want to talk about this morning is our transformational activity. We have meaningfully expanded the scope of this activity. And as we noted in this morning's release, we now anticipate that our aggregate investments over 2019 and 2020 in terms of consulting and other third-party resources will be at the range of roughly $75 million to $100 million. I devoted a good amount of time last quarter to the broader thinking behind our transformational and restructuring activities. In short, we believe there are significant opportunities to harness data and analytics and technology to drive performance across the enterprise, but also that this will require meaningful IT and operational investments in areas like technology-enabled process change, shared service expansion and improvement and also the deployment of administrative tools and technology directly into our practices. To that end, we've contemplated different areas where we intend to supplement our own internal resources with external resources in order to accelerate these efforts, along with support for the implementation of these tools as well as analytics. We started with the commitment to roll out a robust scheduling and clinical resource management tool across our anesthesia organization, which is now meaningfully underway. Since then, we've also gone through an intense process of sizing scope and other opportunities within our organization. These span across our practices as well as our shared service functions, and they include our entire revenue cycle, human resources and information technology where we believe that systems improvements can open the door for meaningful IT-enabled process change. To go through this scoping, we have now engaged three firms, Accenture, FTI Consulting and South, each of which brings significant experience and capabilities to our areas of focus. Across these three partners, we are standing up targeted and focused work streams meant to complement each other as they unfold. And in terms of the investments we're committing to, I think a good way for you think about them in the aggregate is somewhere in the range of $10 million a quarter, sometimes a bit more, which will flow through our transformational and restructuring line item. We also intend for this process to be finite, although a realistic time frame is probably 8 to 10 quarters with the majority of the activity happening over the balance of 2019 and through 2020. I would say in terms of how this activity relates to our outlook, I would say that our viewpoint is really towards 2020 and beyond since most of the returns we expect to yield won't be immediate. As we go through the decision-making about where we're committing capital, I think it's safe for you to assume that the anticipated returns on the investments are not only significant but also recurring once they begin to yield. Just as importantly, and as Roger mentioned, the systems and process improvements we intend to achieve will also enhance our ability to support the physicians affiliated with MEDNAX to optimize their working environment and to ensure that they can continue to take great care of the patients. I want to wrap up with some comments about cash flow and frame up for you the way we're thinking about our sources and uses. On the sources side, I think it's still realistic for you to expect us to convert between 60% and 2/3 of our adjusted EBITDA to operating cash flow. When it comes to cash flow, I like to talk in ballpark terms since there are always moving parts and timing issues around working capital. For 2019, against our forecast range of $505 million to $535 million in adjusted EBITDA, that would suggest a ballpark expectation of operating cash flow in the range of $300 million to $350 million prior to our transformational and restructuring spend. We did disclose this morning that our Q1 CapEx for continuing operations, excluding MedData, was just under $6 million. And I think a range of $25 million to $30 million is a good expectation for you to have of our annual CapEx needs for continuing operations. This is meaningfully below our total spend in 2018 of $49 million. So all told, a realistic view of free cash flow for us for the year from continuing operations is roughly $300 million, again, prior to our transformational and restructuring spend. In terms of uses, I'll reiterate Roger's comment that we expect to pursue a balanced approach towards transformational investments, acquisitions and share repurchases. So far this year, we've been more heavily weighted towards share repurchases given our views about the value of our stock. So I won't comment on how much more we utilize our remaining $150 million in buyback authorization, but we are nonetheless biased towards routine, persistent activity on that side. Our expectations of acquisition activity are relatively unchanged, and we'll continue to pursue targeted, strategic acquisitions primarily within women and children services and radiology. And third, we utilized our free cash flow towards the internal transformational investments we have talked about at length today. Lastly, I'll reiterate from the last conference call that we intend to use any proceeds from the sale of MedData towards a similar combination, debt repayment, share repurchases and acquisitions. And with that, I'll turn it back to Roger.

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

[Operator Instructions] And our first question is from the line of A.J. Rice with Credit Suisse.

