MEDNAX (MD) Roger J. Medel on Q4 2015 Results - Earnings Call Transcript

| About: Mednax, Inc. (MD)

MEDNAX, Inc. (NYSE:MD)

Q4 2015 Earnings Call

February 04, 2016 10:00 am ET

Executives

Charles W. Lynch - Vice President-Strategy & Investor Relations

Roger J. Medel - Chief Executive Officer

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Analysts

Ryan S. Daniels - William Blair & Co. LLC

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Kevin K. Ellich - Piper Jaffray & Co (Broker)

John W. Ransom - Raymond James & Associates, Inc.

Brian Gil Tanquilut - Jefferies LLC

Chad Vanacore - Stifel, Nicolaus & Co., Inc.

Chris Rigg - Susquehanna Financial Group LLLP

Ralph Giacobbe - Citigroup Global Markets, Inc. (Broker)

Gary Lieberman - Wells Fargo Securities LLC

Gary P. Taylor - JPMorgan Securities LLC

Dana R. Hambly - Stephens, Inc.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the MEDNAX 2015 Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions given at that time. As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Mr. Charles Lynch. Please go ahead.

Charles W. Lynch - Vice President-Strategy & Investor Relations

Yeah, thank you, and good morning. I want to read our forward-looking statements and then I'll turn the call over to Roger and Vivian.

Certain statements and information during this conference call may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by MEDNAX's management in light of their experience and assessment of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate.

Any forward-looking statements made during this call are made as of today, and MEDNAX undertakes no duty to update or revise any such statements, whether as a result of new information, future events or otherwise. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the company's most recent annual report on Form 10-K and its quarterly reports on Form 10-Q, including the sections entitled Risk Factors.

In today's remarks by management, we will be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this morning's earnings press release, our Annual Report on Form 10-K, or in the Investors' section of our website located at mednax.com.

With that, I'd like to turn the call over to our CEO, Dr. Roger Medel.

Roger J. Medel - Chief Executive Officer

Thank you, Charlie. Good morning and thanks for joining our call today to discuss our results for the fourth quarter of 2015. I am very happy with how we ended the year. For the fourth quarter, our revenue was up 14% and adjusted EPS was up 13%. Our NICU volumes continue to grow against a very strong fourth quarter last year and our anesthesia volumes increased as well.

During the quarter, we made our debut in the debt market raising $750 million, and Vivian will talk more about this, but I think it's a great demonstration of our ability to access capital in difficult times at reasonable rates. And at the end of the quarter, we completed our 12th acquisition of the year, which was also our seventh anesthesia practice addition in 2015.

Overall, the quarter was a great one, but it was just one part of a very busy year for us. We used over $850 million of our capital to grow through acquisitions in 2015, by far the largest amount we've ever used for growth in any one year. In doing this, we expanded our existing physician specialties and added a significant presence in teleradiology.

Internally, we realigned MEDNAX along geographic lines, instead of being siloed by our specialties. And we expanded our sales and marketing efforts dramatically. We are now much better positioned to generate organic growth through cross-selling and being more responsive to our hospital customers.

So now here we are in February of 2016, and based on the markets this year, you'd think the whole world had changed – and maybe some things have. But at MEDMAX we are still taking care of just as many babies; in fact, a few more than a couple of months ago. We're still attending just as many surgeries, or a few more than a couple of months ago, and we're still leading just as many studies – actually a lot more than a few months ago. In terms of the things that have changed at MEDMAX, I think everything we did in 2015 puts us in a great position to continue to succeed in the future.

Let's look at acquisitions. In anesthesia, we acquired seven private practices in 2015. And over the last three years, 21 private practices have joined MEDNAX. In fact, over that time period, more practices have chosen to join MEDNAX than any other organization. I believe our commitment to quality, patient care, and dollar investments to support our physicians play a real and important role in these decisions. And based on our pipeline, I believe that we will continue to be one of the most active acquires in this specialty at reasonable rates.

Beyond anesthesia, we continue to add new neonatology and other pediatric subspecialty practices to our pipeline. A lot of these will help us to expand the scope of services we provide to our hospital customers, making us a true health solutions partner for them when it comes to women and children's care, anesthesia, radiology et cetera.

And we will look at opportunities to grow through vRad and potentially through the addition of onsite radiology practices. Since our acquisition of vRad last year, we've gotten a number of indications from radiology practices that they are interested in talking about joining us. They see a number of benefits, such as using our teleradiology services to add access to subspecialist care, adding productivity if they are looking at growth through new hospital contracts, or maybe handling attrition from retiring partners.

We want to do this the right way, and by that I mean in a way that supports the physicians in these practices, just like we've always done. So we will move carefully. But there is a great opportunity in radiology and there are steps we can take in 2016 to address this opportunity.

The changes we made to our balance sheet are an important part of our acquisition strategy. Despite all of the disruption there has been to the bond market, we were successful in adding a long-term, fix rate component to our debt structure at what we think is an attractive coupon at 5.25%. And we freed up more than $1.3 billion on our revolver, putting us in a great position to access capital this year.

Finally, we were able to do all of this and the acquisitions we completed in 2015 and still end the year with leverage of only two times. So we've got plenty of financial power to continue to execute on our strategy.

