MEDNAX's (MD) CEO Roger Medel on Q2 2016 Results - Earnings Call Transcript

| About: Mednax, Inc. (MD)

MEDNAX, Inc. (NYSE:MD)

Q2 2016 Earnings Conference Call

July 28, 2016, 10:00 ET

Executives

Charles Lynch - VP, Strategy & IR

Roger Medel - CEO

Vivian Lopez-Blanco - CFO & Treasurer

Analysts

Ryan Daniels - William Blair

Chidinma Iwueke - Bank of America Merrill Lynch

Jason Plagman - Jefferies

Tim Murray - JP Morgan

Ryan Halsted - Wells Fargo

Chad Vanacore - Stifel

Dana Hambly - Stephens

Chris Rigg - Susquehanna

Brian Tanquilut - Jefferies

Ralph Giacobbe - Citigroup

Operator

Welcome to the MEDNAX 2016 Second Quarter Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Vice President of Strategy and Investor Relations, Charles Lynch.

Charles Lynch

Thank you, Justin. I'm going to read our forward-looking disclaimer and then we'll turn the call over to Roger. Certain statements and information during this conference call may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by MEDNAX's management in light of their experience and assessment of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.

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

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

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

Roger Medel

Good morning and thanks for joining our call to discuss our results for the second quarter of 2016. It's been a very busy quarter for us. So I want to discuss a number of topics in some detail. First, we continue to have one of our busiest years ever from an acquisition perspective. Similar to the first half, we acquired seven physician practices and since the end of the quarter we've acquired our eighth practice for the year.

In anesthesiology, we've acquired four practices so far this year and our pipeline continues to grow. Anesthesiology groups increasingly see the need to be a part of a larger organization that can support them and invest in the data and technology capabilities that their hospital partners are asking of them. So we see the opportunities to continue to grow our footprint as significant and I anticipate that we will have additional acquisitions to discuss with you in the near future.

This quarter, we also added a neonatology practice and within our pediatric subspecialties, we announced our first acquisition of a pediatric ophthalmology practice. The scope of our hospital relationships continues to grow and this acquisition reflects the ways our partners are asking us to help them to build out additional pediatric services.

In radiology, we continue to have good conversations with high-quality groups and I am optimistic that we will be able to announce our first practice acquisition this year. So overall, our practice acquisition pipeline remains very robust and we're on track to have a very busy year in 2016. In early July, we also closed our acquisition of Cardon Outreach.

This is an exciting acquisition because it complements the services we added last fall with the acquisition of Alegis and significantly expands MedData's capabilities in revenue cycle management. This combination of services sets MedData apart in the world of RCM. That world is changing very fast and it's changing in areas that hospitals typically haven't invested in, in the past. MedData's own strength in patient pay collections hits right on one of these areas; the percentage of a hospital bill that the patient is responsible for through co-pays or deductibles is quickly moving. What used to be 5% of revenue is quickly moving to 10%, 20% and ultimately, 30% or more and it is much harder to collect.

MedData's unique process of patient outreach and communication before the bills even get sent is a proven solution to this problem and we're getting a great reception from hospitals. At the front end of the patient experience, today, there are millions and millions more Americans eligible for Medicaid coverage and that's another challenge for hospitals. Medicaid eligibility isn't a simple thing to establish. It's different in every state. It has to be reestablished every month. And if a hospital doesn't get it right, there's risk of denials, delays in ARs and higher bad debt and that's where a much bigger percentage of their patient population than ever before.

Just like MedData has done for patient pay, both Alegis which we acquired last fall and Cardon have established a long track record of streamlining the eligibility process for hospitals. In the case of Cardon, they've been doing it for more than 20 years and they can do it across all 50 states. When you put the three companies together as we've done, you now have a solutions provider that addresses the key areas where hospitals have to adapt to a changing world. For us, this not only adds to the value we can bring to our hospital partners but it also creates cross-selling opportunities, both between the companies within MedData and between MedData and our own hospital partners at MEDNAX.

So I'm very excited about the growth opportunities we've created here, [indiscernible] but I also want to discuss today is teleradiology. As you saw in our press release, we did note that vRad had an impact on our second quarter results and we expect it to impact our third quarter as well. What we've seen has been a lot of changes within our customer base of on-site radiology practices related to changes in their own business and we're adapting as quickly as we can to those changes. Radiology groups have seen growth in their own business, a lot of it based on higher volumes in hospital emergency rooms, but they are also being challenged on all fronts to be more efficient.

