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MEDNAX Inc. (NYSE:MD)

Q3 2011 Earnings Conference Call

November 1, 2011 10:00 AM ET

Executives

David Parker – VP, IR

Roger Medel – Director and CEO

Vivian Lopez-Blanco – CFO

Karl Wagner – President, American Anesthesiology

Analysts

Brian Zimmerman – Deutsche Bank

Joanna Gajuk – Bank of America

Ryan Daniels – William Blair

Bill Bonello – RBC Capital Markets

Robert Mains – Morgan Keegan

Ralph Giacobbe – Credit Suisse

Kevin Ellich – Piper Jaffray

Brooks O'Neill – Dougherty & Company

Matt Weight – Feltl & Company

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MEDNAX 2011 third quarter earnings call. For the conference all the participants are in a listen-only mode. There will be an opportunity for your questions instructions will be given at that time (Operator Instructions) and as a reminder, this call is being recorded.

Now that been said, I'll turn the conference now to the Vice President of Investor Relations Mr. David Parker. Please go ahead.

David Parker

Thank you, John and good morning everyone. Certain statements and information presenting during this conference call may contain forward-looking statements. These forward-looking statements are based on assumptions and assessments made by MEDNAX's management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.

Any forward-looking statements made during this call are made as of today, and 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, including the sections entitled Risk Factors, which is available on the Investors page of our website, www.mednax.com.

In addition, during this call we will discuss certain non-GAAP items for the three and nine months periods ended September 30, 2010. This morning’s press release contains a detailed GAAP reconciliation table and that is available on the Investors page of our website, www.mednax.com. Joining me on the call today are Roger Medel, our Chief Executive Officer and Vivian Lopez-Blanco, our Chief Financial Officer.

With that, I would like to turn the call over to Roger.

Roger Medel

Thank you, David and good morning and thanks for joining our conference call this morning. As we take a look at our third quarter and year-to-date results I am going to focus my comments on two key areas that demonstrate the strength and efficiency of our model and our resources as we strive to take great care of our patients. These areas are growth and operating momentum.

With our third quarter results we have demonstrated strong growth and the continuation of our positive operating momentum. Our revenue was up over 16% year-over-year largely as a result of acquisitions completed in the past year and also reflects same unit revenue growth. We also continued to expand operating margins as we successfully integrate new group practices into our existing operations and as we look for ways to improve the efficiency of our National Medical Group.

Supporting our growth efforts, we recently announced that we have expanded our credit facility by $150 million to $500 million and extended it for five years to 2016. This was done for two main reasons; first, we believe this was a good opportunity to access the credit markets to expand our availability of capital and more importantly this highlights the confidence that we have in our ability to invest that capital by continuing to make accretive acquisitions.

This morning we announced the acquisition of Bexar Pediatric Surgery Associates in San Antonio, Texas. This practice consists of five pediatric surgeons and one pediatric plastic surgeon. This is the first pediatric surgery practice that we have acquired and while this is a relatively small sub-specialty we believe it is a welcome addition to our Pediatrix division. Pediatric surgeons provide specialized care for patients ranging from new born to adolescents for all problems or conditions affecting children that require surgical intervention and also have particular expertise in the areas of neonatal and prenatal surgery. From a continuum of care perspective pediatric surgeons typically work closely with neonatologists and pediatric cardiologists.

Bexar Pediatric Surgery Associates have long-term relationships with the large San Antonio area hospitals consistent with the existing and strong relationships our pediatrics group has established in this same metropolitan area. This acquisition further strengthens our relationships with hospitals in the San Antonio area and provides the opportunity for a more collaborative patient care approach and the ability to offer patients a broader continuum of care with our existing hospital partners.

We have further been active throughout the third quarter on the business development side. During the quarter, we completed four acquisitions on September 30 we completed the acquisition of Midwest Maternal-Fetal Medicine in Saint Louis, Missouri. This practice has long standing relationships with three large area hospitals in the Saint Louis community. Their six physicians and 14 clinical and administrative staffs are being integrated into our Pediatrix Medical Group division. As with many of our physician partners Midwest Maternal-Fetal Medicine saw this partnership as a way to enhance quality improvement initiatives share clinical outcomes data and bench practices and have a greater role in advancing healthcare while achieving the best possible outcomes for their patients.

We also have the opportunity to address the continuum of care advantages for our patients as our neonatal specialist currently provide services in two of the three hospitals served by Midwest Maternal-Fetal Medicine. I will touch on the next three acquisitions only briefly since I mentioned them on our second quarter call shortly after we announced them. Nevertheless they are important new practices that we have added to our National Medical Group during this third quarter. Pinnacle Anesthesia is an anesthesia group practice that staffs two hospitals in Southern Palm Beach County, Florida just north of our headquarters as well as several office based physician groups in the area. The clinical and administrative operations of these 15 physicians and 16 nurse anesthetists are currently being integrated into our American Anesthesiology division.