I was just wondering. It seems like a lot of the discussion around reworking the compensation structure and improving that as well as the process change activity is focused on anesthesia specifically. Is that where the bulk of the opportunity is? Or is it in the, can you comment on the opportunity that as it may relate to the other specialties as well?

Well, radiology from the beginning was structured with the other compensation package, so that's why we're not addressing that. The opportunities that we see are in anesthesia to change the model, the compensation model for our physicians. On the neonatology side, we're not really seeing the need to make a change at this point. So the bulk of the changes are being made in anesthesia, but the new compensation package is in place for both anesthesia and radiology.

Okay. A.J., it's Stephen. In terms of the transformational activities, I think those are much more broad. There are some in anesthesia, as we've spoken about previously. But really, there are other elements of them that are across the organization as well as focus on other specific opportunities in all business lines.

Okay. Maybe just to follow up on that. On the transformational activity, there's renewed interest seems like to me and washing around this whole issue of balance billing. I don't know. I haven't heard you guys speak to this in a while, whether you really feel like you have any exposure to that anymore. But does that factor in, in any way, that anything you're looking at in either compensation or your transformational program? Any view you have on all of that?

Yes. We don't balance bill, of course. I think what you mean is surprise billing. Balance billing is mostly against the law. But I think on the surprise billing is when people are out of the network and the hospital network, yes, but the physicians are not. Again, our strategy from day 1 was always to be a network. Our out-of-network business is very, very little. And so it's probably less than 5% or something. I don't know what the number is, but it's less than 5%, 2% to 3% maybe.

Next, we go to the line of Ralph Giacobbe with Citigroup. Please go ahead.

First, just want to clarify. The nonrenewable you mentioned in the release, the contract, that's just the previously announced SAC contract, nothing incremental. Is that correct?

Correct.

Okay. And then, I do want to understand a little bit, the assumed contribution of MedData, the $45 million after they just put up the $9 million in the first quarter. Is there seasonality adjustments to go with that as well? I guess what I'm just trying to get is the underlying assumption of the core and sort of what's left if MedData is sort of not the same level that you initially thought of sort of what's left?

Sure, Ralph. MedData was $9 million in Q1. It's always a little lighter in Q1 for some of the same reasons that we as a company are a bit lighter in Q1 from an the EBITDA perspective. And I think, in my comments, I said something about the expectation for Q2 was $11 million, which what's played into the adjustment to our guide. So if you think about the $45 million in total, with $9 million in Q1, that would sort of suggest an average of $12 million a quarter over Q2, 3, 4. I think it would sort of ramp up a little bit into the year. So $11 million in Q2, and then you got basically $25 million to go over the back half.

Next, we go to the line of Jason Plagman with Jefferies. Please go ahead.

Hey, guys. I just want to get some additional thoughts on anesthesia volumes. They've been soft for some time now. Any additional insight on what's driving that softness, the movement of procedures from inpatient, outpatient or anything else? And then when we might or when do you think we might start to see those volumes return to growth?

Yes. I mean I don't think volumes in anesthesia have been particularly soft. I think what we talked about in the past has been more of all pyramid shift in anesthesia. We do participate, probably more than half of our businesses is in surgery centers, and so the shift from 1 in-hospital to the outpatient center really is not that meaningful for us. So I don't know, Stephen, would you want to comment on that?

I would just say in terms of Q1 results, I mean, yes, they were a little softer than we had expected, but we have a little better mix than we had expected, and they've obviously canceled each other out. So it was not meant to be a directional statement with any magnitude to it. It just was really a modest directional statement.

Okay. That's fair enough. And then I just wanted the radiology M&A pipeline, we've seen a lot of activity out in the marketplace from some of your competitors. Thoughts on how much activity is going on and then just evaluations that you're seeing to land some of those bigger radiology practices.