As a result, they can't dedicate their own physicians' time to reviewing preliminary studies when they come to work in the morning. They need their staff to be productive with light reads. So vRad's customers are asking us to take on a much more integrated role in their practices. They're asking vRad to take over all of their after-hours final reads, not just preliminary reads or certain modalities. In essence, they're asking us to be the extra FTE for them that they can't afford to dedicate from their own practice.

This is exactly the kind of partnership that we would like to have with teleradiology customers, but the speed with which it's happening has caused challenges for us that we're now factoring into our guidance. First of all, this caused capacity constraints. To address this, we have been recruiting aggressively.

When we acquired vRad a little over a year ago, the company had about 350 radiologists in its network. Today, we're at 475 and well over 100 of those were recruited earlier this year. But out of that total, we have only about 375, who are actively reading studies, with the rest still going through the onboarding process and that takes a lot of time. Keep in mind that vRad's screening process for new physician recruiting is very rigorous. In addition, the radiologists in vRad's nationwide network have to be licensed in multiple states and credentialled at dozens of hospitals which impacts how quickly they can begin reading studies. Overall, the process from the recruiting outreach, signing, screening and then contracting with the physician, licensing, credentialing can take six to nine months.

We're taking some steps to condense that time, but nonetheless, before those radiologists can come online, we're capacity constrained. As a result, we don't expect to see the same normal seasonal upswing in revenues that we would expect in the third quarter. The summer typically is a busy season for teleradiology as we take over more volumes for physicians who are on vacation. But compared to that normal pattern, we're expecting more of a flat comparison from the second quarter to the third this year at the top line for vRad. There is a near-term cost impact as well. Recruiting and onboarding of physicians is part of that, but we view that as an investment that will have a positive return for us as vRad's physician network grows and those physicians come online. In addition, though since we're working at above capacity today, that requires us to pay our physicians premium compensation for the extra work and the extra time. We expect that will also continue until our newly recruited physicians starts coming online.

And third, the change in business mix impacts our overall modalities. That is, when we're taking over all of a practice's overnight reads, that carries a meaningfully higher mix of simple x-rays which are a lower-priced modality. We can still generate an attractive margin on this business, but it creates the need for greater physician capacity given that this is a higher volume, lower-priced point modality.

Ultimately, what's been kind of getting to us is that as teleradiology continues to evolve and be a more and more important piece of the puzzle for the radiology industry, we believe vRad has become one of the few and certainly the biggest teleradiology player that they can turn to as an organization they can take on the role of a true partner. So while the dynamics of the business are impacting our results here in the short term, I think we've already taken aggressive steps in the right direction and the long-term outlook for the business remains strong.

Finally, I want to back up a little bit and put all of these moving parts in perspective. We're a far more diversified company than we were in the past. We're providing services that span across more than a dozen physician specialties, telemedicines and revenue cycle management and we're doing it across all 50 states and Puerto Rico.

As a result, we're not as reliant on just one area for our growth. That's been beneficial to us, particularly in periods where one service line might face a tough comparison such as in 2015, with the reduction in our parity revenue from neonatology services. And in an period where we're investing in one of our service lines toward future growth like we're doing at vRad today, our diversification means that the magnitude of impact on our overall results from these investments is modest. vRad has a unique position as the largest teleradiology provider with the most robust technology and data platform in the industry. I would anticipate that the investments we're making today to expand the Company's physician network will pay dividends for us down the road.

In the meantime, even with the impact that we've factored into our guidance to account for what I've talked about, we're anticipating an acceleration in EBITDA growth in the third quarter versus the second based on the positive trends we're also seeing across all of our businesses. We've got a great practice acquisition pipeline. We've been closing deals. We've got strategic growth in our MSO services and we've got the financial strength to continue to pursue growth. These all demonstrations of the value of our diversification and the way that we can continue to grow and succeed.

With that, let me turn the call over to our CFO, Vivian Lopez-Blanco.

Vivian Lopez-Blanco

Thanks, Roger. Good morning and thanks for joining our call. I want to give an overview of our operating results for the second quarter and provide additional details in a couple of areas. For the second quarter, our net revenue increased by 14% to $772 million. 86% of this growth came from recent acquisitions. Our practice acquisitions contributed roughly two-thirds of that growth and our acquisitions of vRad and Alegis contributed the remainder.

