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AmSurg Corp (NASDAQ:AMSG)

Q4 2007 Earnings Call

February 19, 2008 5:00 pm ET

Executives

Chris Holden - CEO

Claire Gulmi - EVP and CFO

Analysts

Whit Mayo - Stephens

Kevin Ellich - RBC CapitalMarkets

Art Henderson - Jefferies &Co

Brendan Strong - Lehman Brothers

Darren Lehrich - Deutsche Bank

Bill Bonello - Wachovia

Erik Chiprich - BMO CapitalMarkets

Shelley Gnall - Goldman Sachs

Rob Hawkins - Stifel Nicolaus

Justin Lake- UBS

Mark Arnold - Piper Jaffray

John Ransom - Raymond James

Operator

Good day everyone and welcome tothe AmSurg Corporation Conference Call. Today’s call is being recorded and willbe available for replay today beginning at 8:00 pm Eastern Time and will run throughFebruary 27th, at 11:59 Eastern Time by dialing 719-457-0820 and using replaypasscode 2570941.

And now at this time for openingremarks and introductions, I would like to turn the conference over to thePresident and Chief Executive Officer, Mr. Chris Holden. Please go ahead, sir.

Chris Holden

Thanks, Justin. Welcome everyoneto the AmSurg’s fourth quarter 2007 conference call. Joining me here today is ClaireGulmi, Executive Vice President and CFO. I would also like to welcome everyonewho is joining us today on the webcast.

And before we begin, I’d like toread the disclaimer. Certain statements in this conference call constituteforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. These forward-looking statements reflectmanagement expectations and are based upon currently available information.These forward-looking statements involve known and unknown risks, uncertaintiesand other factors that may cause actual results, performance or achievements ofAmSurg to differ materially from those that are expressed in or implied by theforward-looking statements. These factors are discussed in more detail in thecompany’s reports that are filed with the Securities and Exchange Commission,including without limitation AmSurg’s Annual Report on Form 10-K for the yearended December 2006 and quarterly report on the Form 10-K for the quarter endedJune 2007. Copies of these filings are available from AmSurg on request.

Now as I begin, let me open bysaying that we are pleased that we produced solid growth for the fourth quarterand met our expectations for EPS for the quarter. And after my openingcomments, I will turn it over to Claire for the financial summary for thequarter ending December 31, 2007.

Briefly, net earnings forcontinuing operations per diluted share increased 14% over prior year to $1.40including a $0.03 impact from the affect of the Medicare Deficit Reduction Actof 2005. In terms of same-store performance, same-store revenue growth for thequarter was 7% for Q4 ‘07 and 4% for the full year 2007.

As far as development highlights,the pipeline continues to produce favorable growth opportunities. For Q4 2007,we added eight centers, five of which were GI and three of which weremulti-specialty. Of those eight, six were acquisitions and two were de novo. Wealso had two dispositions during the quarter.

At the quarter’s end, we had twocenters under development, one of which is expected to open in 2009. We haveone center pending CON approval with a possible 2009 opening and fouracquisition centers under letter of intent, two of which were closed on January1st, 2008.

And for the year ending 2007, weended the year with 24 centers added, which is a new record for AmSurg, 21 ofwhich were acquisition and three de novo. For that period, 20 of the newcenters added were GI and four were multi-specialty, which brings our year-endtotal to 176 total centers, up from 152 in 2006, 123 are GI centers, 36 are Iand 17 are multi-specialty.

One note, we have one letter ofintent on the list that I mentioned at quarter’s end which involves a center inthe State of New Jersey.And the letter of intent is contingent on successful resolution of someambiguity surrounding physician ownership of ASCs in that state.

A recent lawsuit known as theGarcia case in Bergen County generated theactivity around this issue. In response to that case, the New Jersey Board ofMedical Examiners proposed an emergency rule that would protect a physician’sright to own an ASC. The emergency rule was silent on the issue of corporateownership and the Attorney General advised the Governor not to sign theemergency rule and send it back to the Board to process through regular rulemaking. And just last week, Senator Richard Codey introduced a bill, whichamong other things, will grandfather existing ASCs and certain ASCs currentlyin development. Senator Codey’s bill also permits corporate ownership andallows for transferability and expansion of existing ASCs. We are actively engagedin this - the development process to develop this legislative solution and wewill continue to monitor its progress.

It’s also - this marks the firstquarter of my tenure here as CEO of AmSurg and just wanted to comment brieflyin terms of the strategy of the company and what is different at the end ofthat period of time and I’ll comment on it in several categories. The first isin terms of development and these comments are in addition to what we arecurrently doing in same-store and de novo in our current book of business. But,specifically, we are now actively prospecting for multi-specialty centers, asyou heard from the total center count, we now have 17 multi-specialty centersin our portfolio, which does make us probably one of the top-10 largest chainsin the United States in that category.

In addition to that, we havebegun prospecting in the chain pool of centers across the United States.That’s an area that formally we had not done in the past. We’ve also focusedsome effort on network development, where we have markets with concentrationsof centers. We have several of those in the portfolio now and it has been asource for development of second and third and sometimes even fourth and fifthadditional centers around the same groups, or super groups that are forming inthose markets. And we see that as an opportunity going forward, and as a trendin the market.

In addition, we have enhanced ourresearch and development process and services here to work towards identifyingnew devices and techniques and procedures that can be deployed through our veryunique distribution system.

Same-store growth is an area thatwe are focused on in building around our strategic brand equity with ourphysicians. In that regard, we are - we have announced today, a strategicalliance with NextGen, which is an IT provider, to deploy a customizedenterprise-wide IT solution available to our physician partners. We also areworking aggressively to develop a more robust web-based marketing strategy,that takes advantage of our broad network of centers and bring somecohesiveness to that web-based strategy. We have also begun to reduce variationof our marketing strategies and pollinate some best practices forcenter-specific marketing programs across the entire platform.