Now let's look at organic growth. First of all, in 2016 we'll finally move beyond Medicaid parity, and that will be beneficial to our same-unit growth compared to 2015. But much more importantly, our realignment was meant to make us more nimble and able to take advantage of opportunities for new contract growth, cross-selling, and the addition of new service lines for our hospital partners.

We have also continued to invest in our sales and marketing efforts, as well as collaborating with the teams at vRad, MedData and Surgical Directions. In 2016 I'm optimistic that all this work will produce successful results as we move through the year.

Finally, we will continue to take great care of our patients. This is the foundation of our organization, and our commitment to quality care has brought us through every kind of market environment over the 20 years that we've been a public company.

We've invested in data, quality improvement, research, education and safety for decades. These investments are now even more valuable as the business of healthcare moves towards the way we've always approached the practice of healthcare. These investments will be our priority, but I believe that the way we adapted as an organization in 2015 positions us to succeed and to grow and to be a true health solutions partner for our customers.

With that, let me turn the call over to our Chief Financial Officer, Vivian Lopez-Blanco for our review of the results.

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Thanks, Roger. Good morning and thanks for joining our call. I want to give an overview of our operating results for the fourth quarter and provide additional details in a couple of areas. For the fourth quarter, our net revenue increased by 14% to $742 million. All of this growth came from recent acquisitions with our acquisition of vRad in May contributing roughly half of that growth and practice acquisitions, particularly in anesthesia contributing most of the rest.

Looking at our same-unit metrics, same-unit revenue declined by roughly 130 basis points. Excluding the impact of parity in both 2015 and 2014 periods, same-unit revenue would have increased by 1%. On the volume side, same-unit increased by 50 basis points against a strong 3.2% comparison last year. Our NICU days were up 30 basis points and we saw growth in our anesthesia volumes, other pediatric services and pediatric cardiology, partially offset by a slight decline in maternal-fetal medicine.

On the pricing side, we recorded roughly $1.5 million in parity revenue in the quarter or less than $0.01 per share in EPS, compared to $16.7 million or $0.05 per share for the same period last year. Excluding the impact of parity from both periods, our net same-unit growth from reimbursement-related factors was about 50 basis points. Impacting this growth was roughly 80 basis points shift in mix towards government payers compared to 2014. On a sequential basis though, our payor mix shifted favorably by about 40 basis points compared to Q3. Our EBITDA increased by 9.2% to $169 million, and our EBITDA margin declined by a 100 basis points to 22.8%, with this margin decline primarily reflecting the impact of lower parity revenue this quarter versus last year.

Looking at some of the components of our EBITDA. First, our profit after practice expense for the fourth quarter was $255 million, up 14% year-over-year. Profit after practice expense margin improved slightly by about 10 basis points despite the impact of parity. This primarily reflects a favorable impact from the mix of businesses we acquired in the past year. Second, our G&A expenses were 11.5% of revenue in Q4, an increase of 110 basis points over last year. This increase reflects a higher mix of G&A expenses on our portfolio companies.

Our fourth quarter net income grew by 4.9% to $93 million and diluted earnings per share of $0.99 grew by 11.2% as compared to the prior year period. On a non-GAAP basis, adjusted EPS of $1.13 grew by 13% over the prior year. For the quarter, weighted average diluted shares were 93.5 million, down about 5.6 million shares from the prior year, due primarily to the repurchase activity we undertook during the end of 2014 and the first quarter of 2015.

Our balance sheet is another area where I want to go into additional detail. At year-end, accounts receivable were $445 million, an increase of approximately $93 million as compared to December 31, 2014. Day sales outstanding were 55 at the end of the quarter, up about 3.5 days from September and about 5 days from the end of 2014.

For the fourth quarter, operating cash flow was $104 million, compared to $179 million last year. This decrease in cash flow was driven primarily by the increase in DSO during the quarter as well as a decrease in accrued expenses in the current year compared to the prior year.

We believe the increase in our DSO was impacted by coding personnel shortages. As the industry transitioned to ICD-10 coding during late fall, we saw an increase in demand for coders, which affected our own turnover as other providers try to add additional personnel to handle the changes. We view this as temporary, and during the fourth quarter we began taking steps to resolve our own staffing needs and add additional coding resources. These steps have begun to take effect so far in 2016.

Our total outstanding debt was $1.3 billion at December 31, up from $569 million at the end of 2014 mostly related to acquisitions completed during 2015 and the share repurchases we executed in the back half of 2014 and the first quarter of 2015. During the fourth quarter, we completed our debut offering of senior notes, raising $750 million in 8-year notes with 5.25 coupon. We used the net proceeds of this offering to repay a portion of our credit facility borrowings.

The differential in interest cost between our senior notes and the revolver borrowings we repaid impacted our fourth quarter EPS by about $0.01. So at year-end, our total outstanding debt consisted of $750 million in senior notes and roughly $534 million in borrowings under our credit facility. As you will recall, we amended that credit facility in June of last year, increasing the revolving loan commitments to $1.7 billion from $1.3 billion, in addition to our $200 million term loan. At year-end, our available borrowings under our credit facility were $1.4 billion.

Moving on to our outlook for the 2016 first quarter, as we announced in this morning's press release, we expect that our earnings per share for the three months ending March 31, 2016, will be in a range of $0.72 to $0.76, and that our adjusted EPS will be in a range of $0.85 to $0.89. The range for our first quarter outlook assumes anticipated same-unit revenue growth will be 0.5% to 2.5% year-over-year, including an approximately 1% unfavorable impact on pricing from the decrease in parity revenue from the first quarter in 2015.