Looking at our same-unit metrics, same-unit revenue increased by 2%. Excluding the impact of parity in the 2015 period, same-unit revenue increased by 2.5%. On a net reimbursement side, we saw modest improvements in managed care contracting and modest flow-through of price increases, partially offset by the unfavorable impact from parity revenue that did not recur this year. After excluding the impact of $3 million of parity revenue from last year's second quarter, our net same-unit growth from reimbursement-related factors was 2.7%.

During the 2016 second quarter, we had a favorable 50 basis point shift towards commercial payers compared to the 2015 second quarter. On a sequential basis, our payer mix also shifted favorably by about 50 basis points compared to the first quarter of 2016. On the volume side, same-unit volumes decreased by 20 basis points. Our NICU days were down 2.1% against a very strong 3.8% comp in the year-ago period. This decline was offset by good growth in our anesthesia and other pediatric services while maternal-fetal medicines volumes were down year-over-year.

Our EBITDA increased by 7.4% to $168 million. Our EBITDA margin was 21.8% compared to 23.1% last year. Operating trends at vRad impacted our EBITDA growth as did the timing of acquisitions we completed during the quarter. Looking at some of the components of our EBITDA. First, our profit after practice expense for the second quarter was $260 million, up 30.7% year-over-year. Profit after practice expense margin declined about 10 basis points with improvements in same-unit margins, offset by the mix of businesses we've acquired in the past year.

Second, our G&A expenses were 12% of revenue in Q2, an increase of 124 basis points over last year, but in line with our level of G&A expense as a percentage of revenue in the first quarter of this year. Our interest expense was $15.1 million, up from $5.1 million last year. This increase is related to the incremental interest from our notes we issued in December 2015 and a higher average borrowing. The difference in interest cost between our senior notes at 5.25% and our revolver at roughly 2% impacted our EPS in quarter by roughly $0.04.

Our second quarter net income was $82.4 million compared to $84.1 million last year and we reported diluted earnings per share of $0.89 versus $0.90 in 2015. On a non-GAAP basis, adjusted EPS was $1.03 compared to $1.02 last year. For the quarter, weighted average diluted shares were 92.9 million, down from 93.5 million shares from the same period in the prior year, due primarily to the repurchase activity we undertook during the first quarter of 2016.

At the end of the quarter, accounts receivable were $461 million, an increase of approximately $60 million as compared to December 31, 2015. Days sales outstanding were 54 at the end of the quarter, down 2 days from the end of the first quarter. For the second quarter, we generated $150 million in operating cash flow, up from $146 million in last year's second quarter. Our total net outstanding debt was $1.4 billion at June 30, up from $1.3 billion at the end of 2015. This increase was related to the acquisitions thus far and share repurchases completed in 2016.

Since the end of the second quarter, we've also completed the acquisitions of Cardon Outreach for $400 million and a pediatric cardiology practice. As of today, our total net debt outstanding is approximately $1.8 billion, reflecting borrowings to complete these acquisitions as well as other ordinary course borrowing and repayment activity. Our available borrowings under our credit facility are currently approximately $875 million.

Moving on to our outlook for the 2016 third quarter, as we announced in this morning's press release, we expect that our earnings per share for the 3 months ending September 30, 2016, will be in a range of $0.92 to $0.96 and that our adjusted EPS will be in a range of $1.09 to $1.13.

For the third quarter of 2016, we expect that our EBITDA will increase by 7% to 11% compared to the third quarter of 2015. Within that guidance range, we have incorporated an expectation that vRad's financial results will be slightly higher than the second quarter rather than reflecting a more pronounced upswing that we would expect based on normal seasonal patterns.

We expect that vRad will impact our EBITDA growth for the quarter unfavorably by approximately 3 to 4 percentage points. The range for our third quarter outlook assumes anticipated same-unit revenue growth will be 1% to 3% year-over-year. Based on our expectations for revenue at vRad for the third quarter, we expect that it will have a slightly unfavorable impact on our same-unit growth for the quarter. Our third quarter 2016 results will also be affected by the anticipated impact of senior notes offering in Dec. The difference in the interest costs associated with this offering at 5.25% coupon compared to the cost of our credit facility borrowings at roughly 2% will impact our third quarter by roughly $0.04 per share, all else being equal.