We have also begun to work withour quality department to identify best practices and to make - take advantageof the data mining opportunities for the quality data that is inherent to oursystem. We have - most recently, we have conducted a study related to thequality of - metric of withdrawal time for scopes in the colonoscopy setting.Through that process, we were able to pull together over 15,000 cases in a veryshort period of time and to - begin to simulate that data and bring in toprepare it for publication about 18 months down the road, work with variousexperts to help us take advantage of that resource.

We are also making some headwayin scaling of the - and efficiencies of the organization. We did in the last -effective January 1 of this year, we completed a re-organization of thecompany, reducing the divisions from six to four. We created a matrixorganization including new four new metrics VPs. They include the VicePresident of Financial Operations who oversees managed care contracting,materials management and operational benchmarking processes. The introductionof the Vice President of Clinical Operations who oversees all Clinical Managersand develop central-level clinical operating standards.

She is also responsible foridentifying best practices in pollinating those for high volume proceduresacross the platform. We have also added a Vice President of Revenue Management.He is focused on improving billing office functions and increasing cashcollections. And lastly, we stepped up our efforts with our Vice President ofStrategy and Marketing, asking him to take responsibility for coordinating allstrategic planning and marketing efforts across the organization and providingleadership on the enhanced research and development efforts.

We also added contract withSyQuest for the deployment of an inventory management system to be taken to berolled out across all the centers over the next 18 to 24 months. Otherorganizational changes included the appointment of Billie Payne, a 12-yearveteran of operations here at AmSurg as the permanent Senior Vice President ofOperations for the organization.

Also included in ourorganizational changes is the transition to a more formalized goal setting andperformance management system. Our new system tightly aligns compensation withindividual performance across the organization. We were able to hire EricThrailkill as our new Chief Information Officer and along with his hire,invested in the enhancement of IT infrastructure required to improve our workflow, remote competing, collaboration and communication efforts across theorganization.

In summary, the changes areincluded the aggressive development strategy targeting small change and networkexpansions, the investment in our physician brand equity at the core of oursame-center growth strategy, a new structure to drive the realization of ourscale potential and then intensity - and increase intensity in ourorganizational performance management coupled with the IT infrastructure andtools to support all of the above.

The first quarter of tenure hereat AmSurg has exceeded my expectations on many levels and as I mentioned in ourcall last October, this organization is strong, the pipeline is healthy and theunderline financial fundamentals are perhaps the best in this space. Now that Ihave more visibility on the potential for same-store growth, I believe there ispotential for growth, but it will be a function of building our brand equity asa strategic partner in the minds and hearts of our physicians.

I am most pleased by the energyand enthusiasm of this team. They have embraced the new changes and played asignificant role in the development of our strategic direction. We recognizeour special responsibility as a market leader and look forward to making adifference in 2008 and beyond.

And with that, I am going to turnit over for the financial report from Claire Gulmi.

Claire Gulmi

Thanks, Chris. Hello everyone. Weare pleased with our results during the fourth quarter, were we experiencedsame-center revenue growth of 7% and we added eight new centers to ourportfolio. This predicts revenue growth to 24% to a 144 million. Our EBITDAafter minority interest increased 24% also to 27.6 million and our EBITDAmargin after minority interest was 19.1%.

Earnings per share for thequarter from continuing operations increased 16% to $0.37 compared to $0.32 in‘06. As Chris mentioned during the quarter, we sold two centers, anophthalmology center and a GI center, both located in Tennessee. The ophthalmology center hadlimited growth potential and we sold back to the partner physicians. At the GIcenter, our physician partners recently sold their practice to a local hospitaland we felt it was best for that hospital to own assets of surgery center also.Both centers were sold at market multiples and we recorded an after tax gain onthese sales of $888,000 and earnings at these disposed centers of $0.01 pershare for the first nine months of the year which reclassed or reclassed todiscontinued operation.

Our tax rate for the quarter was39.6% due to the impact of FIN48 and is expected to stay at that level for2008. Our operating cash flow for the quarter was $22.8 million bringingyear-to-date operating cash flow to 79 million, capital expenditures during thequarter totaled 86 million, which included 78 million for acquisitions, 3million for developments and $5 million in maintenance CapEx. Because of ourincreased acquisition activity during the quarter, our long-term debt increasedto 217 million at year-end. But even with this additional activity, long-termdebt to total cap is at 35% and we have approximately $100 million inavailability under our line of credit.

Today, we are establishingguidance for 2008 as follows. Our revenue exceeds between 600 and 620 million.We will add 12 to 15 new centers during the year and our total capitalexpenditures for the year are expected to be approximately 100 million, 78million of this will be for acquisitions.

Our same store revenue growthwill be 3 to 4% for the year. This includes the full 100 basis point reductionin same center revenue growth because of the Medicare rate reductions. Netearnings per share of $1.53 to $1.55, and this guidance includes a $0.05reduction from Medicare rate cuts which reduces our EPS growth rate by 4percentage points.

And for the quarter our netearnings per share is expected to be between $0.36 and $0.37. We expected 2008to be a challenging year because of the Medicare rate reductions. Yet we arepleased with our growth outlook coming off of a strong fourth quarter foracquisitions and our continued focus on same-center revenue growth.

And at this time, I’ll turn itback over to Chris for final comments.

Chris Holden

All right, very good. I think operator,we'll take this point to open it up for Q&A.

Question-and-Answer Session

Operator

Thank you, sir. Today’squestion-and-answer session will be conducted electronically. (Operator Instruction) We'll go first toWhit Mayo with Stephens.

Whit Mayo - Stephens

Hi, good morning. You spent $78million on acquisitions in the quarter, which itself would be a record for youguys in any given years. So, can you comment on the size of these transactionsand just on the timing in the fourth quarter, were they spread out kind ofevenly or back end loaded? I am just kind of surprised with the amount of debtat the end of the quarter. And secondly, just given the relative momentum oflate that you had in your pipeline, I just think that - I think several of uswould expect that your guidance for acquisitions could have been a little bithigher. But can you just comment if whether or not the lower number is justrelatively based on the larger size of some of the deals that you are seeing?