Excluding parity revenue from both periods, a non-GAAP measure, our first quarter outlook assumes same-unit revenue growth will be 1.5% to 3.5% year-over-year. Our first quarter 2016 results will also be affected by two specific items. Included in our first quarter of 2016, as compared to 2015, is the impact of our senior notes offering in December. The difference in interest costs associated with this offering at 5.25% coupon compared to the cost of our credit facility borrowings at roughly 2% impacts our first quarter by roughly $0.04 per share, all else being equal.

Additionally, as a reminder, our first quarter 2015 results included approximately $0.02 per share from Medicaid parity net of the impact from incentive compensation and income taxes. These two items affect our expected growth in earnings per share in the first quarter to a greater extent than our expected growth in EBITDA, a non-GAAP measure that we began providing in 2015. While we don't provide specific guidance of EBITDA, we do anticipate that in the first quarter of 2016 our growth in EBITDA compared to the prior year will be at least equal to the growth rate in EBITDA that we reported in the fourth quarter of 2015.

As a reminder, our results for the quarter of every year are impacted by timing issues that affect our results on a sequential basis. For the first quarter of 2016, these factors include a significant increase in expenses associated with Social Security payroll taxes that are higher at the start of each year when compared to the fourth quarter of the prior year, as well as impacts on net revenue because there are – there is one fewer calendar day than the fourth quarter.

These recurring items impact our operating income, net income, earnings per share and are included in our financial outlook for the 2016 first quarter. It's also important to remember that we typically have negative cash flow from operations during the first quarter of every year as we use cash and amounts under our credit facility to pay bonuses and 401(k) plan matching contributions that accrued throughout the prior-year.

Now I'll turn the call back over to Roger.

Roger J. Medel - Chief Executive Officer

Thank you, Vivian. And with that, let's open up the call for your questions. Operator?

Question-and-Answer Session

Operator

Thank you. And we'll go directly to the line of Ryan Daniels with William Blair. Please go ahead.

Ryan S. Daniels - William Blair & Co. LLC

Yeah. Good morning, thanks for taking the question and for all the color. Roger, maybe one for you on debt refi. I'm hoping to get a little bit more color on that, meaning, should we read into it as a sign that you really want to restock the war chest given the size of the M&A pipeline, or is there also a component just wanting to lock-in some fixed rate debt over the longer-term versus letting the debt flow?

Roger J. Medel - Chief Executive Officer

Yeah. I think it's a combination of those things. I think that we are pretty much tapped out in our line of credit; we weren't going to get a lot more – a lot bigger line than almost $2 billion on the line and we thought that with all the talk about interest rates starting to go up and that kind of stuff that it was a good time to put some longer term debt on our books and so we were able to do that at what we think are pretty reasonable rates. So we are happy with that. But in addition to that, we use the money, as you pointed out, to pay down our line of credit. So the way I see it, I have another $1.4 billion of very cheap debt available now to continue going down our acquisitions path.

Our pipeline is very full. We do have a number of deals under LOIs and so we are happy with our position. We think that given interest rates going up that – as we sit and look at what could happen this year, it is possible that some of these multiples that have been paid will start to come down. So we think we are in a pretty good spot. We got lots of cash available and our debt ratio is at a two times level and so we're – we are just going to sit back and see what happens.

Ryan S. Daniels - William Blair & Co. LLC

Okay. That's helpful color. And then, as my follow-up, just any more color on the One MEDNAX strategy? You talked a little bit about that reorganization, investment in sales and then the thought that that could help to accelerate organic growth. Is that something that clients, meaning, your hospital partners are starting to recognize yet in regards to your broader offering and maybe where is that manifesting most, or is it still in its early stages where they are just starting to see this increased awareness of your full set of capabilities? Thanks.

Roger J. Medel - Chief Executive Officer

Yeah. Thanks. Absolutely. I mean, look, we have a number of RFPs that we are considering and are responding to at this point in time and it's really all coming from hospitals, either asking us to participate in new areas, particularly in the maternal-fetal medicine area or – or other specialties like anesthesia. So what – I believe that we will see some important growth from that area this year. We have had to make some investments there, and so you see a little blip in the SG&A et cetera, but that's just been frontloaded somewhat, but beyond that I do believe that we will see some pretty good growth. It's from not only existing specialties, but other specialties that are our hospitals are asking us for help with.

Ryan S. Daniels - William Blair & Co. LLC

Okay. Great. Thank you.

Operator

Thank you. Our next question comes from the line of Kevin Fischbeck, Bank of America Merrill Lynch. Please go ahead.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Great. Thanks. Just maybe want to follow up that last question. Is there any sense of timing around when you think that this really will start to kick into the organic growth rate?

Roger J. Medel - Chief Executive Officer

Well, we were hoping last quarter, but we think – I mean, I don't know whether it will be the first quarter or the second quarter, but we're pushing as hard as we can.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Okay, so how do you think about the organic growth rate number for Q1? Now, I guess I understand, obviously you want to take out parity; you kind of see apples-to-apples – like your sales will get the benefit of leap year in Q1 of this year. So I mean, do you feel like there is a lot of momentum organically in the business heading into 2016 or is this -kind of feel more like where it's been the last few years?