Finally, as we indicated in our press release this morning, our third quarter outlook assumes an effective tax rate of 39% compared to 38% in last year's third quarter. This higher rate primarily reflects the change in our expected annual earnings mix between various states. Based on our expected pretax income in the third quarter, this 1 percentage point increase in our tax rate will impact our earnings per share by roughly $0.01 to $0.02, all else being equal.

While we don't provide financial guidance beyond the coming quarter, I'll point out for your modeling purposes that we do anticipate that our effective tax rate for the full year 2016 will also be roughly 39%.

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

Roger Medel

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

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of Ryan Daniels from William Blair. Please go ahead.

Ryan Daniels

Yes. Roger, I guess, a follow-up for you. I'm struggling a little bit to understand why vRad won't see the normal uptick in Q3. Thinking that existing clients are asking you to do more and capacity goes towards that, wouldn't that, in turn, still be driving sales growth? Or is it that the excess work you're taking on there has a kind of a lower per unit value such that the revenue growth is slowing. Can you just give us a little more color?

Roger Medel

Yes, no, not at all. I mean, the big problem here is that we're seeing a higher volume. I'll just tell you that in February, we saw 23% volume increase year-over-year from the prior month and for the first half, we saw 16% growth in volume year-over-year during the first half. So the volume really is coming in much higher than we expected. The problem is that we have contracted for turnaround times and so we when get an x-ray or a CT scan or an MRI, by contract, we have to return -- we have to produce the report at a specific amount of time. So what we've done is given the fact that we're at over full capacity right now, where we've slowed down our growth.

We have, in fact, we have sales but what we're telling, our marketing people are telling our new contracts is that we can't bring them on until November or December. We expect that by the end of the year, we'll have this problem corrected. So what we're doing is we're just slowing down the growth because we just don't have the capacity to read these x-rays and to turn them around in the required amount of time.

Ryan Daniels

And then, I guess, my follow-up question would be do you ever have flexibility in the contracts to get subsidies or pass-through any of your increased labor cost to clients if they're asking for more help? Or is the onus on you in regards to developing extending the relationship just to take that on in the near term and then recruit and figure that out over the longer term?

Roger Medel

No, not at all. Clearly, the more services that they're asking us to provide, the more we can charge for the services, so that isn't the problem. It's that like I say, for example, one of the things that I talked about in my prepared remarks is that we're seeing a really very high demand from practices to assume all of the care at nighttime. It used to be that we would -- they would say, Well, you read the MRIs or [indiscernible] and they want us to provide them with final reads. Because if you provide them with temporary reads, what happens is when -- so when they show up in the hospital tomorrow morning, they have -- and they're just temporary. So they have to review all of those studies and to provide them their final analysis.

And they don't want to do that anymore. It takes a lot of time to do that and they just want to come into the morning, have all these finals done and then go on to read whatever new studies are coming in. And a lot of the things that happen in the middle of the night are really more -- tend to be more simple x-rays. Somebody's got a broken bone, so they have an x-ray of the arm or somebody's got pneumonia and -- they're not the complicated MRIs and all that stuff tends to be more scheduled ahead of time. And, of course, that's a lower reimbursement procedure. So all of that is impacting our ability to generate the kind of results that we think we can generate.

Operator

And our next question comes from the line of Kevin Fischbeck, Bank of America. Your line is open.

Chidinma Iwueke

This is Chidinma Iwueke filling in for Kevin. I guess, I wanted to ask a little bit about the guidance. Your guidance your Q3 is below [indiscernible] decent amount even though you guys closed an accretive deal in July. So how much worse is the cost issue in Q3 than in Q2? Or I mean, are there any other factors that we should be thinking about?

Vivian Lopez-Blanco

So yes, there's a couple of factors as we stated in the prepared comments, the impact of the vRad results all in which is what Roger talked about volume and increased search pricing, is about 3% to 4% of EBITDA, an impact to EBITDA as well as we also discussed the increase in the tax rate which is about $0.01 or $0.02.

Operator

And our next question comes from the line of Brian Tanquilut, Jefferies. Please go ahead.

Jason Plagman

This is Jason Plagman for Brian. Back to the vRad question, can you provide any more color on kind of the sequencing of your hiring this year? How we should close the gap between the 375 that are productive today to the 475 that you've got hired? How should we think about the sequencing of those people coming online productively?