Claire Gulmi

Sure. Let me - I am going tostart by answering that, Whit, and then I am going to turn it over to Chris tokind of talk on a bigger picture level. Several of the acquisitions that we didin the fourth quarter were much larger than our normal size. Two were somelarge multi-specialty centers and third was the largest GI center in the countrythat all three of those were bought on about December 1st. The rest of thecenters were bought kind of evenly throughout the quarter. So, we did haveseveral large acquisitions during the quarter. As far as the guidance for 2008,I am going to let Chris discuss that.

Chris Holden

Well, that’s been a guidance and thatis a struggle particularly since the number of centers is the tough part andthe size of the centers is changing. It’s been all over the Board. So, it’sbeen difficult to put the guidance on in terms of number of centers. And theway we came to the current guidance is, that’s been consistent with the priorperformance and we still have the wild card in the air of what is going tohappen to pricing. I mean will it come down? Will it fall in line? So, we tookall of that into account in formulating the guidance that we presented heretoday.

Whit Mayo - Stephens

Okay. Any sense for just whatsort of the average multiple was that you paid for the fourth quarter deals?

Claire Gulmi

I think the average would havebeen consistent with what we paid in the past which is around ‘07.

Whit Mayo - Stephens

Okay. Okay and just turning tothe same-store guidance for a second, I am just trying to make a sense of whata normalized underlying rate would be. You guided 3 to 4%, that includes a 1%headwind from the Medicare refinement, but I presume you’ll probably continueto benefit over the next three quarters from the partnership expansions thathelped you out in the fourth quarter. So, if you could comment a little bitabout that and also whether or not the two centers that you sold in thequarter, did that help out your same-store at all?

Claire Gulmi

The two centers we sold in thequarter really had no affect on the same-center for the 2008 projections. Theywere small enough that they really didn’t drive anything. As far as kind of thenormalized same-center number, I think that even though we had a little bit ofa kick in the fourth quarter from the partnership expansions, we saw that inthe third and fourth quarter both - affected both quarters, I think that getsnormalized once we get into the first quarter as of ‘08. So that, generally, Ithink that - the biggest amount of noise is that we’ve got the reduction in theCMS of about 100 basis points. We do have an extra day in the year for 2008than we did over 2007, which helped to offset that a little bit. So, we arethree to four to five, somewhere in the normalized range.

Whit Mayo - Stephens

Okay. And just one last question,just to make sure I had this right, how many same-store centers did you end thequarter with and what should we look for in ‘08? I have got a 142 for thefourth quarter and 152 for ‘08. I just want to make sure I am thinking aboutthat right?

Claire Gulmi

For ‘07, we had 143 centers inthe same-center group and for ‘08, we will have a 159.

Whit Mayo - Stephens

159?

Claire Gulmi

159.

Whit Mayo - Stephens

Okay. I will follow up with youoffline about that.

Claire Gulmi

Okay.

Operator

We go to the next from RyanDaniels, William Blair.

Christina Blaishek - William Blair

Good afternoon. It’s ChristinaBlaishek for Ryan Daniels today. Can you give us a little bit more color aboutthe announcement you made earlier today on the NextGen platform? I guess morespecific, how much is it going to cost? Can you give us an estimate foranticipated expenses in ‘08 and any specific key benefits you expect toachieve? Any additional color you can provide would be very helpful.

Christina Blaishek - William Blair

I going to let - this has beenClaire’s pet project and she is on a good drive. So, I am going to turn thatover to her.

Claire Gulmi

Sure. This will be a long rollout for us as we look across the 176 centers that we have and we have just seenan increasing need for better IT services, better software, better support andthat’s a real value that we think that we can bring to the table in partnershipwith NextGen. We expect to invest in hardware software and development costprobably close to $2 million this year. Some of that will be capital cost, someof it will be expense, but it’s all baked into our numbers here that we havegiven you today.

Christina Blaishek - William Blair

Okay.

Claire Gulmi

This we will probably - this willbe the development year. So, we will probably only have three or four centersup by the end of year and then work through all of the logistics above, thethings to make it work properly and then begin a rollout to our centers. Itwill be something that we offer as an advantage and opportunity, not somethingthat we are really trying to force our centers to do. But again, we’ve heardcontinually from them that this is an important need for them. We will host thesoftware centrally which limits their expense for upgrade and maintenance andagain, that’s one of things that many of our centers have trouble keeping upwith. So, we think that’s what the real opportunity is and then to standardizeour processes across all centers and be able to man that in a better fashion Ithink will add value to AmSurg and to our partners.

Christina Blaishek - William Blair

Okay, great. So you're notrequiring all of the centers to upgrade to this platform. But do you anticipatethe majority of them?

Claire Gulmi

I think over time that we willget a lot of participation just because it’s a great product. We can offer atan advantageous price, because of our purchase and we can see that there isreal need for them. So, I expect a lot will participate in that.

Christina Blaishek - William Blair

Okay, great, and then oneadditional question. On the two centers that were closed on - that youmentioned during January of ‘08 that were centers on your letter of intent.What specialties were those?

Claire Gulmi

They were both GI centers.

Christina Blaishek - William Blair

Both, Virtual GI. Okay, great.Thank you.

Operator

We will go next to Kevin Ellichwith RBC Capital Markets.

Kevin Ellich - RBC Capital Markets

Good evening. Thanks for takingmy questions. First, can we get some more color on the multi-center marketopenings that could have positively contributed the same-store growth? I thinkyou might have given the specialties of those centers, but do you have any concernsregarding cannibalizing existing business or how do you monitor that and how doyou think about that?

Claire Gulmi

Are you talking about the threecenters that we opened within the same markets?

Kevin Ellich - RBC Capital Markets

Exactly.

Claire Gulmi

Obviously, when you open a secondsatellite center, you will have some cannibalization of the existing center.But the reason that you open the satellite center is because you see a pickupdemand of volume that is being done somewhere else. So, it’s a win-winsituation for us in a fairly short period of time that you might have a littlebit of decline at the mother center, I guess, as you open the second center.These have been very good second locations for us.