Northwest Newborn Specialists is a large 20 doctor group based in Portland with annual patient volume in excess of 29,000 patient days, which expanded Pediatrix's neonatal physician network into Oregon. Our fourth acquisition was a one physician maternal-fetal medicine practice in Austin, Texas. We are very confident that we will continue to complete group practice acquisitions across all of our specialties and sub-specialties. There is a very strong interest in our practice management approach because we provide a level of certainty at a time of uncertainty. We continue to see substantial growth potential for our American Anesthesiology division and at the same time we see further opportunities to expand our geographic presence within our Pediatrix division.

Operating efficiencies should be expected of an organization that grows by acquisition it is particularly encouraging that we are seeing those efficiencies within our anesthesia division where our vertically integrated management processes are proving to be more efficient as we bring practices into our administrative infrastructure. We treat for practices that we acquire as our partners and provide these divisions the opportunity to continue to take great care of their patients. This patient centered model aligns the interest of the physicians with those at the hospital in a way that strengthens that relationship. We believe that when these principles are being practiced it is much easier to attract groups who are interested in joining our model.

For these reasons as well as many others we continue to be encouraged by our ability to grow through acquisitions. We also continue to benefit from same unit revenue contributions and our operating momentum. Same unit revenue growth for the 2011 third quarter was 5%, incrementally this was driven by strength in net reimbursement related revenue growth and volume growth across all patient service lines in the quarter. We saw an increase in same unit NICU patient days and a slight increase in births for the third quarter, which was part of that solid same unit volume growth for the business.

Another area of growth I want to speak to is organic growth. We have recently placed renewed emphasis on opportunities to grow our existing practices. During the past few months, our Pediatrix division has expanded its Maternal-Fetal Medicine Physician Services establishing new practices in Salt Lake City, Utah and the Eastern Idaho area. Within both our Pediatrix and American Anesthesiology administrative offices we have the breadth and depth of management working with physicians in our metropolitan areas to identify additional ways to expand our existing physician services and to look into new areas of patient care for the company and we will continue to pursue these opportunities.

In concluding my remarks, I want to underscore the value our National Group practice brings to physicians providing care in their communities. There are many challenges that small group practices face and the ability of our National Group to adapt effectively continues to attract these groups to our models. This patient centric model aligns the interest of the physicians with those of the hospital and provides the resources and infrastructure support necessary to practice medicine in today’s difficult environment. In turn, physicians can focus on taking care of their patients.

At this time, I would like to turn the call over to our CFO Vivian Lopez-Blanco for our review of our financial results before we open the call to take your questions. Vivian.

Vivian Lopez-Blanco

Thanks Roger. Good morning everyone and thanks for joining our call. As Roger said, we are reporting a strong quarter with growth coming from both acquisitions and same unit practices, positive operating momentum and the strength of our financial model as we integrate acquired practices into our existing infrastructure. Our revenue for the three months ended September 30, 2011 grew by 16.1% from the prior year to $407.7 million approximately 7% of our revenue growth came from acquisitions while the remainder is from same unit growth, which increased by 5% for the 2011 third quarter from the prior year.

Same unit revenue growth included net growth of 3.1% from reimbursement related factors. This includes continuous modest improvements in the rates we are paid by third party commercial payors partially offset by an 80 basis point shift in payor mix the government payors from commercial payors year-over-year. Same unit revenue growth attributable to patient’s volume was up 1.9% for the 2011 third quarter and includes volume growth across all of our physician service lines. The number of NICU patient days increased by 1.3% for the 2011 third quarter from the prior year period on a same unit basis while the number of births at our hospital also same unit was slightly higher.

Profit after practice expense for the 2011 third quarter was $144.3 million a 15.2% increase from $125.2 million for the prior year period. Profit after practice expense margin decreased by 27 basis points, which can be primarily attributed to net increases in operating expenses partially offset by the positive effect of acquisition related growth. General and administrative expenses grew by 14.7% for the 2011 third quarter, below the rates of our revenue growth. G&A expenses as a percent of revenue were 13 basis points lower for the 2011 third quarter, compared to the prior year period as a result of our model of acquiring and effectively integrating practices into our existing administrative infrastructure.

Our operating income was $95 million for the 2011 third quarter, which is a 16.8% increase from the prior year period. Third quarter operating margin improved by 13 basis points to 23.3% year-over-year primarily due to acquisition related growth, which drove efficiency across our operations infrastructure. As we compare the three months and nine months ended September 30, 2011 to the 2010 periods we believe it is more meaningful if the 2010 GAAP net income and earnings per share for these periods are presented on a non-GAAP basis by increasing the income tax provision and decreasing net income by $10.9 million to exclude the impact from the favorable resolution of certain tax matters that took place in the third quarter of 2010.

For the 2011 third quarter, MEDNAX’s net income grew by 15.7% to $58.2 million as compared to non-GAAP net income of $50.3 million for the 2010 third quarter. GAAP net income was $61.3 million for the 2010 third quarter. Earnings per share was $1.19 for the three months ended September 30, 2011 based on a weighted average 48.9 million share outstanding, which compares with non-GAAP earnings per share of $1.06 based on a weighted average 47.5 million shares outstanding GAAP earnings per share was $1.29 for the 2010 third quarter.