Sure. I'll just make some general commentary. I mean there is activity out there, and there are deals that are getting done. I think we've historically indicated that we have been and intend to continue to be extremely selective with who we choose to partner with. I think we are very, very happy with the affiliations that we have completed over the past 12 to 18 months. And we continue to have a significant amount of active dialogue, and we expect some of these relationships over time to matriculate. But we are not – we are conducting the process in a very disciplined and thoughtful manner in trying to find not just the right partners from a cultural perspective but also the right partners in terms of the economics.

Next, we go to the line of Pito Chickering with Deutsche Bank. Please go ahead.

Good morning guys. Thanks for taking my questions. Just two questions here. The first one looking at the first quarter same-store revenue guidance, you guided 0% to 2% same-store revenues with 100 basis point negative impact from the selling days, so you're guiding to 2Q looks as though it's 100 basis points weaker operationally than it was in the first quarter, but you're maintaining the EBITDA guidance for the year despite the low revenue growth. So where did this new margin leverage come from embedded within this guidance?

Pito, it's Charlie. You're right, we've kind of rolled forward our experience in Q1 into Q2. And as Stephen mentioned, that might make the range look a little bit lower than you might have anticipated. But we're 1 quarter into the year. As we looked at our forecast and looked at our expected adjusted EBITDA for Q2, we think our range for the full year is appropriate at this point. Hold on, I'll just add one quick thing on top of that. I would say, as I said in my comments and said over the last couple of quarters, our primary focus is adjusted EBITDA. And I would sort of suggest to the audience that perhaps, it would be appropriate to have a little more focus on that than on the revenue line. Think of it this way, even on a same-store basis, we are kind of working our way through the business practice by practice and thinking about where profitability comes from. And we may proactively take steps that have a slight negative impact on our overall revenue but are flat or accretive to our EBITDA. So I might suggest that over the course of this year or next year, our revenue line itself and movements in the revenue line may actually relate to profitability efforts as opposed to just trying to drive an unfettered top line.

Okay. Fair enough. And then a second question, looking at your – I guess, at the increase 1Q 2019 versus 1Q 2018 increased about 220 basis points as a percent of revenue. What percent of the increase is from sort of guarantees you had to physicians? And how much is discretionary? And as you think about that growth in 2020 and beyond, as you rework the comp structure, sort of can you sort of give some more details on how that leverage can change?

I would suggest we're 1 quarter into 2019. It's probably premature for us to talk about 2020. I mean in very broad terms, I think there are a lot of factors that play into it. And I think we sort of need to pause a little bit and see how this unfolds over the next few quarters.

And next question comes from the line of Ana Gupte with SVB Leerink. Please go ahead.

Hey. Thanks. Good morning. Following up on the commentary you made on the incentive realignment for the anesthesia practices. Is that again the same thing that you've been doing, trying to do or leave a note on the contracts and doing kind of up and down side risk share for their ability to drive either revenue or cost efficiency? Is that what this is about? And what percentage of the renewals in for – coming up for 2020 and then into 2021 where it seems like they accelerate a lot? How you've been able to do that?

Yes. That's what we've been talking about, changing the compensation structure for our anesthesiologists from a guaranteed salary to sharing of the revenue. And so that's what we're talking about. We've completed, like I said, a number of those renegotiations this year. We expect to complete a couple more before the end of the year. And then there will be some that are coming up next year. I don't know exactly what the percentage that we have of our contracts that was completed now, but it's probably more than 25% that have been completed by now.

Okay. And then on this increased cost save guidance that you have, can you again just remind me of what the cadence of that is expected to be into this year and the next?

Sure. In terms of the $120 million 2018-2019 cost plan, it'll be done by the end of this year. If you recall, we acted it last year with about $0.05, a little more than $0.05, and it's continuing to get baked in month after month, quarter after quarter. So we are very comfortable that it will ramp by the time we exit this year.

Okay. And then on the neonate side with the secular pressures, but you do talk about the improved – the cross-sell, and I think you said something in your prepared remarks around, well, baby care and nursery and so on. I mean is that potential being fully realized? Where are you on the cross-selling? And how much more is there, if you will, to go? Are we kind of in early innings? Or have you mostly realized the potential of what that is?