Kevin Ellich - RBC Capital Markets

Okay. And then the specialty arethese GI centers or I?

Claire Gulmi

Everything that we've done forsecond centers is GI.

Kevin Ellich - RBC Capital Markets

GI. And then you -- so you havepretty good visibility on some of your markets, where you can do the satellitecenters?

Chris Holden

I think right now we've a targetlist that has about 10 different markets on it.

Kevin Ellich - RBC Capital Markets

Okay, fabulous -- that should begood for growth. And then on the operating expense side, I think operatingexpense was a little bit higher than I was looking for. Was there anythingunusual there, and is that a good rate to use going forward?

Claire Gulmi

It was little bit higher in thequarter. I don't think, as we look through it, there was not any particular oneitem that was there. We had the operating expenses was 20.5% for the year,which included about 20 basis points of an impairment charge in the secondquarter. So 20.2%, 20.3% of revenues probably a reasonable number goingforward.

Kevin Ellich - RBC Capital Markets

Okay, excellent. And then lastquestion on the payer environment commercial pricing. Are you seeing anypressure from managed care? Specifically, we saw some announcements out of Ohio on the managed carefront. I'm just wondering if you guys have seen any of that yet or experiencingany of that?

Claire Gulmi

Generally we're hearing we're nothearing a pressure from managed care other than what our normal day-to-dayactivity and that we're not seeing any rush for lower rates for managed care atthis point.

Kevin Ellich - RBC Capital Markets

Okay, thanks.

Operator

We'll go next to Art Hendersonwith Jefferies & Company.

Art Henderson - Jefferies & Co

Hi, could you just talk a littlebit about the acquisition multiples you are seeing in the field, and if thoseare coming in a bit or if they are not changing at all?

Chris Holden

Right now, Art, it hasn’t changedmuch and in terms of some of the bigger ones that you have still got, I thinksome of the expectations of the private equity heyday, so it’s still a wildcard at this point.

Art Henderson - Jefferies & Co

Okay. And then you've done a lotinternally with getting the organizational structure reworked and then puttingtogether some new initiatives to sort of drive growth going forward. Do youfeel like all the tools are in place right now, or is this sort of an ongoingprocess where they will be more changes in the next couple of quarters?

Chris Holden

Well, we're always pushingourselves to find new ways to grow the business. This is a snapshot of the fourmonths that I have been here, what we’ve been able to generate in terms ofideas and changes to the organization that we think make those happen, Art. ButI’ve never stopped looking for ways to grow the business.

Art Henderson - Jefferies & Co

Okay. The last question, CapEx,what should we think about for this year?

Claire Gulmi

I think that probably a $100million in total CapEx for the year, $78 million of that will be inacquisitions.

Art Henderson - Jefferies & Co

Okay, thanks.

Operator

We'll take our next question fromBrendan Strong, Lehman Brothers.

Brendan Strong - Lehman Brothers

Hi, Claire. Maybe just onefollow-up question on the other operating expenses, is there anythingseasonally in that number, because it seems to have spiked up a bit in thefourth quarter, and I would have thought you might have got a little bit moreleverage on that with the strong same-store growth this quarter?

Claire Gulmi

No. There really, really isn’t. Ilooked at it last year, it spiked up in the fourth quarter last year too. Idon’t really think there’s seasonality. We really went through pretty clearlythrough each center to see what specific items and there was really no one itemthat caused that.

Brendan Strong - Lehman Brothers

Okay. And then maybe just alittle bit of a bigger picture question. With all of the things that you guyshave implemented and looking at possibly adding some additional services, whendo you think this stuff starts to benefit you? Is it something that you see animpact from later this year? Do we need to wait until 2009? Any commentaryaround that would be helpful.

Chris Holden

Well, in terms of new devices,procedures and so forth, I think that’s a longer-term play. We just now turnedon the faucet, if you will, for screening and looking for those and devicesespecially have such a long window. The first part I think of the process thatwe need to expedite is getting a group of physician leaders out of the fieldthat are close to the development and close to where those ideas are generated.A lot - we find - and as I have been out in the field talking to the doctors,they know about a lot of different things that are going on and those are theleads that we need to follow up on. But I think the short answer to your question;it could take a while for things like that to take effect.

Claire Gulmi

Let me add one thing too. I amgoing to go back to a question you bring - I think you just asked a minute agoabout the fourth quarter and other operating. There is one phenomenon that goeson in the fourth quarter and that is the shortest quarter from a number of daysduring the year, each - almost every year, because of the holidays and again,in our surgery centers, most of our costs are fixed. So, that’s why you seethat other operating jump up a little bit.

Brendan Strong - Lehman Brothers

Thank you.

Operator

We'll go next to Darren Lehrichwith Deutsche Bank.

Darren Lehrich - Deutsche Bank

Thanks. Good afternoon, everyone.I think Chris you mentioned that you are increasing your prospecting in thechain pool. I would love to just get your commentary on what exactly you areseeing amongst that pool of smaller chains at this stage of the game and whatexactly you will be focusing on within that pool?

Chris Holden

Hi, Darren. There has been a lotof - I’m limited on what I can say obviously but there has been a lot ofactivity, things that would have never been presented, I think are now beingpresented to us because I think our position is well understood. And I thinkthat the credit market, the things that we talked about and you talked about inyour research, the credit crunch and the slowing de novo for those that counton that is, I think is making its way into the system. I don’t think there isany question about that. The wildcard remains, at what price, that’s thestruggle in that process.

Darren Lehrich - Deutsche Bank

Okay. And then you referencedthis R&D process that you have. I guess I would be interested just to know,who runs that R&D process for you and it sounds like you will be involvingsome physicians but just so I’m clear on exactly how you are organizing forthat structurally.