For the first nine months of 2011, MEDNAX generated revenue growth of 14.6% and operating income growth of 16.2%. MEDNAX earned net income of $159.6 million or $3.28 per share through September 30, 2011 based on a weighted average 48.7 million shares outstanding. This compares to the first nine months of 2010 when MEDNAX generated non-GAAP net income of $138 million or $2.91 per share based on a weighted average 47.4 million shares outstanding. GAAP net income was $148.9 million or $3.14 per share for the first nine months ended September 30, 2010.

Revenue for the nine months ended September 30, 2011 was $1.18 billion, an increase of $150.3 million from the prior year’s period revenue of $1.03 billion. Of this $150.3 million increase 75% or approximately $112.7 million are revenue growth came from acquisitions while the remainder same unit growth, which increased by approximately $37.6 million for the first nine months of 2011. Same unit revenue for the first nine months of 2011 grew by 3.7% with almost two-thirds of that coming from reimbursement related factors which contributed net growth of 2.3%.

For the first nine months of 2011, we continued to see improvement and reimbursement from third party commercial payors. Same unit patient volume increased by 1.4% with volume growth driven by our same unit neonatal, anesthesia and pediatric cardiology practices. Operating income grew to $263.9 million for the first nine months of 2011 up 16.2% from $227 million for the first nine months of 2010.

We ended the third quarter with approximately $36 million of cash on our balance sheet. Accounts receivable were $207.1 million an increase of $25.7 million compared to December 31, 2010. The growth of our AR is related to same unit revenue growth as well as the building of receivables related to recently acquired practices.

As a reminder we do not buy historical accounts receivable when we complete practice acquisitions. Our DSO increased slightly to 47 days at September 30, 2011 primarily due to the increases in AR from recent acquisitions. As of September 30, we had a total of $50 million outstanding on our revolving credit facility, which as Roger mentioned we recently expanded to $500 million and extended it for another five year turn. The expanded facility is comprised of a syndicate of 10 financial institutions most of which have been long standing banking partners of MEDNAX and have supported the growth of the company. Coupled with our strong cash flow from operations this expansion of capital puts us in a solid financial position as we continue to grow our operations by acquiring, established physician practices in our specialty.

During the 2011 third quarter, we generated strong cash flow from operations of $100.1 million. For the nine months of 2011, we had cash flow from operations of $181 million. Consistent with our strategy most of our cash flow from operations is invested back into the growth of our business.

At this point, I would like to move to our outlook for the 2011 fourth quarter, which we announced in this morning’s press release. We expect that our earnings per share for the three months ending December 31, 2011 will be in a range of $1.15 to $1.20. The range for our 2011 fourth quarter outlook is determined by anticipated total company same unit revenue growth for the period, which we estimate to be 2% higher to 4% higher year-over-year. The same unit forecast is expected to be evenly divided between patient volume across all MEDNAX physician specialties and net reimbursement growth, including improvements from commercial contract rates as well as variability in the mix and services reimbursed under commercial and government payor programs.

At this time, I would like to turn the call back to Roger.

Roger Medel

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

Question-and-Answer Session

Operator

(Operator Instructions) and first we will go the line of Darren Lehrich with Deutsche Bank. Please go ahead.

Brian Zimmerman – Deutsche Bank

Hi, thanks and good morning this is Brian Zimmerman in for Dan. My first question is regarding your press release this morning with Pediatric surgery I was wondering how you are viewing these types of practices from a market opportunity standpoint and then can you comment, make some comments on what type of market profile you look at when you decide to acquire these types of practices.

Roger Medel

Okay, for pediatric surgery this is our first acquisition of a practice it is an area that I have been looking at for a long time. Pediatric surgeons work closely with neonatologist and pediatric intensivists and pediatric cardiologist. It is a different specialty and it is one that we don’t really have any experience in. So as we always do we will acquire one practice it is a small practice only five or six physicians and we will learn how to integrate it, how to run it, how to bring value to it and once we feel comfortable that we can in fact bring value through these physicians and their practices we will make the second acquisition.

Having said that it is an area that is very attractive to us it fits sort of some of the same parameters that our other pediatric sub-specialties fit into but they tend to be smaller groups there is a small number of these specialists probably under 1000 pediatric surgeons and they provide valuable services within the neonatal intensive care unit and the pediatric intensive care unit. We believe that we can bring them some advantages as far as their back office functions are concerns that is where we are going to be focusing on over the next year.

Also this was the right market, this is the market in which we have a large presence of specialist different specialist within our MFM, neonatology and pediatric cardiology partners and so we felt that given the kind of hospital partners that we have here as well we thought that this was the right market and the right time to pull the trigger on this acquisition. So that is what we are looking at.

Brian Zimmerman – Deutsche Bank

Okay, thank you. And then my second question is looking at margins I guess EBITDA margins were a little bit lower than our expectations can you comment on any factors you might have seen besides mix.

Vivian Lopez-Blanco

You know what I think again we have talked about that that is going to fluctuate from time-to-time as we kind of look at the mix of the practices that we are bringing into the equation here. But overall we don’t believe that it was a big swing there.

Brian Zimmerman – Deutsche Bank

Okay, have you attempted to quantify maybe the fact that integrating the anesthesia practices has been on your operations?