Yes. No, I wouldn't say that potential has been realized at all. I think there's a lot of opportunity left there, a number of opportunities both on the well newborn side, on the hearing screen, on the OB hospital side. So I think that, that is a total focus of ours, and we are making progress there. And I believe by the end of this year, we'll be able to demonstrate some additional growth in that specialty.

Next is the line of Chad Vanacore with Stifel. Please go ahead.

Thanks. So just given the talk on the call about maybe could string revenue growth revenue this year, and Steve, you mentioned it has potential to actually maybe cut some revenues but improve the EBITDA margins. What's the target EBITDA margin that you're shooting for by the end of the year? At the end of the year, fourth quarter, you lead at a run rate of – what kind of margin target range are we talking?

Yes. Chad, we've really not been addressing margin for the past couple of quarters pretty specifically because of the very movements in revenue that you just mentioned and that I mentioned a little earlier in the call. I think we are focused on net tonnage, total dollars of adjusted the EBITDA as opposed to how it relates to any other metric and then the conversion of that adjusted EBITDA into free cash flow. So that is and will be our focus.

All right. But guidance seems to imply from 2Q to 3Q and 4Q that margins would improve. Is that the way you're looking at it?

Again, we are not guiding on margins, but you can back into the Math. We to expect, of course, over the course of time but not significantly in this year, incremental contribution and efficiencies from the transformational initiatives that we have underway. And so I think, over time, of course, that's going to lead to additional EBITDA contribution. But how that relates to the revenue line will have a lot to do with what sort of opportunities we identify, again, over the course of time, to lean more towards revenue that are productive in terms of EBITDA and lean away from revenue that may not be profitable.

Okay. Then, well, just thinking about the restructuring costs then, you got $75 million to $100 million target over the next couple of years. Where's the bulk of that spending going? What improvements did you expect to make? And do you expect to have a return on investment that we should be thinking about? Or would it be just overall efficiencies to the company?

I would say in aggregate, we expect very significant ROIs. There are some projects where the ROIs are very high double-digit ROIs. There are some projects where the ROIs are lower, but that they lead to process efficiency or physician satisfaction elements or to opportunities to further drive clinical efforts of the company. But in aggregate, solid double-digit ROIs that are comparable to or better than transactions that we do. So if you were to actually see the individual unpacked ROIs for the types of investments that we're at, at the beginning of making what we think is a long stream, there is a long way to go before those curves cross between the ROI versus our cost of capital. And we expect the more detail you're aware of, the more you would encourage us to pursue these in scale.

Next, we go to the line of Kevin Fischbeck with Bank of America. Please go ahead.

Good morning. This is Joanna Gajuk, filling in for Kevin today. So just couple of follow-ups. So the commentary that you had on anesthesia volumes decreasing, so I guess, overall volumes without anesthesia should have been up much nicely. So what's the magnitude of the decline that you've seen in the anesthesia business? And I guess, what I'm getting at, is that one of the areas you're talking about in terms of exiting some of the businesses that have lower margins?

Hey, Joanna, it's Charlie. I'll just point out, as part of that, keep in mind, when we look at the data for the quarter, that did have a fairly outsized component within anesthesiology. So that's one component of the volumes that we talked about in the first quarter. Adjusted to that, our volumes were down slightly, so we didn't see anything that was outsized there. It's really more some of the mathematics around that date count, and that had a lesser impact in some of our other businesses either that weren't impacted five days at all or just didn't have a lot of revenue scale to impact the overall same unit.

I would add to that, Joanna. When you zoom back out a little bit to 10,000 feet, we're pleased with the quarter. We made our quarter when we were just trying to – we were ahead of our midpoint for both adjusted EBITDA and EPS. So we are happy with how it came out. We simply were trying to give a little color on some of the internal hydraulics of what happened across the businesses. And there is nothing that transpired that really elevated to any level of anything beyond that.