Chris Holden

Well. Yeah, make one guy’s dayhere, we have a young man on our staff named Hunter Phillips, who has proven tobe a real superstar in that arena and has gone out and helped us ferret outquite a few interesting things to look at, and put us in front of somecompanies that are developing things that would be a good adjunct for our distributionsystem. We obviously have the - a unique GI distribution system with 15% of allMedicare certified GI centers are partnerships and about 1 in 10 or 12 of allprivate practicing GIs are partnered with us, right now, there is nothingreally that looks like that, anywhere else, for anyone that’s making devicesalong those lines.

And we are focusing some of ourefforts along those devices and procedures that are a fit in addressing theobesity issue, that’s clearly an opportunity and Hunter is guiding some of hispathway with that in mind. And then, on the ophthalmology piece there is somuch being done now with lenses and the technologies there, that there isprobably an even bigger pipeline of things. But that may be a more of a matureprocess inside of that service line because they have been doing, and that’sbeen evolving so quickly and so well; lenses today are just incredible. Andthen really haven’t focused yet on terms of multi-specialty, and what would beable to flow through there. But -- and I have also gotten - honestly, I havegotten a lot of help from the investment community, they’re in touch with thedevice makers and some of those different opportunities and those are beingpresented to me now, which is another nice pipeline to evaluate. So, getting alot of help in that regard Darren.

Darren Lehrich - Deutsche Bank

Okay, that's great. And thenjust, as far as this same market expansion that you are doing. I guess you got2 points of same-store growth there. Should we be just thinking about that assame market growth now? And so, that is the same-store I guess going forward?

Claire Gulmi

I'm not sure I understood yourquestion.

Darren Lehrich - Deutsche Bank

So, I think you highlighted the 3centers, and then those were in same stores -- is that correct?

Claire Gulmi

Yes, they are in the same-storecategory.

Darren Lehrich - Deutsche Bank

Okay. We'll just be seeing alittle bit more of that going forward. Have you done many of those in the past,just to remind me?

Claire Gulmi

One or two in past years. Thiswas, to have three in one year, was the biggest year that we have had.

Darren Lehrich - Deutsche Bank

Okay, great; and then, Claire,just as far as LIBOR having come down quite a bit in recent weeks. Can you justremind us, how your balance sheet is structured with regard to swaps. And howmuch of that LIBOR is truly floating for you?

Claire Gulmi

$50 million of our debt is fixedat little bit over 5%, and the rest is floating with LIBOR. So, we'll get totake the benefit of most of this rate drop.

Darren Lehrich - Deutsche Bank

Okay, great. And then thehousekeeping item -- just revenue and procedure mix by specialty?

Claire Gulmi

Sure, revenues, GI revenues were68%, I revenues at 20% and our multi-specialty centers at 12% in revenue, froma procedure standpoint 81% GI, 13% Ophthalmology and 6% multi-specialty.

Darren Lehrich - Deutsche Bank

Okay. I think that will do it forme. Thanks, very much.

Claire Gulmi

Sure.

Chris Holden

Thanks, Darren.

Operator

We'll go next to Bill Bonellowith Wachovia.

Bill Bonello - Wachovia

Hey, good afternoon. I just wantto follow-up a little bit more on some of the acquisition activity since thepace of spending has gone up so dramatically. I guess we seem to be seeing somepretty significant reverse leverage in the results, net-net in operating incomebut once we get below operating income due to the increasing interest expense,and I am just curious how you think of that, I mean, are these centers that aregoing to become increasingly more accretive over time, are they notcontributing much in year one? Are they dilutive in year one? And then I have acouple of follow-ups.

Claire Gulmi

All of the centers that wepurchased will be accretive in year one. And they begin to generate more cashflow and growth obviously and we pick out debt they become more accretive inthe future years, but they will all be accretive in the current year.

Bill Bonello - Wachovia

Okay. And but you are not - Iguess it’s just - the numbers sort of you say you are not paying more for thecenters but I guess - I am trying to understand, it seems like you are growingabout 13% - 13 million or so, excluding the impact of the cuts, if we give thatback to you in your guidance, and your acquisition spend was 163 million, withabout 70% of that in the back half of the year. It just seems like, that worksout to something like 8% pre-tax return-on-invested capital -- I guess I amjust struggling trying to understand why that’s a - why we like these big acquisitionsversus sort of the bread and butter that you have done in the past?

Claire Gulmi

I am not sure I am following yourmath, Bill. But as far as these acquisitions, the size would do nothing butincrease their accretiveness to us - as opposed to decreasing, even though itadds more interest expense, I think we’ve obviously have that with a largesmall centers, so we feel like if we maintain our pricing discipline in theseven multiple range with the interest rate environment that we are in, and thelow leverage that we have on our balance sheet, that these transactions areaccretive, and require less corporate overheads to manage the larger centersthan it does smaller centers. So, ideally, they would be more accretive than asmall acquisition. So, I am not quite sure I am following you there but I hopethat answered some of your question?

Bill Bonello - Wachovia

Maybe. And just - are the centersthat you are buying - are they the ones that are bigger from a marginstandpoint - are they inline with the centers that you typically acquire orthat are - that you’ve been operating?

Claire Gulmi

You would not get substantialdifference in margins that you are seeing at our average center.

Bill Bonello - Wachovia

Okay. And then just the lastquestion, just back on the same center growth. Is that - have you alwayscounted, when you’ve added centers in-market, have you always counted thevolume in those centers as part of your same-center growth?

Claire Gulmi

We did when it was in the same -yes we did, and the reason you do is because if you don’t your center is goingto look worse than it actually is because you cannibalized some of yourexisting procedure put them in the new center. So, we’ve really looked at it asan end partner - if it is in the same partnership then it should be included inthe same center growth.

Bill Bonello - Wachovia

Fair, okay. I was just trying tosee if there was a change from --

Claire Gulmi

No, it's just that we had more ofthat this year.

Bill Bonello - Wachovia

Great, okay. Thank you.

Operator

We'll go next to Erik Chiprichwith BMO Capital Markets.