Vivian Lopez-Blanco

No we have, as you guys know we haven’t disclosed that again. We have kind of given some information directionally that we are pretty happy with the integration of these practices. But there is, there is variability in the margins within the anesthesia practices as we talked about before, depending on whether the CRNAs are employed by the practice or employed by the hospital. But we look at separately from that internally we look at how we are doing as far as the integration grows just from the back office perspective and you know again w are happy with it. We are not ready to disclose that but everything is going very well as a matter of fact we basically integrated our Charlotte practice into the billing platform that we are using for all anesthesia practices as of the beginning of September.

Brian Zimmerman – Deutsche Bank

Okay, thanks a lot guys.

Operator

Our next question is from Kevin Fischbeck with Bank of America/Merrill Lynch. Please go ahead.

Joanna Gajuk – Bank of America

Good morning actually this is Joanna Gajuk for Kevin here today. Question for you I didn’t hear you talking about your outlook for anesthesia deals this year are you still, do you still continue to believe that you can close one to two anesthesia deals this year.

Roger Medel

You know I do. I know reminding is a little off on that and I know that we are all disappointed that we didn’t get that deal done in the third quarter but I remain confident that we will get the deal done in the fourth quarter in fact I remain confident that we will do two deals in anesthesia as I said in this fourth quarter. So you know we have a long history of acquiring practices when they are ready to be acquired some times that people are not on the same time schedule that you are on, there is a lot of different contracts and issues that need to work through a lot of different physicians and nurse anesthetist and household administrators and managed care companies and stuff and not everybody on the same time schedule as you are. So we are going to wait until the deals are ready to be done we are not going to rush to deals or do them before they are complete or ready. That is the history that we have, we have been very successful at it and when this deal is ready to be done we will get it done and I believe it will be ready in the third quarter.

Joanna Gajuk – Bank of America

That is great news and also can you maybe give a little more color I heard you mention that the birth trends in the quarter were positive. So can you comment on any (Inaudible) between the different regions that you might have seen?

Vivian Lopez-Blanco

Well I think we have been encouraged this year I think we have been talking about this pretty much since the first quarter we have been less negativity in the birth rate overall. So we are encouraged by that and certainly in the third quarter it was positive. And so when we look at this on a region by region and practice by practice I mean we still believe that there is some variability but none the less the overall trend is positive for us. So we are encouraged by the topic.

Joanna Gajuk – Bank of America

Thank you and on this topic I believe last quarter you were (Inaudible) practices being weaker maybe than the rest of the sub-specialties so it seems like this quarter it is better any color on what is driving that?

Vivian Lopez-Blanco

Well I think again overall volumes and overall same units as you know was basically 5% for the quarter and we did have 1.9% up in volume for all of our specialties so I think again it is all related to you know we are seeing more favorability and we are very encouraged with the overall volume trends for the quarter.

Joanna Gajuk – Bank of America

Alright, and then also in terms of can you just talk internal in terms of seasonality of fourth quarter versus third quarter?

Vivian Lopez-Blanco

Well I mean I think and several of you guys have put that in your reports I mean typically we see you know the third quarter in line with the fourth quarter and so that is kind of what we are projecting and what is included in our fourth quarter guidance.

Joanna Gajuk – Bank of America

Alright, thank you very much.

Operator

Our next question is from Ryan Daniels with William Blair. Please go ahead.

Ryan Daniels – William Blair

Yeah good morning and thanks for taking my question let me just ask you a quick follow up on the M&A front. Roger can you just talk a little bit about the pipeline I know you provided more details last quarter and kind of the breadth of the pipeline, size of deals that you are seeing so that would be number one. And then maybe as a follow up to that what the competitive environment looks like for transactions I guess in particular on the anesthesia side if you are seeing more entry there from operators or private equity as you continue to look at that market.

Roger Medel

Okay, our pipeline remains very full. We are looking at a number of different deals across the country and say many different geographic areas. We are very encouraged by the interest that we are seeing from different groups throughout the country and we believe that next year we will do more deals than we did this year, which is one of the reasons we went out and got our line of credit extended because we think we are going to use it. So I am just, I just think this is a great time to be in this specialty and we have been able to prove to ourselves that we can bring value through these practices that we can provide them with the kind of infrastructure and support that allows them the opportunity to take better care of their patients while we are helping them take care of their business.

And I think this is going to continue and I think it is going to grow. On the competitive front we haven’t really seen a lot of competition from any of the I would say the other sort of companies out there that are saying they are in the anesthesia business. We have completed the deals that we wanted to complete and that we were after. We did see one group that we were interested in that appears to have made the decision to go with a private equity firm well we expect I don’t know if they will be able to get that deal closed or how that will, how that will develop but we did see one group go with the, make the decision to go with the private equity firm we will see how that develops. And so we expect it other times we expected there is going to be real competition but it will on that private equity firm.

Ryan Daniels – William Blair

Okay that is helpful color and then maybe to a little broader question. The first is with the final ACL rates coming out and looking a little bit more favorable for providers it looks like more MDs may enter into accountable care organizations and I am curious if any of your host hospitals have thought about that and if you internally have thought about what that could do just on the payment front for either you are anesthesiologist or neonatologist in that type of environment?