Roger Medel

Okay, well, that's a good question. As I said, you have to source out the physicians and then you have to screen them and then you hire them and then at that point, they have to get state licenses. And many of these -- all of these physicians we get them licensed in 10, 15 or 20 states. The state licensing process is one that can easily take six months and there's nothing I can do about that. That's just how long it takes to get a state license and then once they're licensed in the state, they have to be credentialed in all of the hospitals and facilities that we have contracts with. And so that might take another couple of months.

So I think that what we're saying here is that over the next two to three quarters, we're going to get all of these physicians' online. Obviously, the ones that we started to recruit back in March and April will come online sooner or earlier than the ones that we recruited in June. But as they -- as we move through the next two to three quarters, we will -- they will all come online. I don't have a better answer for you as to how many are going to come online in the third quarter and I can get that information, but basically we believe that by the end of the year, early first quarter, we'll have the problem solved.

Jason Plagman

And the 475 employed, are you -- I'm assuming you're continuing to recruit now, but how many additional radiologists are you trying to add before the end of the year or over the next few months?

Roger Medel

Yes. Our target is to have at least 500 radiologists on board before the end of the year. But we will continue to recruit even after that because we expect that the volumes are going to continue to grow.

Operator

And our next question comes from the line of Gary Taylor, JPMorgan. Please go ahead.

Tim Murray

This is Tim Murray on for Gary. Just wondering if you can refresh us on the rough annualized impact of Cardon to revenue?

Vivian Lopez-Blanco

Yes. This is Vivian. So when we announced the deal, we said that it would be about $0.14 accretive. That's still what we're expecting.

Operator

And our next question comes from the line of Gary Lieberman, Wells Fargo. Please go ahead.

Ryan Halsted

This is Ryan Halsted on for Gary. Just following up that question, so the $0.14 accretion, what's the expected timing of that? Or at least is it expected to have an accretive impact in the near term?

Vivian Lopez-Blanco

I'm sorry. Say that again. I couldn't hear the first part.

Ryan Halsted

Sure, I'm sorry. Just the question is on the $0.14 of accretion that you're expecting from Cardon, what's the potential timing? Should we anticipate it should be accretive right away?

Vivian Lopez-Blanco

Yes, it'll be accretive, right away. Of course, there's a little bit of ramp up because at the beginning, you do have some transactional costs and all of that, but it'll be accretive right away.

Ryan Halsted

Okay. And on the cross-selling opportunity that you mentioned, I was just wondering if you could share just some color on the 800 to 900 hospital partners, I mean, how many of those have you identified as good cross-selling potential, where you currently don't have a presence with your physician services business?

Roger Medel

Well, I don't have a specific number to give you. But yes, I can tell you that our revenue cycle management people and our MedData people are very excited about that possibility. I would dare say, it's more than 50%.

Vivian Lopez-Blanco

Yes, I mean, what happens is that the regional -- we have a divisional and regional structure and they're looking at these opportunities at those levels and so there's a pipeline report that they look at, but we don't really summarize it to the level that you're talking about because it does vary from hospital to hospital as you would expect. But the regional folks are looking at what things they believe are opportunities within their hospital partners.

Ryan Halsted

Okay, so but you would say that at least what you're looking at today, the opportunity lies mostly with MedData and maybe down the road, you might be able to explore additional cross-selling opportunities, but there aren't as many for the sort of the physician services business at those hospitals?

Roger Medel

No, I'm sorry, I must have misunderstood. I didn't mean that at all. I think that the physician selling opportunity, I thought we were talking about MedData and Cardon. I think the physician selling opportunities, look, are almost in every hospital because you're talking about all the pediatric services that we offer, all of the anesthesia services that we offer, all of the radiology services that we offer even if the ability to build like a pediatric surgery practice or a pediatric ophthalmology practice. So no, I think that the cross-selling opportunities for physician services is pretty huge.

Ryan Halsted

Maybe one last one, on the third quarter guidance, the EBITDA range of 7% to 11%, what are sort of the factors in the high end and the low end of that range? I mean, you called out the 3% to 4% from the mix in the teleradiology recruiting. Are you sort of assuming that the impact of that sort of explains the delta between your guidance range? Or are there other factors?

Vivian Lopez-Blanco

So specifically on the EBITDA line, you're also talking about, obviously, the same-unit metrics that we share with you guys every -- for guidance which is 1% to 3% would impact that as well.