Erik Chiprich - BMO Capital Markets

Hi, good afternoon, and thanksfor taking the question. I just needed some clarity. On the 12 to 15 centersthat you are planning to acquire, is that and the de novos, is that a netnumber after some divestitures or is that not include any divestiture activitythat may occur in 2007?

Chris Holden

Does not include -- does notinclude.

Erik Chiprich - BMO Capital Markets

Okay, thanks. And then, secondly,on supply expense, on a per-procedure basis, it looks like that continues tocome down. Can you talk a little bit about either what you are seeingrefractive IOL usage or volume discounts? Any additional opportunities there inthe future to continue to see declines there?

Claire Gulmi

It's hard to look at that numberon a per procedure basis, because the mix changes so much. When we add a lot ofGI centers, that number would go down. If you look at it on a percent ofrevenue basis, it’s pretty flat with the prior year. We saw a jump up a littlebit in ‘06 as we saw higher usage in our ophthalmology centers of the newtechnology lenses. But I think we are probably in - what you’ve seen in thepast few quarters is what you would think going forward.

Erik Chiprich - BMO Capital Markets

Okay, thanks. And then finally, Iknow you guys have discussed in the past and have, I think, direct-to-consumer,advertising initiatives that you were looking into. Can you just provide anupdate there and any traction or how the roll-out might be going with thoseefforts?

Chris Holden

We're still in the process offinalizing our summary from that. And hopefully have something on that for thenext call. We do know at this point that the takeaway is that the web-basedstrategy is the pipeline for the direct-to-consumer. And that is part of whatdrove our decision to beef up our efforts in that regard.

Erik Chiprich - BMO Capital Markets

Okay. We look to the next quarterfor more info. Thanks.

Operator

We’ll go next to Shelley Gnall fromGoldman Sachs.

Shelley Gnall - Goldman Sachs

Hi, thanks for taking thequestion. If I could just, one more follow-up on the pricing guidance for nextyear, on the same-store guidance. I shouldn’t say pricing, I should say revenueguidance. I think, Chris, you mentioned there were ten target markets where youwere looking to potentially do additional physician partnerships and open upsome second centers. Is that expectation built into the 3 to 4% same-storeguidance?

Chris Holden

In terms of second - to theeffect second centers would have on that?

Shelley Gnall - Goldman Sachs

Right.

Chris Holden

Owing to the extent - at thispoint if you were to do a second one, it would have been in what we’ve talkedabout for what was on the pipeline at quarter end.

Claire Gulmi

I think any of those 10 centerscould have possibly other centers that would open in ‘08. I think would befuture year guidance.

Shelley Gnall - Goldman Sachs

Okay.

Chris Holden

12- to 15-month process.

Shelley Gnall - Goldman Sachs

And Claire, I don't know if youhave given this in the past -- do you breakout that same-store guidance intopricing and case growth?

Claire Gulmi

If you look at our plan,generally what we said in the past -- and it's still true -- is that pricingand case growth are about the same.

Shelley Gnall - Goldman Sachs

Okay, great. And then if I couldfollow-up on the New Jerseysituation. Thanks for the update, I’m just wondering. First, did any payerstook advantage of the loophole, while there was a loophole, I guess, therestill is and reject the claims from the New Jersey facilities?

Chris Holden

We didn't have that experience,we did not.

Shelley Gnall - Goldman Sachs

Okay, great. And then are thereany other states where you operate where they have similar statewide bans onself-referral?

Chris Holden

Almost every state has a model.There’s a federal rules and the state rules which govern that but surgerycenters are the most widely accepted exception for physician ownership. It’s astandard that physician ownerships and ASCs is well founded and accepted acrossnearly every state. I think there are one or two exceptions, and that’s it,maybe New York,I can’t think of the other one.

Shelley Gnall - Goldman Sachs

Okay. So, no other importantmarkets where you have big exposure?

Chris Holden

No, the bigger barrier-to-entrywould be CON state, we see that more often.

Shelley Gnall - Goldman Sachs

Okay. And then just one follow-upon the acquisitions. Chris is it correct to assume that for the right price anddepending on the size of the facility, the acquisition guidance could be low.Should we think that - is it unreasonable to rule out a larger acquisition ofsay 30 ASCs, as we think about chain acquisitions?

Chris Holden

We did not bake in any guidanceon potential chain acquisitions.

Shelley Gnall - Goldman Sachs

I'm sorry, chains were not partof the…

Chris Holden

It's not part of the guidance,no.

Shelley Gnall - Goldman Sachs

Okay that's it for my questions.I'll follow-up afterwards.

Chris Holden

Okay.

Operator

We'll go next to Rob Hawkins inStifel, Nicolaus.

Rob Hawkins - Stifel Nicolaus

Hi, good afternoon.

Chris Holden

Good afternoon.

Rob Hawkins - Stifel Nicolaus

Yes, can you hear me?

Chris Holden

Yes.

Rob Hawkins - Stifel Nicolaus

I am still little confused and Iam kind of following on Bill’s question. Maybe just too kind of break it down,a little bit further. On the multi-specialty deals you are doing. What does oneof these deals look like. Typically, I mean is it 5 or $10 million type ofacquisition. Are we talking about 5 to 10 million revenues, how does this lookvis-à-vis say at GI center? And then, what the margins are like because the wayI am coming out of this and looking at your guidance, it just doesn’t look likethere is a whole lot of margin improvement built in to maybe what was done inDecember, so I could be calculating it correctly.

Chris Holden

I don't think you will see a bigchange in the margin. I just think you will be seeing a big change in the sizeof both revenues and expenses. I don’t think it’s - the multis are notimproving our margin, but they are not a drag on the margin, it’s really whatmy point was there.

Rob Hawkins - Stifel Nicolaus

Okay.

Claire Gulmi

From an EBITDA line.

Rob Hawkins - Stifel Nicolaus

It just looks like - I was goingto say -

Claire Gulmi

They...

Rob Hawkins - Stifel Nicolaus

I am sorry.