Roger Medel

Well we think about it all the time we try to follow it and we try to understand exactly what is going to happen there as you know we, it is just all in very early stages and basically the outcome is really unknown. We do see hospital that are our partners that talk about it, we do have our own participation both with our government relation people up in Washington and our partners across the country. But there is really no granularity I can give to that at this point in time it is just too early. We are very focused and keeping an eye on that.

Ryan Daniels – William Blair

Okay thank you and then the final one just quickly given that you do your own revenue cycle management for (Inaudible) I want to get your thoughts on ANSI 5010, ICD 10 a lot of things that are upcoming on the kind of revenue cycle management front I am curious if you have made the IT investment there to manage all the transitions that happen over the next few years if we are going to see any kind of uptick in your investments looking forward to make sure you can manage that appropriately.

Vivian Lopez-Blanco

Yeah I mean we are always, Ryan hi this is Vivian we are always pretty much on the forefront of that so definitely there has been a working group on that for a while but we don’t think it should significantly impact the investment I mean we have pretty robust systems I mean that is one of as you know one of our core competencies. So we are all over that.

Ryan Daniels – William Blair

Okay, perfect. Thanks a lot for all the color guys.

Operator

And next we will go to Bill Bonello with RBC Capital Markets. Please go ahead.

Bill Bonello – RBC Capital Markets

Hey thanks guys. Couple of questions first of all and I apologize if you highlighted this and I missed it there was some mixed shift to government this quarter I think that is pretty typical for Q3 is there anything beyond the normal seasonal mix shift.

Vivian Lopez-Blanco

Well Bill that is right. You have it correct as you know typically for whatever reason we if we go back to historical patterns borrowing what is happened in the last 18 to 24 months in our shift of mix but yeah we see it well within that range so we are actually pretty encouraged by that.

Bill Bonello – RBC Capital Markets

Okay, and then just one more question on the pipeline and Roger you sounded very enthusiastic which is encouraging and you sighted this expansion of the credit facility. Just curious if there is any color you want to or couldn’t provide sort of on size of deals. I mean should we think that there might be some big deals coming because of this expansion of the credit facility and because it is taken a long time then you had some of them down or is that reading too much into it.

Roger Medel

Well you know I am a neonatologist so a big deal for me is five guys on that as we are on the world of small groups we are not going to do any 300 or 200 anesthesiology acquisitions for the foreseeable future. There are groups out there in the 20, 30, 40, 50, 60 physician range and that is kind of the range that I would say we are probably going to be seeing some small groups in the 20 range and some larger groups in the under 100 range and I wouldn’t read anything more than that.

Bill Bonello – RBC Capital Markets

Okay and then just a final question physician compensation is there anything going on there and the only reason I ask is we have seen some other practices that have been reporting increases in labor cost I think that is probably specific to those specialties then I thought we have had our check.

Vivian Lopez-Blanco

No I mean we haven’t seen our physician compensation as I mean first of all as you know we typically have booked the ones that have been it the system for a while had contracts with us and so we haven’t seen anything as we are renewing some of these contracts that has been out of the ordinary on either side of our house whether it is the anesthesia or the pediac side.

Roger Medel

You know Bill we tend to rely more on our bonus program one of the reasons we instituted that program years ago was to get away from the annual increases in base salaries and so as you know we paid $130 million in bonuses at the beginning of this year to our physicians. So we think that takes care of the need for these continuous base salary increases they have their employment contracts with the base salary but they look forward to their bonuses as the way to get their annual increases.

Bill Bonello – RBC Capital Markets

Okay, great. That is all I had. Thank you.

Operator

And next we will go to Rob Mains with Morgan Keegan. Please go ahead.

Robert Mains – Morgan Keegan

Thanks and good morning.

Roger Medel

Good morning.

Robert Mains – Morgan Keegan

Vivian I want to circle back to your comment you made earlier about mix. Did I hear you say that that you felt that part of the issue could be the growth that you kick on in their mix business affecting the overall mix in the quarter?

Vivian Lopez-Blanco

Well no I mean I wasn’t specifically referring to mix when I was talking about that I think we were talking about margins in general I was talking more about the mix of practices Rob that is what I was talking about there.

Robert Mains – Morgan Keegan

Okay and so that would explain then the margin differential so I would assume if we have a static mix of practices the sort of margin trend that we see in this quarter would be the one that we would have going forward subject to the fact of improvements you can make through your practice enhancement efforts.

Vivian Lopez-Blanco

Yeah, but remember the other thing I always talk about is that you know it is affected by several things namely being volume because of what Roger was just saying to Bill that you know we do have a predominantly our physicians that are on the same unit base I mean they share in that bonus program. So right now this third quarter as you know were up 5% so needless to say we are accruing bonuses at that rate so that does impacted us well. So there is a few several of these factors that impact the margins in addition to the just the mix of the practices.

Robert Mains – Morgan Keegan

Okay and then actually we are in that go back to one of those questions of Bob specifically about what we saw seasonally with the mix shift. Do you feel that we are kind of back to where we were pre-recession where if we get kind of the levels shift one way or another and mix that are likely to occur when state physically you are starting to lie one in there for we could see most of the impact in the third quarter not see things bounce around as much as they did in the last couple of years.