Roger J. Medel - Chief Executive Officer

Well I think that a lot of – a lot of it is just driven by growth and payor mix and we think that – as we look for this first quarter, we've given you some guidance of where we think we come in between 0.5% and 3.5%. I think that's a pretty good indicator across the ceiling.

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

So I think, Kevin, these things are a little bit longer term, because as you look at some of the organic growth initiatives, I mean, there are some lead times to it. So we've basically built the forecast roughly about two-thirds volume and one-third price – net pricing impact. We have seen – fourth quarter was actually pretty good compared to really the prior year because it was a very strong quarter. So I do think these – our organic initiatives will start to be paying off, but they are on a longer-term basis because they do have a little bit longer lead time.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Okay. And then you sounded pretty optimistic about the growth at vRad. I guess vRad's not in your same-store numbers yet, right? So can you give us some data points of how vRad grew year-over-year?

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Yeah. So vRad, we're continuing to be very optimistic with it, because honestly it's delivered on the volume side. And so you're right, it hasn't been – it really hasn't been included in same-unit but it's certainly impacting the overall revenue base, but the volume side has been good, so we have not been disappointed at all with vRad.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Okay. Great. Thanks.

Operator

And next we'll go to the line of Whit Mayo with Robert Baird. Your line is open.

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Just on the acquired growth in the quarter, it looks like just under $100 million compared to maybe $103 million in the third quarter – maybe it's just MedData that's rolled into the same store count now. But I guess I'm just surprised that the absolute acquired revenue number isn't up a little bit sequentially, given the size of the New Jersey deal. So I guess, was there a blip in performance in any deals in the quarter, or maybe I'm just missing something and it's all MedData and – I mean it looks like vRad is performing really well on about a $300 million run rate. So just kind of curious if you could give some more color on some of the acquisitions in the quarter?

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

So you're right that basically MedData did roll in, so that was pretty good with... So we – again, I mean the deals in the quarter, it's really too soon to start analyzing those. Obviously we look at that on a hindsight basis, but sometimes it does take – I mean as we've talked to you guys in the past it does – some of them have a ramp-up because of the upside that we bring on the revenue cycle side, especially with the managed care contracting et cetera.

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Okay.

Roger J. Medel - Chief Executive Officer

It also depends on when in the quarter, right? I mean, there is three months to the quarter, so stuff that was added in December obviously is business from (24:29) September.

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

That's fine. I'm kind of complaining over $3 million. So...

Roger J. Medel - Chief Executive Officer

Yeah.

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

I guess my second question, just sort of curious on your internal view on kind of the status of the credit markets and what this means for deals. I hear you, Roger, on transaction multiples. Things probably got a little overheated last year, but I guess do you think that we see sellers accelerate or sit, given the tight nature of the markets. And I guess large deals, maybe they are unlikely to trade in this environment with the lack of several – but I don't know, just kind of open-ended questions for what you think this data – sort of like the credit markets means for the acquisition landscape?

Roger J. Medel - Chief Executive Officer

Okay. So what I am about to tell you is total speculation and worth what you paid for it. Yeah, I think that interest rates do have an impact. First of all, the private equity firms as you know are affected by that and so that is something that we think, particularly as rates continue to climb we might see that have an impact on them. And then of course, the ability to access the markets for some of the strategics – as I look at their debt to equity ratios, they are – a little higher than ours. And so for all those reasons, I – my guess is that what happens is, if you are expecting a double-digit multiple for selling your practice and all of a sudden you are faced with a situation where those multiples go down, my guess is that you go to the sidelines for a while. I don't think you are, because you are already pregnant with the idea that you are going to do the deal and you are just not going to immediately jump and say, well I'll take a single-digit multiple. But I think as time progresses, I think that the likelihood is that some of those deals will get done.

Having said that, we do have a very full pipeline, a number of good anesthesiology deals in our pipeline at multiples that we consider to be reasonable. And so, we expect that we will continue to execute during this year independently of this other factor, which I think over time should help more deals get done at reasonable multiples.

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Fair enough. Thanks.

Operator

Thank you. We'll now go to the line of Kevin Ellich, Piper Jaffray. Please go ahead.

Kevin K. Ellich - Piper Jaffray & Co (Broker)

Good morning.

Roger J. Medel - Chief Executive Officer

Hey, Kevin.

Kevin K. Ellich - Piper Jaffray & Co (Broker)

Hey. Vivian, just going back to your Q1 guidance for the same-unit revenue growth, clearly, we see the impact from parity. I guess two questions there is; one, how much more – how much longer will parity continue to negatively impact same-unit growth; and then two, did you guys split out – and maybe I missed it, but did you split out what do you expect in terms of price versus volume for that same-unit growth?

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

So – good morning Kevin. So, your first question, so we – as we talked about, we basically had $0.01 or so – in the – I'm sorry, $0.02 in the first quarter. It continues to go down. I mean, for the whole year last year we had top-line parity that we calculated at about $12 million or so. So it's roughly about a $0.01 in the second quarter and $0.05 or so in the third quarter and the fourth quarter. No, I did not break it out in the actual prepared comments, but I did say it just a couple minutes ago...

Kevin K. Ellich - Piper Jaffray & Co (Broker)

Got it.