Claire Gulmi

They - an average multi-specialtycenter, if I look at that, it’s a two multis that we bought in the fourthquarter. They would be something like $10 million - 10 to 12 million inrevenues, 4 to $5 million in EBITDA. So, there would be - have margins that arevery similar to our existing portfolio.

Rob Hawkins - Stifel Nicolaus

All right. I guess, I’ll try tofactor that in and it just doesn’t look - it doesn’t look like it’s taking thenumbers up too much. I guess in the 12 to 15 are you mainly, you are notfactoring a whole lot of multi-specialty in that as well. You are more or lesslooking at kind of your typical GI and ophthalmology?

Claire Gulmi

I think that, I am, I don’t thinkI am following the question here that because the GE - it doesn’t matterwhether its multi or GI or ophthalmology for us when we look at and the marginsare very similar. So, when we plan to 12 to 15 centers for ‘08. We looked at anaverage margin not at whether it was - what the specialty was. I am going totalk to you offline and see if we can...

Rob Hawkins - Stifel Nicolaus

Okay. Sure, no problem.

Claire Gulmi

I don’t think I am seeing itright now.

Rob Hawkins - Stifel Nicolaus

Okay. I’ll follow up with youonline. I’ve had most of my other questions answered. Thanks.

Claire Gulmi

Okay.

Operator

We’ll go next to Justin Lakewith UBS.

Justin Lake - UBS

Thanks. Just a couple offollow-ups on the M&A side. Can you give us an idea Claire what the revenuecontribution was from the acquired facilities this quarter?

Claire Gulmi

For the quarter, I don’t havejust fair revenue for the quarter. I have all of the acquisitions that we didfor the quarter, was about - for the quarter was about 13 million that wouldinclude some that we bought earlier in the year.

Justin Lake - UBS

That's year-to-date acquisitionsfor the quarter. What was that number on the third quarter?

Claire Gulmi

I don't have the third quarterhere. This is just the fourth quarter.

Justin Lake - UBS

Got it.

Claire Gulmi

But for the year, it was only 18million. So, the majority of the revenue that we received - that we achievedfrom current year acquisitions occurred during the third and fourth quarter.

Justin Lake - UBS

Okay. And as far as, what you arethinking in that 12 to 15 acquisition guidance or new center guidance, most ofit seems to be on the M&A side. So, can you give us just a ballpark numberof how much revenue you expect that to contribute to that ‘08 guidance?

Claire Gulmi

I'm sorry. How much revenue fromwhat Justin?

Justin Lake - UBS

From the 12 to 15 centers. Howmuch revenue do you think you will be contributing there?

Claire Gulmi

Sure, again. It depends ontiming; we are assuming that they come in spaced out throughout the year.

Justin Lake - UBS

Sure.

Claire Gulmi

That revenues would generateabout $16 million from the current year acquisition.

Justin Lake - UBS

Got it. And just the questionsaround the margins of the multi-specialty centers that you are acquiring, itdoes sound like those - the EBITDA margins there are fairly similar andprobably towards the high-end of what we normally think of kind of a specialty -a multi-specialty standalone center. Is there anything that you could tell usabout those centers as far as their specialty mix or maybe they are in-networkversus out of network reimbursements that we would be able to generate a kindof inline margin with single-specialty center?

Claire Gulmi

Are you asking why they generatean in-line margin with the single specialty center?

Justin Lake - UBS

Yeah, I was thinking normally, wekind of think of looking at other companies of multi-specialty center maybebeing high 20s rather than a 35 number.

Claire Gulmi

Right.

Justin Lake - UBS

I'm just wondering if there isanything specific to those centers.

Claire Gulmi

I think it's just the optimalsize. I think with the volume that’s running through those centers, the twomulti-specialty involved were heavily orthopedic, and really have a lot ofsingle-specialty characteristics because it’s two or three large groups thatoperate out of that centre. So, I think that’s probably the driving factor.

Justin Lake - UBS

Okay. So, you said heavilyorthopedic, which was normally higher margin, that makes sense?

Claire Gulmi

Right.

Justin Lake - UBS

Just as far as the risk factors,we think about there, the normally out of network would be one and percentageof reimbursement, and then the second might be - well, maybe workers comp,anything there?

Claire Gulmi

One of the centers has a largeworkers comp component based in Californiawhich has already gone through workers comp reforms. So, there should be norisk there. They do have - their multi-specialty have more out of networks inour typical single specialty, but we reviewed it very carefully, and looked atwhat the risks were and the spread of payers, and we feel like, we understandand what our risk is there and that can protect against any major change inthere.

Justin Lake - UBS

And what's the percentage kind ofwork for those single specialties for your existing business versus what youbought?

Claire Gulmi

It can be all over the board. Itdepends on the market.

Justin Lake - UBS

I just mean your average -[overlapping speakers]

Claire Gulmi

I think our average out ofnetwork is probably 2 or 3%. Obviously, it’s much bigger than that for amulti-specialty center. But that’s because most of our GI centers are fullyin-network.

Justin Lake - UBS

All right. So, the stock youbought might be closer to 15 - 20 or higher?

Claire Gulmi

I don't have that number in frontof me. It's probably higher than 15% to 20%.

Justin Lake - UBS

Okay. But you are comfortable ofall that when you...

Claire Gulmi

We did an extraordinary level ofdue diligence understanding and analyzing the payers in the market whatpressures were there and feel comfortable that we're in good shape.

Justin Lake - UBS

And one was in California, where was the other one?

Claire Gulmi

Both in California.

Justin Lake - UBS

Both in California, that's it for me. Thanks a lot.

Operator

We'll go next to Mark Arnold withPiper Jaffray.

Mark Arnold - Piper Jaffray

Most of my questions have beenanswered. I guess just to follow-up on the 12 to 15 new center guidance. Giventhat you’ve expanded the scope of centers you are willing to look at, does the12 to 15 member imply that we are seeing a big slowdown in the number of GIcenters, that are available or the number of single specialty centers that areavailable?

Chris Holden

No, no that's not intended to bethe implication there.