Vivian Lopez-Blanco

Well I wish I could have a crystal ball on that and you know like I said we are pretty encouraged with this quarter but honestly can I call this quarter a trend I am not sure yet. You know we do typically see this like I was saying before in the third quarter we do think it is potentially is related to what you said but as far as going back to historical patterns and are we out of the woods with some of these more macroeconomic factors that mean I can’t really say that for sure. We are just encouraged overall where we are at for the quarter and where we are at for the year but I wouldn’t be able to say we are out of the woods with this yet or not.

Robert Mains – Morgan Keegan

Okay, fair enough then just one last mix question and I will let it go. You described the impact of a mix shift being the same in neonatology and anesthesiology because of the difference between commercial and Medicaid and Medicare rates respectively. The duration that you saw in this quarter was that kind of a cross off specialties but it was more or was it more one than the other?

Vivian Lopez-Blanco

Well we don’t talk about a specific specialties as you guys know but when I talk about the shift its overall companywide mix shift. But it is not going to be we don’t want to get into anesthesia or pediacs when we talk about that because we haven’t disclosed that. But remember our practice is currently in anesthesia which is albeit I don’t know if we can continue this as we continue our expansion into anesthesia to have a very good mix that means obviously less government just because of the areas where they are at. They are in very good demographic areas so the payor mix for them is really good. But overall I am not going to talk about one mix versus another mix for these divisions.

Robert Mains – Morgan Keegan

Okay, fair enough. Thank you very much.

Operator

Our next question is from Arthur Henderson with Jefferies & Company. Please go ahead.

Unidentified Participant

Good morning it is actually (Inaudible) for Art. Roger I wanted to go back just briefly to your commentary on the acquisitions in the anesthesiology space you have mentioned a range of 20 to 40 to 60 positions. Can you remind us kind of the two acquisitions you are looking at for the balance of this year kind of where those fall out in that range. And then secondly given the expansion of the credit agreement and your commentary on the pipeline is there any reason to believe that we should expect more than two to three anesthesiology acquisitions as we look to 2012 and beyond or are we still looking at two to three. Thanks.

Roger Medel

Well nice try on the first one. You know that will fall somewhere within that range I don’t want to get into the predicting business that you know we will get, I believe that we will get two acquisitions done this year one will be larger than the other one and that is all I would want to say about that. Yes, I do think that next year as we have discussed I think prior to this I do think that next year we will get more acquisitions done than we did this year if we, complete the ones I want to complete this year we will have done three I think we will do more than three next year. We have got a lot of interest there is a lot of practices in our pipeline and I think that we will bit more than three next year whether it will be five or four or six I don’t know but we will I believe we will do more than three next year.

Unidentified Participant

Okay, that is helpful and then one housekeeping just in terms of the guidance according to my numbers here I guess your same store volume growth last year in the fourth quarter was about 1.6% and the pricing was down about 1.4%. So more of a difficult comp on the volume and easier comp on the revenue and yet you are expecting it to be kind of split evenly any color you can provide there in terms of you know how we should be looking at that?

Vivian Lopez-Blanco

Yeah, I mean basically is that that is kind of why we are at here today last year we had more volatility than this year so this year if you look at where we are at total year-to-date at 3.7 we have volume growth of 1.4 and rate growth of 2.3. So other than that frankly there is no other magic to that so I think it is more in line with the current trends that we are seeing.

Unidentified Participant

Okay, thank you that is all I had.

Operator

Our next question is from Ralph Giacobbe with Credit Suisse. Please go ahead.

Ralph Giacobbe – Credit Suisse

Thanks, good morning.

Roger Medel

Good morning.

Vivian Lopez-Blanco

Good morning.

Ralph Giacobbe – Credit Suisse

So just want to go back to some of your comments about your contracting efforts it seem to be going well and even with the rise in the government pricing it seemed like it was the best result we have seen in a few years. Can you maybe help us understand give us a sense of average rate increases that you are getting and help us understand your contracting cycle.

Roger Medel

About managed care contracting we talk about 2% to 4% annual increases in managed care contracting we think that that is a good area for us to be at some months of the quarters maybe better than others. But that 2% to 4% is sort of what we like to talk about. We see nothing that is changing that makes us feel like that is not going to continue for the foreseeable future. Just as a reminder when we talk about 2% to 4% we were talking about next across all of our business and as you know half of our neonatology business was Medicaid which is a business that we don’t get increases from.

So on an overall basis 2% to 4% really on a company wide basis translates into 4% to 8% so that, so that we can be very apples-to-apples but you know what the cycle for us is just an ongoing thing we have got contracts across the country that explains typically our contracts are two to three years with built in escalators and so when we talk about feeling comfortable that we will continue to see that 2% to 4% over the next couple of years it is because many of these contracts already have these escalators they were gain until we think that we will continue to see those. But the cycle is they are just whenever they expire every year we look at the beginning of the year which contracts are going to expire here and we put our recontracting strategy in place and then we know what we want to get from each of the players who’s contact expire that year then it is just a work plan and we work with it so do you.

Ralph Giacobbe – Credit Suisse

Okay, alright that is helpful. And then just my follow up did you guys gave or do you guys provide same unit EBITDA margins.

Vivian Lopez-Blanco

No, no we don’t, we don’t provide same unit basically what we provide is top line.