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Just to give more color on how we look at that and how we looked at volume, again, because I was really trying to make more the point of that even though volume was a half a percentage in Q4, that was really up against a very strong comp in the prior year. So we're pretty happy with that.

Kevin K. Ellich - Piper Jaffray & Co (Broker)

So are you expecting 0.5% again in Q1? I guess that's – did I miss that?

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

You said, what? Say that again Kevin, somebody just said something (28:42).

Kevin K. Ellich - Piper Jaffray & Co (Broker)

So for Q1 – I mean, you did 0.5% of growth for volume in Q4, I understand that, but in Q1, how much of – what volume growth are you expecting in Q1?

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

So yeah, so what I said was, in whatever range it is, okay, we have about two-thirds volume and one-third pricing, net pricing (29:02).

Kevin K. Ellich - Piper Jaffray & Co (Broker)

Okay. Got it. Yeah, I got that now. Sorry I missed that. And then I guess, Roger, kind of big picture, I think everyone is seeing the headlines on the Zika virus. That apparently has made its way into the U.S. What are you guys thinking? Are we expecting any change in the birth rate? And I guess even if we do see some cases, do you think that could lead to high-risk pregnancies and maybe some increased volume into the ER – or into the NICU? Sorry.

Roger J. Medel - Chief Executive Officer

Yeah, we think it's way too early to tell. Obviously there are some efforts going on immediately to eradicate some of the mosquitoes et cetera. It is a terrible, terrible thing that – if in fact it is causing these babies to be born with microcephaly. It's a sort of a sentence for the rest of their lives. So, I hope not. We're cautiously optimistic that there won't be too many of those cases that we will see. But in any event, I just don't believe that it's going to be enough to move any kind of needle unless there is some unforeseen epidemic.

Kevin K. Ellich - Piper Jaffray & Co (Broker)

Got it. Okay. Thank you.

Operator

Our next question is from John Ransom, Raymond James. Please go ahead.

John W. Ransom - Raymond James & Associates, Inc.

Hi, I thought of it before Whit did, but he asked all my questions, so I'm going to take credit for it. I'll move on to the next analyst.

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Thanks, John.

Operator

Thank you. We'll now go to Brian Tanquilut with Jefferies. Please go ahead.

Brian Gil Tanquilut - Jefferies LLC

Hey, good morning guys.

Roger J. Medel - Chief Executive Officer

Hey, Brian.

Brian Gil Tanquilut - Jefferies LLC

So, there were – Roger, just a question on G&A. So obviously we saw a decent ramp in 2015, so how should we think about that as a percentage of revenue in 2016?

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Yeah. So it will be roughly in that same new range now that you saw there, Brian. So 11.5%, slightly above that, but it will be in that range because now we have everyone settled in there. And so, like I said, a big part of that is just the mix of our portfolio of companies and how they really have their expenses classified.

Brian Gil Tanquilut - Jefferies LLC

So there's no new initiatives to think about in G&A – that would hit the G&A line I guess, is the point?

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Yeah. I mean, so we – what Roger was saying, we did have the realignment, but I think most of that is – when I look at our 2016 estimates and whatnot, I think that range will still cover it. Obviously it'll depend as a percentage what top-line does, but I think we'll be fine within that range, 11.5%, 11.375%, whatever it ends up being.

Brian Gil Tanquilut - Jefferies LLC

Got it. And Roger...

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

In that range.

Brian Gil Tanquilut - Jefferies LLC

Got it, Vivian. And then, Roger, just as we think about the birth outlook, obviously you have a little bit of visibility of that – into that from your maternal-fetal business. I mean how should – how are you thinking about the birth rate outlook for 2016 right now?

Roger J. Medel - Chief Executive Officer

Well, we did see some bump in birth rates last year. We are hoping that, that's a trend and there is nothing that makes us feel like that's going to reverse. The statistics, if you will are with us; as you know, births by 1990 were up to 1 million and – an additional million from 3 million to 4 million. And so babies that were born in 1990 are now getting to be 25 years old and we do expect to see a continued increase in birth rates just from the – from that statistic. But like I said, I'm cautiously optimistic that for 2016 we'll continue to see slight increases in the birth rate.

Brian Gil Tanquilut - Jefferies LLC

Okay. And then last question for me. Viv, you highlighted that sequentially the payor mix improved. Is there any differentiation there between the anesthesiology business and the NICU or – like is there one that you would call out, or is that kind of across the board that's how you saw the payor mix play out?

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

No, we did see more increase towards government in anesthesia than we did in pediatrics. And again, part of it year-over-year is that last year anesthesia had a real big dip in Q4, but there's nothing really that I see it as a significant trend. But individually that's how we saw the numbers play out.

Brian Gil Tanquilut - Jefferies LLC

All right. Got it. Thank you.

Operator

Thank you. And our next question is from Chad Vanacore with Stifel. Please go ahead.

Chad Vanacore - Stifel, Nicolaus & Co., Inc.

Hi. Good morning, all.

Roger J. Medel - Chief Executive Officer

Good morning, Chad.

Chad Vanacore - Stifel, Nicolaus & Co., Inc.

So you touched on a competitive environment for acquisitions. Are you seeing any price moderation as other physician staffing companies are pressured?

Roger J. Medel - Chief Executive Officer

Not yet. Not yet.

Chad Vanacore - Stifel, Nicolaus & Co., Inc.