Ryan Halsted

Okay. Is the mix impact that you called out of 3% to 4% sort of explaining the high end and the low end, where the low end would be that you're seeing a greater negative impact from the teleradiology mix and vice versa on the high end?

Vivian Lopez-Blanco

Yes. I mean, it's really a range of their results, what we expect their results to be and how that's going to impact our overall range of EBITDA.

Operator

And our next question comes from the line of Chad Vanacore, Stifel. Please go ahead.

Chad Vanacore

Just looking at neonatal volumes, first negative comp we've had in the past six quarters, it was much weaker than expected. Can you drill down and tell us what was really the determining factor there?

Roger Medel

Yes. The volumes in neonatology fluctuate. The number of births goes up and goes down. The admissions to the neonatal ICU are a function of number of births. Our percentage of admissions is the same as they were before. Our length of stay are also within the historical ranges. And so --

Vivian Lopez-Blanco

I mean, the biggest factor is that last year we were coming up a very strong comp like I said in my prepared comments. I mean, the comp for last year, as I said, was 3.8. So we do think that, that was a big factor.

Chad Vanacore

All right. So does that mean we should expect to bounce back next quarter? And do you have any estimate at what kind of levels we should look for?

Vivian Lopez-Blanco

Well, that's included in our estimates. I mean, in Q3 against last year is not as significant. But as Roger says, there's always fluctuations in that even though the trends -- we're not seeing any difference in admin rates or length of stay or all that. They've been pretty constant, but yes, the comp for the third quarter is less easier than what we had in the second quarter.

Chad Vanacore

Okay. Would there be any geographic distribution to explain any of that?

Vivian Lopez-Blanco

Would there be what? I'm sorry.

Roger Medel

Geographic. No, no--

Vivian Lopez-Blanco

Geographic.

Roger Medel

No, I mean, whenever we see volumes either up or down, we always look for one of those specific geographic areas and no, the answer is there isn't.

Chad Vanacore

Okay. And then just thinking about acquisitions. So last quarter you expressed a lot of enthusiasm about your pipeline analyzed that you had. Growth from acquisitions seemed to moderate a little bit. Are you seeing transaction close time lengthening or any kind of greater competition there?

Roger Medel

I would say no more than in the past. We feel -- we still have full pipeline and we still think that we're going to do a number of acquisitions this year. As I said in my remarks, I do expect that we will be doing more anesthesia deals and we expect that some in the not-too-distant future and I also expect that we will acquire our first radiology, on-site radiology practice this year which has been our plan all along.

So I would say no. I think that we're right on track. Some of the timing can be off a little bit for whatever reasons. People go on vacation. We had a deal that we thought we were going to close a couple of weeks ago and somebody went on vacation and we'll get it closed, but the point is that it's just in the normal flow of deal flow.

Chad Vanacore

Roger, on the anesthesia side, the market had been pretty hot. Are you seeing that moderate at all as far as multiples and price you're willing to pay?

Roger Medel

I wouldn't say that it has moderated. I think that the practices that were -- that people were willing to pay a premium for are probably not as many as before. And so we're seeing multiples come down a little bit. But again, I think that based mostly on the type of practices that are out there, not the big central, long-term established kind of practices. Those, when they come on, they are still getting those higher multiples.

Operator

[Operator Instructions]. And our next question comes from the line of Dana Hambly, Stephens. Please go ahead.

Dana Hambly

Roger, I want to try to understand a little bit better. You talked about some change in behavior, I think, for the on-site radiologists that was then having an impact on you guys. Could you explain again what the impact or the change in behavior is at the on-site radiologists?

Roger Medel

Yes. So what we're seeing is that the -- first of all, the volume that they are seeing of studies has increased. We think that that's mostly due to the increased volumes in ER, et cetera. So that -- and then they were mostly contracting with us over the last couple of years to do preliminary reads and not final reads. And what we have seen at a much higher rate than we anticipated is that they are coming to us and they are saying, instead of me sending you the complicated studies at nighttime, so let's say, from whatever, 8 PM to 6 AM instead of me sending you those, we're -- we want to send -- we want you to take over the night.