Ralph Giacobbe – Credit Suisse

Alright, that is all I have thank you.

Operator

And we will go to Kevin Ellich with Piper Jaffray. Please go ahead.

Kevin Ellich – Piper Jaffray

Good morning just a couple of quick questions. Roger I was wondering on the anesthesia front is there any fundamental changes in deal structures like the doctors or your physicians demanding more or anything like that?

Roger Medel

Now we got a strategy we are sticking to our strategy and we are not seeing any changes at multiples or anything like that no.

Kevin Ellich – Piper Jaffray

Got it okay. And then in your prepared remarks you made a comment about organic growth. And I was just wondering if you could expand on any opportunities or other opportunities that you see on that front maybe just expansion of service lines or incremental physician hiring.

Roger Medel

Yeah, we see some of those and historically we don’t talk about it very often it is just things that we are always talking about acquisitions and I just wanted to remind everyone that there are other opportunities that are constantly propping up they are not as vague or as significant as the exact revisions are but we do get requests from our hospital partners to take over their emergency rather pediatric emergency rooms or their PICUs or to build MSM practices and so I just wanted to highlight that this specific quarter we were out to build an MSM practice in Salt Lake City as well as in Idaho. And we see those are requests I would say on an ongoing basic we have also seen request to build on the hospital services in a couple of our practices across the country and a lot of request for pediatric hospital services PICU services and those kinds of things. Particularly, in these hospitals with when we already have good standing relationships though they will ask us to provide some of that.

Kevin Ellich – Piper Jaffray

Understood thank you and then just going back to the pediatric surgery I sense that is the new specialty for us to look at. I guess on average how many cases as a typical pediatric surgeon handle in a year?

Roger Medel

I don’t know, I don’t have those numbers right in my finger tips I will find that out for you.

Kevin Ellich – Piper Jaffray

Okay.

Roger Medel

But these guys six practice group of pediatric surgeons is a good size practice. So but I don’t know, I am just hanging around, I don’t know I will find out what the numbers are.

Kevin Ellich – Piper Jaffray

Okay thanks. And then just one housekeeping for Vivian can you remind us should the tax rate in Q4 is that seasonally lower?

Vivian Lopez-Blanco

Yes Kevin, what is happened here in the last couple of years is that we have had variability in the quarterly tax rate primarily the first couple of quarters it higher than the last two quarter. I still estimate I think you guys have asked me before and I am still sticking to the annual rate will be in the range of 38.4 to 38.5 the reason for the differences in the quarter it is related to discrete items which we have to book like that based on accounting (Inaudible) yeah it will be lower.

Kevin Ellich – Piper Jaffray

Got it okay. Thank you.

Roger Medel

Thanks.

Operator

Our next question is from Brooks O'Neill Dougherty & Company. Please go ahead.

Brooks O'Neill – Dougherty & Company

Good morning terrific quarter, terrific update. I like David a lot and I am going to miss my buddy Bob so it is well.

Roger Medel

Here is a sat out to Bob.

Brooks O'Neill – Dougherty & Company

Just a couple of questions obviously you have covered a lot already I understand that last year in the fourth quarter you benefited from a couple of anesthesia acquisitions. But it looks to me like with your guidance you are projecting sort of maybe below 10% earnings growth in the fourth quarter A am I doing the math right and B can you just comment on why you are being so conservative for the fourth quarter.

Roger Medel

Well as you know we build our acquisition into our guidance and we are just being conservative at that how much contributions we are going to get from these acquisitions and what when the acquisition will get done so we are just trying to be realistic.

Brooks O'Neill – Dougherty & Company

Yep that makes sense. I am curious Roger I know you don’t want to get into guidance for ’12 or beyond. But do you think about the company and where it is today you would you be willing to sort of talk a little bit about what you hope the company can grow at in terms of sort of a long-term picture at this point.

Roger Medel

We got to see the faces on the people across the table.

Brooks O'Neill – Dougherty & Company

Let’s say no, no don’t go there.

Roger Medel

You should see my (Inaudible) or right now you are having a stroke over there.

Brooks O'Neill – Dougherty & Company

Great.

Roger Medel

So obviously I am very excited about this whole anesthesia thing I said it before I think this is going to be a home run for us. I think as we get more and more experience with this specialty we get more and more comfortable that we have chosen the right specialty that we have the right people in place and we have the right systems in place. And it is a specialty that is 10 times the size of our neonatology specialty and so I think all of the opportunities are there we need to execute and we need to continue to bring value to these practices. But my hope is that we can double our size there in the next three to five years.

Brooks O'Neill – Dougherty & Company

Yeah, that is great. I was thinking that that would be possible and I am glad to hear you focused on trying to get there. So that is tremendous. Last question it is just.

Roger Medel

Excuse me just a minute I have to call 911 here.

Brooks O'Neill – Dougherty & Company

Yeah, I am just curious if you guys are seeing in your surgical practices any change in volume or demand or activity levels sure doesn’t seem like it but I am curious what you see anecdotally.

Roger Medel

No, I would say we are not seeing any changes at all in our demand for our anesthesiology practices. No.

Vivian Lopez-Blanco

Yeah, revenue the volume growth for anesthesia it is positive you know so they’ve actually done very well this year.