Right. So I guess, on that front, so are you saying Q1 was roughly in line with your expectations, Q1 versus Q2? So essentially back-end loading this guidance, so majority of it, I guess, there's some seasonality. Obviously, Q1 tends to be the weakest quarter. And then, I guess, you're talking about the ramp-up of these cost savings gaining more traction as the year goes on, right? So is that a way of how you think about the progression for the rest of the year? Also, can you flag anything else that's worthwhile mentioning here?

You are correct. That is how we think about the balance of the year.

All right. And I guess, you made a comment, last follow-up on the commentary you made on the payer mix in anesthesia. So I guess, in the press release says slightly unfavorable, and then on the call, I guess, you made it somewhat like flattish. But it sounds like you're not moving to call it sort of the new trend where you kind of assume that there's some fluctuations quarter-to-quarter. So it's not like things are stabilizing there. You still assume that the payer mix will be much worse in Q2. Is that the way to think about your guidance for Q2?

Joanna, I mean, the answer is sort of we were a bit surprised that payer mix was flat in anesthesia in Q1. For the last handful of quarters, we've had headwinds in anesthesia; every single quarter in terms of payer mix. And it's kind of hard to tease apart when something doesn't occur as far as to tease apart that versus when something actually does. So yes, after a handful of quarters where this has been a headwind for kind of unwilling after one quarter or two to call it and say that we expect the Q1 lack of occurrence to persist. So along generally with down in the middle to suddenly a conservative approach to guidance. So I think this is something we just need to think a lot for couple of more quarters before we would get comfortable with any new expectation.

Next, we’ll go to the line of John Ransom with Raymond James. Please go ahead.

Hi. Good morning. I'm probably going to swing and miss here because you guys are so buttoned up. But I was just looking for any color on the MedData process. Is the interest more financial buyer, strategic buyer? Are you happy with where you are? Do you think it'll take longer? Just any kind of color on that would be great.

Strike one.

Those are all great questions.

There is swing and a miss try again.

Really? That's it? Nothing? Okay.

We've been pleased, as we've said before, we've been pleased with the level of interest throughout the process. We believe it is a unique asset, unique company with a lot of positive attributes. And we look for – I think moving the rules are pretty well defined about when an operation is moved from continuing to discontinued operations. So I would just say that we continue in the ordinary course, and we'll let you guys know when there's something to let you know.

All right. My other question is just radiology. Roger, do you have any updated thoughts about kind of long term where we're headed? I'm always curious about the integration of man and machine. Are we going to have – are we moving faster, slowly about like you thought in terms of integration human being – integrating human beings and AI?

Yes. I would say, in general terms, there was a lot of hype about IBM and all that stuff and GE, and those things always take longer than expected. I think the big steps here are not in replacing the radiologist but more in helping the radiologist reach the right diagnosis. And so for example, again, not so much in making the diagnosis, but making sure that diagnoses don't get missed. And so once the radiologists have gone through 100 chest X-rays and determined that there are only 2 pneumonias, you run those same films again through the process, and the machine will confirm that there's 2 diagnosed pneumonias. Stuff like that I think is really what we're most likely to see in the foreseeable future than simply saying we're not going to have a radiologist look at any of these films. We're just going to let the machine make the diagnosis.

Got you. That's not surprising. And then lastly, if I remember, I know you don't break this out separately, but I think vRad before you bought it was running at about $50 million or so on EBITDA. And you took a step back with some kind of 3Q staffing issues a couple of years ago. Just big picture, where are you with that business now versus kind of where the run rate was when you bought it? And do you think you've gotten all the integration work behind you there?

I will say we've made progress. And in general terms, we love the business. We think it's totally part of the future of radiology. The combination of our hospital-based practices with vRad is unique. And the amount of work that's being done there and contributions that are being made to the topic we were just talking about are significant. Having said all of that, there's always more investments to be made and more technology to be acquired. So I'll leave it at that.