All right. Any color around what your competitors are paying for in terms of multiple right now?

Roger J. Medel - Chief Executive Officer

No, I don't want to get into that.

Chad Vanacore - Stifel, Nicolaus & Co., Inc.

That's okay. All right. So you also mentioned that you are seeing some interest from the radiology front. Practices have approached you to purchase their practice. And am I right about that? Not just...

Roger J. Medel - Chief Executive Officer

Yeah.

Chad Vanacore - Stifel, Nicolaus & Co., Inc.

Provide radiology services?

Roger J. Medel - Chief Executive Officer

Yes, you are absolutely right about that.

Chad Vanacore - Stifel, Nicolaus & Co., Inc.

Okay.

Roger J. Medel - Chief Executive Officer

And as I said, we expect that we will jump into this arena sometime this year.

Chad Vanacore - Stifel, Nicolaus & Co., Inc.

Okay. And then how do those multiples compare to anesthesia and neonatal?

Roger J. Medel - Chief Executive Officer

Well, we don't have any signed deals as of this point, but our expectation is that they'll be closer to the neonatal margins than – or multiples than the anesthesia multiples.

Chad Vanacore - Stifel, Nicolaus & Co., Inc.

All right. And then your payor mix was down year-over-year, but improved sequentially. Can you point to any factors that are really driving that?

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

No, Chad. As I was talking about, we did see a higher mix towards government on the anesthesia side. Again, that was partially driven year-over-year by the fact that last year we had a much lower – we had a dip in that. So there is nothing that is from a macro perspective in either one of these that I would say it's a driving factor in that. And again, we're happy that sequentially it's favorable.

Chad Vanacore - Stifel, Nicolaus & Co., Inc.

All right. And then in your prepared remarks, you also mentioned some more staffing needs in terms for coders. Are you seeing any overall wage inflation in a tighter labor market?

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Yeah. No, that was specifically related to coders, because as you know, with the ICD-10 transition, that really caused in that specific area of labor – you know coders were a pretty high commodity at the moment. And so, yeah, that was specific to that, but again, we've already taken steps to really add additional resources there and so we'll see that turning around here. We started to see that turn around in the first quarter of 2016.

Chad Vanacore - Stifel, Nicolaus & Co., Inc.

All right. That's it from me. Thanks.

Roger J. Medel - Chief Executive Officer

Thank you.

Operator

And now we'll go to Chris Rigg, Susquehanna Financial. Please go ahead.

Chris Rigg - Susquehanna Financial Group LLLP

Good morning. I have a follow-up on the last question and really just related to receivables generally. Were – some of the delays there, was it across all payor classes, all business lines? Was MedData impacted by some of the personnel issues? And it sounds like some of these issues have normalized in the Q1, but just want to get some clarity here.

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Yeah. So, no, it really wasn't MedData. Actually MedData would be a somewhat of a solutions provider for us as we look at this – different ways to supplement our coder population. And so, some of it we've done by adding our own internal resources. We basically adjusted some of their work schedules because there seems to be a trend there on telework – in that space. But MedData, we can actually supplement our coders with some of their offshoring expertise. And so, no, that wasn't really the impact.

Chris Rigg - Susquehanna Financial Group LLLP

Just on some of the delays in the core business; was that all payor classes, all businesses?

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Yeah. Pretty much. I mean, mostly specifically anesthesia, right, because that's really where you see the coder. That's how the process works. You need to have the coders code the bills. So it's primarily related to the anesthesia specialty.

Chris Rigg - Susquehanna Financial Group LLLP

Okay. Great. Thanks a lot.

Operator

And our next question is from Ralph Giacobbe with Citibank. Please go ahead.

Ralph Giacobbe - Citigroup Global Markets, Inc. (Broker)

Thanks. Good morning. Just want to go back again to DSOs, make sure I'll understand this. Is this just an issue where you are just – your claims just aren't getting out the door, or are payors holding back claims and/or is your commercial yield coming back lower that's also having an impact on pricing?

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Let's now look more into this than we need to guys. There was a specific issue related to ICD-10. So it's not really – most of it is related to the coder shortage. So it's what you said at the beginning, your first one, which is that the bills were not getting out the door because you had a backlog, because you had less coders available to code the bills. So that's really it. So obviously that will impact ultimately the cash in the door, but we haven't – there was some payor disruption, but really we did not see really a significant impact on ICD-10 actually on payors not turning cash in time; some, but not really – not really. The biggest impact is coder shortages, so getting the bill out the door.

Ralph Giacobbe - Citigroup Global Markets, Inc. (Broker)

Okay. That's helpful. And then can you just talk about margins in the quarter. I know payor mix was sort of actually weaker in the third quarter, but you sort of put up better margins than this quarter. Is it the new deals coming on that's pressuring that line item? Is it something else? Or – and maybe just if you can give us sort of an outlook on where we should expect margin to shake out. There has obviously been a lot of noise with parity. Thanks.

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Yeah. So on the gross profit line, as I talked about, we're happy with the net favorability on that in spite of the parity that we had to overcome. So we continue to see that stabling out as we do have – as I said before, some of the portfolio companies are favorably impacting that, but it does impact it the other way on operating income.