So anything that happens for radiology in their facility at nighttime, they are asking us to do and we want you to provide us with final reads, not preliminary reads. And so what that -- and it's just -- it just takes more time to do that. Now so the night -- taking over the night means we get much more simple x-rays than complicated studies. So again, broken bones and abdominal films and chest x-rays, et cetera, as opposed to functional MRIs and CT scans, et cetera. And so those get compensated at a lower level, but it's a lot of volume.

So you need to have the physicians around that are going to be able to address that volume. And then on top of that, they're asking us to provide them with final reads which because when they come in tomorrow morning, if it's a final read, they're done. This patient has pneumonia and they don't have -- that's what the radiologists said and it gets reported and they're done. If it's a preliminary read, when I come in tomorrow morning, I have to provide the final read.

So I now have to go over all of those studies and come up with the final read and that could take me -- if there was a large volume of x-rays and studies in the prior night, that could take me two or three hours before I can even start looking at this morning's films that are coming in. So that is what we're seeing when we talk about a mix in modality and that is happening very quickly and we think it's great. We love it, but it's a problem and we have a problem and we have to fix it.

Dana Hambly

And you're seeing this nationally?

Roger Medel

Yes, we're seeing it nationally. Like I said, we saw our volume, our year-over-year volume in February was up 23% and for the first half, our year-over-year volume was up 16%.

Dana Hambly

Okay. And with this, you can't -- on the EBITDA growth, you came in a little bit below the low end of your target. Is this entirely due to this kind of sea change? And what's going on in radiology?

Vivian Lopez-Blanco

No, that was partly also what I said in my prepared comments on the release which is related to some of the timing of acquisitions also impacted some of that in the second quarter.

Dana Hambly

So meaning, were there acquisition expenses related to Cardon that you incurred in the quarter, obviously, you didn't get any revenue from that.

Vivian Lopez-Blanco

Yes, we did. Cardon and other deals, that's not the only deal. The contribution from not having the deals as well, right?

Dana Hambly

Okay. Yes. So that weighed on SG&A.

Vivian Lopez-Blanco

Yes. Exactly.

Dana Hambly

Okay, would we still target SG&A in that kind of 11.5% to 12% range?

Vivian Lopez-Blanco

That would be great. Yes, that's what we're expecting, yes.

Dana Hambly

And then just lastly, do you have a number on the anesthesia volumes for the quarter?

Vivian Lopez-Blanco

Not specifically, but they were pretty positive in the quarter.

Operator

And our next question comes from the line of Chris Rigg, Susquehanna. Please go ahead.

Chris Rigg

I got on a little late here, so I apologize if this dynamic was already covered. But I guess, I just want to make sure I fully understand the radiologist dynamic in terms of -- my understanding is that vRad is sort of a productivity-based model. So -- but is it -- when initial -- when someone initially comes on that you sort of smooth out their income, so that there is sort of a negative leverage dynamic for that six-to-nine-month period.

Roger Medel

Yes, that is also true. We do provide them when they first come on with a base salary. It's not a lot of money, but it is some money to tide them over. So yes, that is -- but the big thing is again in order to get our existing 375 radiologists to work extra shifts and longer hours and all that kind of stuff, they're getting paid bonuses and they're getting paid additional per read for -- to entice them. Again, we have to have turnaround times per contract that are -- it's something that we obviously live up to. So all of that is causing the additional expenses.

Chris Rigg

Okay. And then just on the NICU side, I mean, it's sort of been a little lumpy the last several quarters and I guess, just the core of what I'm trying to get at is that it's -- you're clearly doing well in the other business lines volume-wise. I mean, is there anything that can be done on the NICU side to drive volumes? Or are you just beholden to the overall birth trends there?

Roger Medel

Yes, that's a question I've been asking myself for 30 years. Really, there are a couple of things that are relatively significant. Number one, bringing more transports and we do have outreach programs. So if there's a local hospital that doesn't have a NICU, we know that they're still going to get a number of sick babies and so we try to establish relationships with hospitals to have them call us to transport the babies to our facility when they do get a small or sick or premature baby.

But again, that doesn't have any -- that doesn't have -- make any real impact. The other thing that we do is mothers still go where they -- to have their babies where their obstetrician suggests that they go. And so recruiting obstetricians is another way to bring more babies into your facility. And we help our hospitals to try and go out and the obstetricians and the community talk to them about coming to our hospitals, but that's hard to do because the switching costs are very hard -- are very high.