Mark Arnold - Piper Jaffray

Okay. So, you are looking atabout the same - I think it’s about the same guidance as you are at a year ago.But you are looking at a broader scope of centers, but you are still thinkingthat’s the range. There is nothing there that’s going on where you think - areyou becoming less - more selective in the types of single-specialty centers youwould look at than you were say in the last year then?

Claire Gulmi

I don't think we're becoming moreselective. I do think that you’ve got to recognize that we did quite a fewacquisitions in the fourth quarter. So, we really very much dealt into ourpipeline. So, we are trying to be recognized that fact as we look at what weare doing - going into 2008, that we did have an extraordinary year in 2007,and there are only certain number of centers that are for sale out there. So,we are just trying to recognize that fact as we set the guidance.

Mark Arnold - Piper Jaffray

Okay. Just one other, then, bigquestion. You elaborated a little bit on the R&D and looking at new devicesand technologies. Where do things like virtual colonoscopy fit into thatdiscussion?

Chris Holden

They are in that same bucket.

Mark Arnold - Piper Jaffray

Okay. And the house - the HR 4879that was introduced in December. Do you guys have any confidence that you willsee any action on any legislation that would allow you to do those CT scans inan AFC, anytime soon or --?

Chris Holden

I don't have any feel for that atthis point.

Mark Arnold - Piper Jaffray

Okay. And then, just beyond givenyour mixes of specialties, I mean how far beyond say CT scanners, are there anyother kind of high-cost types of equipment that would fit into that technologyrange, as well? And I am trying to think of what that might be given yourspecialty mix today. But, can you elaborate on that at all or is most of itkind of lower cost device things that you are looking at in the short term?

Chris Holden

We are not - we are open toanything at this point. I mean we are trying to identify the universe ofopportunities first, and then winnow it down to ones that make the sense to us.So, you kind of caught us on the front end of the curve of taking through thatdecision.

Mark Arnold - Piper Jaffray

Okay, great. Thank you very much.

Operator

(Operator Instruction) We'll gonext to John Ransom with Raymond James.

John Ransom - Raymond James

Hi, good afternoon. You guys are,obviously, it's a new day at AmSurg, and so along that line, tell me what levelof debt to EBITDA, you would be comfortable with?

Chris Holden

John, I had to think of it -- Imean I try to think of it in terms of what keeps us healthy on several metrics.

John Ransom - Raymond James

Will that be...

Chris Holden

Anything, if we get around thethrees, creeping up on the fours, I start to get nervous about that. So, let’stry to manage it to three or less, would be my optimal. You know, the problemis, you just - if certain opportunities open up, we just have to look at thoseas they come and see what the long-term effect would be.

John Ransom - Raymond James

And I guess my second question isgiven payers decelerating environment and cracking down on out of network, doyou have any new stories to tell that you guys were ever a big pricing story,but are there any new stories to tell about your commercial pricing?

Chris Holden

New stories

John Ransom - Raymond James

As in are getting tougher, termsare getting more restrictive, out of network is being looked at, anything likethat going on?

Chris Holden

No. Our story is that, we haveintensified our focus on the contracting efforts trying to eke-out whateverincremental growth in revenue there is through - by focusing our efforts alittle more aggressively there.

John Ransom - Raymond James

Okay. And then kind of a bigpicture question, I mean you’ve been there long enough now. What was your mostpleasant surprise kind of going in and what your impressions are now?

Chris Holden

I'll tell you the biggest, Idon’t know if it was pleasant or not, but this credit crunch has changed thedynamics of the market quite a bit. And has I think strengthened our position,as we look at the M&A market. But the most pleasant surprise has been howgenerally well-run the company is, there are a lot of talented people in thecompany. We - as you heard today, we blasted through quite a few changes hereto intensify things. Everybody here is very committed on the same-store growthissue and trying to crack the code on taking that to the next level and lot ofideas have bubbled up and a lot of energy around that. So, I have just beenmost pleased with this team here and their nimble and open-minded approach totry and find ways to make it happen. Sometimes, if you come into anorganization, you can find, “we’ve always done it that way” or clichés likethat. But I have found the opposite here. This is a very energetic group, and Ican’t say enough good things about Claire and David and Billie and the teamhere, they are just great partners and fun to work with. And they are brightand talented. So, that was the biggest surprise.

John Ransom - Raymond James

Okay. Thank you very much.

Operator

And we've one follow-up from WhitMayo with Stephens.

Whit Mayo - Stephens

Yes, Chris. Just one quickquestion; just back to the pool of acquisition candidates. Can you remind usjust of your preferred equity model? Do you begin to start to look at some ofthe minority owned deals at this stage of the game, given your broadenedexternal growth strategy at this point?

Chris Holden

When I got here, I was cautionedby several of - revisit the model here, maybe it’s a barrier to your potentialin the pipeline, and I just haven’t found that. And I’ve found that a lot ofthose companies who did pursue a broad based minority model now have someissues, as they try to figure out what to do with their companies now that themarket’s changed up a bit. And so, I don’t really see a big change on that. Iam leaving my mind open in terms of strategic possibilities maybe with hospitalpartners or others going forward. I am going to look and - I am going to waitand see what happens with the M&A front here. If anything meaningful comesforward that maybe has that some of that baked into it, that’s something I’dtake a look at.

Whit Mayo - Stephens

Okay. That’s helpful, thanks.

Operator

And at this time, I'd like toturn the call back to Mr. Holden, for any additional or closing comments.

Chris Holden

All right, we thank you everyonefor joining us on the call today. I’d really - I also like to take thisopportunity because I know a lot of them are listening. But - so thank ouremployees and our physicians for all their daily service and support. Theirwork is making a meaningful difference in our world. And also like to thank allof you for being with us today, and sharing the results of our fourth quarter.With that, I will close the call today and we look forward to visiting with youagain next quarter. Thanks Justin, I appreciate it.

Operator

You're welcome, sir. Again thatdoes conclude today's conference call. Thank you for your participation. Youmay disconnect at this time.

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Source: AmSurg Corp Q4 2007 Earnings Call Transcript

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