So that's why we believe that – we've introduced two new measures, right, since last year, and I think going forward for us a measure that I think is very relevant into how the business is working is EBITDA. And that's why I really talked about that more in my prepared remarks that I've had in the past and I was trying to give you guys some guidance there also. As I talked about that for the first quarter guidance that we do – even though we don't give you a specific number, it's going to be – the percentage of growth will be similar to what it has been for the fourth quarter.

So I think going forward, given the mix of our business and how the model has changed, I think EBITDA is a relevant metric for us, as well as adjusted earnings per share because of the issue related to the amortization that you see specifically on some of the larger deals. So those, I think will give a much better view of how the business is performing generally. So we continue to be looking at those in high single digits and low double-digit increases.

Ralph Giacobbe - Citigroup Global Markets, Inc. (Broker)

Okay. All right. That's helpful. Thank you.

Operator

And we'll now move to the line of Gary Lieberman with Wells Fargo. Please go ahead.

Gary Lieberman - Wells Fargo Securities LLC

Good morning. Thanks for taking the call – the question. Given the higher volatility in some of the more highly levered names in the group, does that make you rethink or just doing additional reconsideration to your ultimate leverage ratio or kind of where you would be comfortable with?

Roger J. Medel - Chief Executive Officer

Well, we – if there was a reason to go to a higher level, a good solid business reason to do it, we would consider it and do it. But right now we are comfortable with being at two times and having $1.4 billion available. So if something came along that makes sense from a business standpoint, we would certainly consider it.

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

I still would like you guys to give us credit for being two times levered, because honestly that's been the most this company has ever been, so...

Gary Lieberman - Wells Fargo Securities LLC

No, in this market that certainly looks like a good place to be. I guess just in terms of financing the growth that you've become accustomed to, where do you see the leverage ratio going? Are you able to keep it at two times and continue on that growth path, or do you need to increase it?

Roger J. Medel - Chief Executive Officer

Well, no, I think obviously as we – it depends on what the opportunities are, but as we acquire more of these practices, we're not just acquiring earnings, we're acquiring EBITDA, we are acquiring cash flow. And so the way that we look at these acquisitions is, where does that put us from a percentage standpoint and what does that mean from a cash flow standpoint. So we would take all of those things under consideration. I don't want – I just say we are comfortable going to three times, four times or 10 times. I think that – that's just going to depend upon what the opportunity is and then what makes sense for us in our current environment.

Gary Lieberman - Wells Fargo Securities LLC

Okay. Great. Thanks very much.

Roger J. Medel - Chief Executive Officer

Yeah.

Operator

Thank you. And we'll now go to Gary Taylor with JPMorgan. Please go ahead.

Gary P. Taylor - JPMorgan Securities LLC

Hi, good morning.

Roger J. Medel - Chief Executive Officer

Hey, Gary. Good morning. Gary.

Gary P. Taylor - JPMorgan Securities LLC

Couple questions. I guess maybe just for Vivian, when we think about first quarter, are you comfortable giving us an interest expense range? I guess it depends a little bit upon obviously what you are anticipating in terms of 1Q acquisitions. We had a $14 million number, which I guess seems a little high. Is it – $12 million to $13 million kind of range makes sense?

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Yeah. I mean, I think again what we tried to say there is that it's basically, all things being equal there, you should be looking at that as just a range. But yeah, I mean it could go $13 million – yes, I mean it's within a couple million, to your point.

Gary P. Taylor - JPMorgan Securities LLC

Okay.

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

But – so what we tried to do is to give you some sort of, like description as to what the differential was on the interest, Gary...

Gary P. Taylor - JPMorgan Securities LLC

Yeah.

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

And that's why I said 'all things being equal', because if that outstanding borrowings remains in that range, then it will end up being within that $0.04 or so that we talked about if we – given the timing of deals, if we had to increase that, that would impact it. And then remember that we will have some borrowings for – just for our payments on the bonuses and all of that that we – primarily to the physicians and the 401(k) contribution that we typically have in the first quarter. But yeah, you're not off on that range at all.

Gary P. Taylor - JPMorgan Securities LLC

Okay. Okay.

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Yeah.

Gary P. Taylor - JPMorgan Securities LLC

And then just going back to the Zika virus just for a second Roger, I just wanted – I appreciate your comments and I agree hopefully this doesn't transpire into something that moves the needle in any way in the U.S. But I just wanted to make sure I understood, is microcephaly, is that a condition that typically would put a newborn into the ICU?

Roger J. Medel - Chief Executive Officer

Oh, yes.

Gary P. Taylor - JPMorgan Securities LLC

Okay.

Roger J. Medel - Chief Executive Officer

The problem is that their brains are shrunk, right, so they don't grow. So you have a child with all kinds of possibilities of seizures and other complications from their brain not having developed correctly. So, yes.

Gary P. Taylor - JPMorgan Securities LLC

Okay. And then my last question was, I just wanted to go back to any color you could provide on the – you talked about the anesthesia deals you did this year and over the last few years how you've been the most active in terms of that specialty. Can you talk to us a little bit about revenue cycle management in that business?

So I guess we are hoping that as you are acquiring those practices, there is some benefit from the larger regional contracting you are doing on the commercial side. We are hoping there is some pickup on just billing and collection versus what these practices might have been able to do on their own. And anesthesia obviously is becoming a larger piece of your total revenue, but I guess it's hard to see that same store revenue in anesthesia is growing materially faster than the rest of the book of the business, or is it kind of hard to parse that out. So is the revenue cycle component of that material to those acquisitions?