Brooks O'Neill – Dougherty & Company

Perfect, thank you Vivian, thank you Roger. Talk soon.

Roger Medel

Thank you.

Operator

Our next question is from Matt Weight with Feltl & Company. Please go ahead.

Matt Weight – Feltl & Company

Thanks you guys have hit on most of the questions I had and I appreciate all the color on anesthesiology with the pipeline. I am just curious in terms relative to the pediatric space is anesthesiology more laborious due diligence process or integration or is there anything structural that result in the slower pace of deals.

Roger Medel

Yeah I mean basically if they are larger groups right there are large group of neonatologist maybe six a group of plastic typical average group of anesthesiologist maybe 40 if not more. And then you have got nurse anesthetist and all of that and if they are working in a couple of hospitals and you got two different hospital contracts to deal with. If so it is more laborious because each division have to have an employment contract and of course to have that time to review the employment contracts and to make their comments and have their lawyers and all that stuff. So yeah I mean but I from a negotiation standpoint they are not it is not that different it is just about due diligence. We have to get in and check there do a little of their coating review and all those kinds of things which just because of your either bigger practices makes it take longer.

Matt Weight – Feltl & Company

Okay, perfect. And then another question in if MedTech is successful on giving SGR appealed and you see the kind of specialists that they are recommending. How do you feel that impacting your anesthesiology practices and are these stuff great enough to spur an increasing consolidation maybe in the industry.

Roger Medel

So I give you Karl Wagner.

Karl Wagner

Thanks.

Roger Medel

You take that one Karl.

Karl Wagner

Yeah, I mean that closes are pretty difficult for anesthesia to take I mean as that said naturally anesthesia from a Medicare standpoint is underpaid when you look at relative to other specialties from Medicare as a percent of commercial insurers. For example Medicare is roughly 80% of commercial insurers for most different specialties but for anesthesia it is about a third of commercial payor rate.

So if you take that below reimbursable as it is and then reduce it by what they are proposing to reduce over three year period. It is pretty agreed just being pretty difficult since that actually been inactive. If it does it would have an impact on us more on maybe some other practices maybe I mentioned we had pretty good payor mix in all practices in a percent of Medicare but certainly would have an impact on it. And then do you think it would first towards consolidation in the anesthesia the real question is how is the whole anesthesia marketplace is going to react to this and dealing with this issue. So it is really unclear at this point I don’t know that the MedTech it does not have a lot of sport out there in the physician community the way they are structuring it I think even a primary care physicians are happy that the proposals is to keep them flat for a few years.

But and you are looking at proposal it gets at physicians by almost 17% over the next several years and then keep it flat when so there is no increase there has been no increase in physician compensation for Medicare just pick up over the last 10 years. So basically patients have gone up and reimbursement for physicians is going down it doesn’t make sense if that is a sustainable model it will keep people seeing better. So I think there is a lot of concern whether that will happen but I do think we saw consolidations but what that looks like if that would have happen but simply (Inaudible).

Matt Weight – Feltl & Company

Great, I appreciate that. That is all I had.

Operator

And having time for one more question we will go to Kevin Fischbeck. Please go ahead.

Joanna Gajuk – Bank of America

Hi, this is Joanna again I am sorry just a follow up to some previous discussions I don’t know around mix shift here. So our read here was that instance like it is not already pressuring those and I guess the our read is that it is the side that the volume are actually better so it seems like it is actually volumes on the government side increasing rather than just pure shift from our commercial into mitigated. Would you agree with that statement here?

Vivian Lopez-Blanco

Yeah, I mean I think like we said we don’t I mean I don’t understand your question specifically other than for us we believe that the, I mean we have volume growth we haven’t seen other than that but we said that 80 basis point shift it is a government mix is what we historically have seen in this third quarter. So I am not sure if you are getting at anything else Joanna there.

Joanna Gajuk – Bank of America

Okay, now that is what I was illustrating on. I was just trying to put a sense confirm a part of that 80 basis points is towards and then it will climb in the second quarter but still it is seasonally expected to see this kind of range of pressure here. But at the same time what I was gaining out to that volume is continuing to be strong versus maybe in 2010 volumes were flat to down so it seems like there was just more of Medicaid volumes coming in versus just bonus being flat but just shifting from commercial to Medicaid.

Vivian Lopez-Blanco

No, we don’t believe that I mean year-to-date basically were flat on the government mix. And so you know I think as we have said in the past there has been variability in this payor mix and yes we had basically flat increase in the p mix as in Q2 and basically a favorable impact in Q1. So we are versus what we have seen in the last year when we had an overall 150 basis point deterioration to government mix though. We are encouraged with those volume and movement on the net pricing because for what we talk about here you know I know that we focus a lot on government mix but when we talk about pricing we basically talk about net pricing and that is up 2.3 year-to-date.

Joanna Gajuk – Bank of America

Thank you.

Operator

And I will turn it back to the presenters for any closing comments.

Roger Medel

Okay, if there are no more questions then we are finished. Let’s go get some deals done. Thanks guys.

Operator

Ladies and gentlemen that does conclude your conference for today. Thank you for your participation. You may now disconnect.

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