Okay. And Steve, you've been there a while now. I think maybe some people looking at MEDNAX will say, Gosh, that company is awfully hospital-centric, and that's a place where payers long term are trying to drive volume away from the hospital setting." Do you have any opinions or thoughts about five years from now, 10 years from now, three years from now, does MEDNAX needs to have a bit more upstream or outpatient orientation? Or are you – do you think that the hospital kind of orientation is where the company will kind of land now and into the future?

I guess I'd start with my answer by saying that having been here now seven or eight months, I mean, I continue to be – and the more I find my way around the company, continue to be just floored by the strength of our women's and children's franchise and the roughly 400 NICUs that we operate on behalf of our hospital partners and then the sort of wrapper around that of all these pediatric subspecialties. So I mean, when I think about this company, the value of that four franchise, I mean, it's largest of its type and it is irreplaceable. So I think it's really hard to answer your question directly or simply without addressing that. When I – but when I do look forward, look, there's something that are going to continue to happen in the hospital, including saving and helping future babies. There are other things where we do have a very meaningful and growing outpatient presence such as in anesthesiology. And then there is the whole rad field, right, which is kind of hybrid on its own. So I think the answer really is kind of both. And I think we have every guy's expectation of continuing to evolve ourselves as the industry itself evolves. And frankly, you can't run a hospital without a lot of the services that we provide, and you also need a lot of them when you're in ASC or in other formats. So I think a blended view of the future is probably our perspective.

Next, we go to the line of Matt Borsch with BMO Capital Markets. Please go ahead.

Yes. A couple of questions here. One, just on the labor market, labor wage situation. How do you see that progressing? I think you got the question one or two quarters ago. Just curious your thoughts here.

I think the comments on the labor market side are more related to anesthesia. And I think that, as I've said earlier, we know we made some progress there and continue to go down that path. I think the nurse and anesthetist as well is something, it's not just the anesthesiologist, that we are dealing with. So I would say that that's the bulk of when we talk about the labor issues, it's really revolves around anesthesia.

And if I could ask a completely different question, on your longer-term strategy. How do you guys think about primary care as an area that at some point you might target in the future in some way?

Well, the logical area for us to think about primary care is pediatrics. That makes the most sense as far as mixing with our neonatal and internal and infant care. The problem there is pediatrics in general is high-volume, low-margin kind of business. And more importantly than that, it tends to – we get all of our neonatal referrals from our pediatricians. And so for us to all of a sudden start practicing general pediatrics sort of puts us in competition with our pediatricians. So we've thought about that for a long time and often, but that the end of the day, we're more into the pediatric subspecialties. We do, do that as an outpatient pediatric cardiology. We're the largest group of pediatric cardiologists with pediatric neurology and some pediatric neurology and some pediatric surgery. But general pediatrics is probably not something that we are going to be looking at. We could think about obstetrics, and we'd like to have some acceptable business where we'd be bringing patients into the hospital. So we've looked at that and may decide to do that at some point in the foreseeable future, but we haven't really taken any steps in that direction.

Just on that last one, would that be somewhat dependent on how do you see the birth rate developing?

No, the advantage to obstetrics is that we would be bringing patients to the hospital, and that makes us be more valued or more sticky or whatever with the hospital. The ability to actually admit patients to the hospital is very valuable for us.

Next, we go to the line of with Whit Mayo with UBS. Please go ahead.

I wanted to go back just to the business strategy around anesthesia compensation, maybe just ask the question a different way. How many of the practices today have now shifted towards this new comp model? And can you tell us what percent of your practice level, expenses guaranteed versus variable? And maybe just another way of asking it is you're spending $1 billion today on comp just to make up a number. How much is guarantee versus variable? And is there a target for where you think this can go?