And I mean, really, the number of admissions to the neonatal intensive care unit are a function of the number of births. I can tell you that if you have X number of births depending upon the population that the hospital takes care of, you're going to have X percentage of those babies admitted to the NICU. And so other than getting back to the historical -- right now, births still are fluctuating around 4 million babies per year and the high number, back in 2007, 2008 was almost 4.4 million babies. So other than getting back to those levels of birth, we're not predicting that we're going to see any significant increase to the babies admitted to our NICUs.

Operator

And our next question comes from the line of Brian Tanquilut, Jefferies. Please go ahead.

Brian Tanquilut

One follow up to provide some clarity. On the NICU same-store volumes, how was the comp versus the sequential comp so versus Q1 or was it -- was there a decline there or I think that would provide some clarity if you saw a decline just from Q1 levels.

Vivian Lopez-Blanco

So basically in Q1, we had positive NICU volume. So I don't know. Is that what you're trying to get to, Brian? And in the prior year, you had --

Brian Tanquilut

Not the year-over-year compare but just the Q1 -- how did Q2 levels compared to Q1 on a sequential basis?

Vivian Lopez-Blanco

Yes, Q1 was about 50 bps and then Q2 was about negative 2 or less.

Brian Tanquilut

As far as just absolute level, do you have that data?

Vivian Lopez-Blanco

No, I don't have that right here. I could get that for you, but yes, I don't have that --

Brian Tanquilut

Okay. I'm just trying to understand it. There was a -- you saw declines from Q1 to Q2, but it sounds like I could follow up off-line.

Vivian Lopez-Blanco

Yes, sure.

Operator

And our next question comes from the line of Ralph Giacobbe, Citigroup. Please go ahead.

Ralph Giacobbe

I joined a little late, so apologize if this has already bet. On the pricing side, a nice uptick. I'm sure payer mix helped, but anything else we should consider or some of the deals that are coming into the same-unit base kind of lifting that average? And then you specifically cited managed care contracting in the release. Anything changed there as to why that would have sort of shone through more in the second quarter?

Vivian Lopez-Blanco

No, I mean, what I always tell you guys is that there is some lumpiness to how we execute on managed care contracting because it's just the timing of the deal. So to your point, you're right on the money when you said, obviously, the whole pricing impact is favorable because you have the 50 basis points in P mix and then some of the managed care pricing came in to play. And so it's all those factors. So it worked out well in the quarter.

Ralph Giacobbe

And then maybe just a little bit on the competitive landscape. We've had two of the larger companies merge in the outsourcing space with the overlap mainly in anesthesiology. So does that impact? Or how does that impact you do you still feel like you've got your bases covered with current business mix or do you think about sort of broadening out physician services capabilities?

Roger Medel

First of all, we do think that there are opportunities for us within our existing specialties. We're happy with what we're doing. We've got a plan. We're going to build the largest group of radiologists and we're going to build a national group of radiologists and we've got vRad to use as the backbone for that. So we're going to get focused on that. But no, we're not thinking about going into ER or any other large specialty at this point.

Ralph Giacobbe

And then last one if I could. And again, if you've covered this, we can sort of catch up off-line, but I guess, the pressure within, I guess, teleradiology, specifically, the 3% to 4%, is that directly related to that area right because 3% to 4% would imply some -- at the midpoint somewhere around an $18 million drag for next quarter on what I think is an annual kind of $50 million EBITDA contributor. Are those numbers right? Or am I not--

Vivian Lopez-Blanco

No. No, that's way overstated. So it is 3% to 4%, but it's not that math. It's a lot less than that on a quarterly basis.

Ralph Giacobbe

Okay. So does that mean the 3% to 4% is not all teleradiology is that why that mix is not right.

Vivian Lopez-Blanco

No. 3% to 4% is the impact on the overall EBITDA that we're expecting. But most of it is coming from vRad, yes. But the math that you're working on is not correct. We can work that -- we can work through that with you. But yes, it's not.

Ralph Giacobbe

Sure, we'll follow up off-line.

Vivian Lopez-Blanco

Yes.

Operator

And at this point, there are no further questions here in queue.

Roger Medel

Okay. Well, if there aren't any further questions, then I'll thank everyone for participating today and I look forward to our next conversation next quarter. Thank you, operator.

Operator

Thank you and ladies and gentlemen, that does conclude the conference here for today. We do thank you very much for using our executive teleconference service and your participation. You may now disconnect.

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