Roger J. Medel - Chief Executive Officer

Well, I'll let Vivian comment on the revenue cycle management question. But I will tell you that from a services standpoint, anesthesia actually presents us with some interesting same-unit growth opportunities. From a critical care standpoint, we are seeing a number of our hospitals who are asking us to look at the possibility of running their intensive care – their adult intensive care units for them. And so they are going more and more to having the ICUs managed by anesthesiologists as opposed to critical care specialists or cardiologists or other people. So I think there is some opportunities for growth there. On the revenue cycle management piece, clearly there are opportunities, but I'll let Viv...

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Yeah. So, Gary, so you're absolutely correct. I mean, it's hard to see it because there is a lot of noise in the numbers related to other things and the base getting bigger is another issue, right? I mean takes more to move it, but yes, I mean we're not changing our perspective on that. We still believe in all of these specialties, right? We can have an uptick as it relates to managed care and just revenue cycle in general, and we are constantly internally looking at ways to improve that. Even though, this quarter again, we had the setback because of the coder issue and that's specific to anesthesia as I said, but we are always looking for ways to improve the process as trends continue in that business. MedData certainly is a – has services that we feel are pretty good as it relates to improving the collection process et cetera because of their model. And so, we're always looking for ways to improve it and we believe there's still benefit there to be had.

Roger J. Medel - Chief Executive Officer

Gary, the way I think of the revenue cycle management company process, it's a four-step process. And depending upon the specific practice, you may be able to impact one part of that as opposed to a different one. So to me, revenue cycle management starts with managed care contracting, right? And so some groups may have good contracts, others may not have contracts that are as good. So the managed care contracting, it's coding, it's then going out and actually getting the clean bill out. So it's the billing part, and then of course the most important part and the most difficult part, which is the collections. And so, again, you can impact different areas of that cycle depending upon what may or may not be being done by the practice that you have acquired.

Gary P. Taylor - JPMorgan Securities LLC

Great. Makes sense. Okay. Thank you very much.

Roger J. Medel - Chief Executive Officer

Thanks, Gary.

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Thanks.

Operator

Thank you. And we'll now move to Dana Hambly with Stephens. Please go ahead.

Dana R. Hambly - Stephens, Inc.

Hey. Thank you and good morning.

Roger J. Medel - Chief Executive Officer

Good morning.

Dana R. Hambly - Stephens, Inc.

A couple questions. Vivian, the realignment cost, I know you guys just – you absorbed those on the P&L. Was there something big one-time in nature there that would have rolled off in the third quarter or fourth quarter, or is that more permanent now? Or was it even material?

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Yeah, it's not really material to speak of. Again, most of the increase that you see as a percentage and in dollars is just rolling in the portfolio of companies because they have a different classification of expenses. So as a percentage, for G&A, even as I look out into 2016 as I think I mentioned in a prior question, I'm really not looking at that composition as a percentage, to change.

Dana R. Hambly - Stephens, Inc.

Okay.

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Obviously, dollars change as we get larger, but from our own what we call core, those have been absorbed in the normal increases that you'd expect us to have from being a larger organization.

Dana R. Hambly - Stephens, Inc.

Great. And then on the acquisition spend last year, $850 million, obviously vRad was a big component of that, but if we subtracted out vRad is that – that level reasonable to think of for this year or is it something you really don't want to comment on?

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

We really don't want to comment on that. I had to answer that quickly.

Dana R. Hambly - Stephens, Inc.

Yeah, yeah.

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Before my counterpart over here.

Dana R. Hambly - Stephens, Inc.

Okay. But...

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

But good try.

Dana R. Hambly - Stephens, Inc.

You said the pipeline this year is similar to where you were last year. That – can you answer that?

Roger J. Medel - Chief Executive Officer

I'd say it's a little better than it was last year at this point.

Dana R. Hambly - Stephens, Inc.

Okay. All right. Fair enough. And then last one, Roger, I think the maternal-fetal being down a little bit in the quarter, I think you've talked about that before not being a predictor of birth volume. Remind if that's correct? And can you just remind the reason we shouldn't think about it that way?

Roger J. Medel - Chief Executive Officer

Well, the maternal-fetal is more – volume is more dependent upon how busy the obstetricians are. And so, what I find is that when the obstetricians – the general obstetricians are busy, they send patients off to the MFMs; when they are not, they tend to keep the patients. And then it also is dependent upon what part of the country you're in. So it's more complicated than, you know, there are a lot of births and so they get – they see an increase in volume. It doesn't really fall – although we would like that and we look at that many times as a leading indicator, it doesn't pan that way.

Dana R. Hambly - Stephens, Inc.

Okay. Great. Thank you.

Vivian Lopez-Blanco - Chief Financial Officer & Treasurer

Thanks.

Operator

There are no further questions in the queue. Please continue.

Roger J. Medel - Chief Executive Officer

Well, if there are no further questions, then I thank you for participating this morning, and I look forward to speaking with you next quarter. Thank you, operator.

Operator

Ladies and gentlemen, this conference will be available for replay, after 1 O'clock PM today through February 18, 2016. You may access the AT&T replay system at any time by dialing 1800-475-6701 and entering the access code 383-550. That does conclude your conference for today. We thank you for your participation. You may now disconnect.

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