Hey, Whit, it's Charlie. In terms of the progression so far, as Roger mentioned, we got a handful of groups that we've created and shifted over to a rev-share model. The size of it – it's a handful of our larger groups. So in terms of the overall clinical compensation, a portion of anesthesia is in pretty decent amount, as Roger referenced. In terms of contractual compensation, that's what the goal is, around the kind of model where effectively solving for where we and the physicians and those groups need to be, to be competitive in that market, to recruit and retain the kind of clinical talent that we need for the services we provide, and we wrap the conversation model around that. And on a go-forward basis, the more risk sharing. That is our goal. The output of that would be creating more flex income structure if revenues go up and down. But to go a little off-topic from your question, I would say the ultimate output that we wish to achieve here is for the physicians and the groups to have ownership of their practices and the future of their practices to have a direct first dollar incentive to identify ways to grow their practices because that goes right into their pockets. And at the same time, to have a direct first dollar incentive to pursue some of the tools and activities that we're helping them pursue around greater productivity, greater use of their time, actually taking care of patients. So it's more of a holistic model of getting them engaged and moving forward that way. And this kind of comp structure, we think, aligns very well with that ultimate goal.

Okay. And then, any way to put like metrics around it for like where you were and where you think you'll be in a year from now?

I want to be a little cautious around that. We do have plenty of active discussions. We're encouraging all of the groups, particularly the physician leadership on this group, to think about this and consult with each other and think collaboratively about some of the groups that have transitioned over, what their experience has been and why they have done it and what they expect to achieve. So we have some calendar renewals that we have discussions around. We have others that we can talk about mid-contracts. So I don't want to get too targeted around some kind of percent of clinician compensation that would move that way. But at a high level, I'd say we've been pretty enthusiastic about the response so far and the willingness of the groups, particularly some of our larger lean groups to think in this fashion and to share their thoughts with their peers.

Okay. No, that's helpful. And maybe just one other question around MedData. Just assuming that you sold the business, have you refined your thinking about the proceeds? And I may be wrong, but I think you suggested previously that you were focused more on reallocating the proceeds towards buybacks. Do you think a little bit more about paying down revolver here? Just wanted to hear your updated thoughts.

Sure. I'm not sure that our thoughts have really changed at all in terms of the use of proceeds. I mean we will probably use the proceeds, as we said before, to – for some mix of debt repayment, share repurchase and other -- and acquisitions. what's dynamic about this is really how it balances with our non-MedData-triggered share repurchases and then whatever MedData-triggered share repurchases there would be. So it depends on timing, where things fall in the cycle. But we don't want – we want to make sure that the sale of the business is accretive from an EPS perspective, and we also don't want it to be diluted from a leverage perspective. So finding some appropriate middle ground.

Next, we go to a question with Matthew Gillmor from Robert Baird. Please go ahead.

Just had 1 question here. So following up on the NICU admit rate and the length of stay. So it sounds like you're saying the better 1Q trend may not be sustainable or is taking out conservative growth within the guide. Is there anything to call out that drove that metrics this quarter? And just generally, maybe help us understand what would cause the admit rate and the length of stay to move up and down.

Admit rates and just – and length of stay do fluctuate from quarter to quarter. We're just calling out that this quarter, that happened. But it's all within historical ranges, right? None of these are data that's not a range. There have been quarters where the admission rates have been higher, the length of stay have been higher or lower or whatever, but it's all within historically ranges.

And we have one final question. It's the line of Ryan Daniels with William Blair. Please go ahead.

It's Nick, in for Ryan. I guess just really quick. Are you guys going to be offering quarterly restatement for us for MedData, so we can do year-over-year assessment more effectively?

Yes. Certainly, as the quarters unfold, we'll providing that on a restated basis for the prior year period.

Anything like right now, though, like especially for the last year like quarterly revenue with MedData, so we can kind of do that year-over-year?

I can't commit to it right now, but it's something that we will have to do as we unfold through the year.

And we have no further questions. You may continue.

All right. Well, if they have no further questions, thank you, operator, and thank you all for participating this quarter. And I look forward to speaking with you next quarter.

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