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Mednax, Inc. (NYSE:MD)

Q2 2012 Earnings Call

July 31, 2012 10:00 a.m. ET

Executives

David Parker - Vice President, Investor Relations

Roger J. Medel - Chief Executive Officer

Vivian Lopez-Blanco - Chief Financial Officer

Analysts

Ryan Daniels - William Blair & Company

Kevin Ellich - Piper Jaffray Companies

Kevin Fischbeck – Bank of America Merrill Lynch

John Ransom - Raymond James

Gary Taylor – Citigroup

Ralph Giacobbe - Credit Suisse

Brooks O'Neil - Dougherty & Company

Kevin Campbell - Avondale Partners

Robert Mains - Stifel Nicolaus & Company, Inc.

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Mednax Second Quarter Earnings Conference Call. (Operator instructions) As a reminder, this teleconference is being recorded.

Now, at this time I will turn the conference call over to your hose, Vice President of Investor Relations, Mr. David Parker. Please go ahead, sir.

David Parker

Thank you, Tony, and, as he indicated, welcome to Mednax's 2012 second quarter earnings call.

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 their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Any forward-looking statements made during this call are made as of today and Mednax undertakes no duty to update or revise any such statements, whether as a result of new information, future events or otherwise.

Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the company's most recent annual report on Form 10-K and its quarterly reports on Form 10-Q, including the sections entitled Risk Factors.

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

Dr. Roger Medel

Thank you, good morning and thanks for joining our call today. As we indicated in our release earlier this morning, we are especially pleased with our results for the second quarter, including the same-unit growth of nearly 4%. This same-unit was the contributing factor in our results, exceeding our guidance for the quarter. I also believe that this quarter's results show that we continue to make excellent progress in pursuing our clearly articulated strategy for sustainable long-term growth. We are drawing on the strength of a company that has over 30 years of operating experience and a reputation for durability in an uncertain healthcare environment.

Our revenue growth for the second quarter was 14.3% with growth attributable to contributions to some recently required practices of over 10% and the remainder coming from the same-unit results just mentioned.

In looking at the strength of our same-unit growth, we saw net reimbursement-related growth of 2.4% and volume growth of 1.5% for the quarter. While our strong same-unit growth was a positive story for the quarter, the larger part of our revenue growth was driven by contributions from acquisitions since last year.

What's not solely reflected in our second quarter results are the great strides we're making with our American Anesthesiology division as we continue to build our national group practice in that important specialty.

By now I'm sure that you're aware of the acquisitions of Anesthesia Medical Alliance of

East Tennessee and Loudoun Anesthesia Associates. Anesthesia Alliance of East Tennessee, the first Tennessee-based practice to join American Anesthesiology, is a 45-position group that practices the (inaudible) of an anesthesia carotene model that includes 158 nurse anesthetists working at the five hospitals, eight ambulatory surgery centers and three hospital-based pain management centers located primarily in the Knoxville, Tennessee metropolitan area.

The flagship facilities are Parkwest Medical Center and the Fort Sanders Regional Medical Center with whom the group has had long standing relationships. The practice provides anesthesia services across a wide spectrum of sub-specialty areas including cardiovascular, obstetrics, newer anesthesia, regional anesthesia and pain management.

Loudoun Anesthesia consists of 12 anesthesiologists and 17 anesthetists. This group founded in 1994 practices within the Inova Health Systems at Loudoun Hospitals. As many of you may recall, our first anesthesia acquisition in Virginia practices as part of the Inova Health System's Fairfax Hospital.

We also completed three additional anesthesiology group practice acquisitions during the 2012 second quarter. We acquired Burlington Anesthesia in Burlington, North Carolina, which I mentioned on our last earnings call, followed by the acquisition of Brazos Anesthesia Associates in Bryan, Texas.

The Brazos practice consists of 16 anesthesiologists who practice is part of an anesthesia fair team model that includes 29 anesthetists, as well as three pain care nurses. Serving the Brazos Valley community for 25 years. Brazos' company provides anesthesia services and three hospitals, as well as eight other office space locations. The pediatric division of Mednax is also an established provider of neonatal services in this community.

Florida Atlantic Anesthesia in Fort Lauderdale, Florida joins us near the end of the second quarter. The practice consists of 24 anesthesiologists and 5 full-time anesthetists and they provide anesthesia services at Holy Cross Hospital and Holy Cross HealthPlex in Fort Lauderdale. Founded in 1998, this group is one of the leading anesthesiology practices in the area and the second Florida-based practice to join American Anesthesiology.

The pediatrics division is also an established partner and provider of NICU services at Holy Cross Hospital, thereby, providing a continuum of care to our patients at our hospital partners inaudible) community.

East of these groups, under talented positions, joined American Anesthesiology because they believe the right choice in today's changing healthcare environment was to join a national medical group whose interest are 100% aligned with theirs. We're a quality established group that has developed relationships with their hospital and their practice in attractive metropolitan areas. We're fostering a collaborative environment in which the best clinical and administrator practices are shared across all the American Anesthesiology groups.

In the current healthcare environment, we have consistently talked about the heightened interest among groups to join us. As these recent acquisitions demonstrate, we are managing an acquisitions pipeline that is as full and robust as it has ever been with continued interest among a variety of groups of different sizes at various stages in the pipeline.

We believe the reason for this is the unique value proposition that we offer to prospective position practices and the proven success of our model. To these prospective practices we are a group of physicians and peers providing a clinical model that allows physicians to do what they do best, take great care of their patients.

We remain confident in our ability to deliver continued growth by attracting physician group practices to our national medical group model and we are well on our way towards our 2012 goals of investing approximately $300 million to complete practice acquisitions across all Mednax position specialties. I also want to briefly address some of the resent headlines in the healthcare environment since our last earnings call. In early May, shortly after our first quarter earnings call, CMS announced that eligibility for the Medicaid primary care bonus payments under the Affordable Care Act would include all American Board of Medical Specialties recognized sub-specialty of pediatrics.

This is includes our neonatologists, our pediatric hospitals, our pediatric intensives and our pediatric cardiology positions. At (inaudible) in Section 1202 of the Affordable Care Act requires payment for Medicaid services of at least the Medicare payment rates in affect for the years 2013 and 2014 for primary care services delivered by a physician with a designation of pediatric medicines.

The proposed rule would bring the lower Medicaid primary care service fees in line with those paid by Medicare. The increase in payment for Medicare is entirely by the federal government with no matching payments required of (inaudible) that is scheduled to be implemented on January 1, 2013.

We're also at a time of the year when we have good visibility into government reimbursements. In fact, while there was still some uncertainty during last quarter's conference call, because states face a challenging state budget cycle and several state budgets hadn't been finalized, I'm pleased to report favorable outcomes in several of our key states as they set physician reimbursement rates for the fiscal 2013 state Medicaid budgets.

In summary of our top five states, we expect no cuts to Medicaid physician reimbursements for the 2013 fiscal year. State after state sought to maintain their physician network to preserve access to care for Medicaid enrollees. These states understand that the best way to achieve this is by protecting reimbursement for physicians. Needless to say, we're pleased with that result.

At this time, I'd like to turn the call over to our CFO, Vivian Lopez-Blanco, for a review of our second quarter financial results before we open up the call to take some of your questions.

Vivian Lopez-Blanco

Thanks, Roger. Good morning and thanks for joining our call. As Roger mentioned, we are very pleased with our results for the second quarter and first half of 2012 and we believe they reflect a long-term stability and growth respects associated with our models.

Net patient service revenue for the three months ended June 30, 2012 increased by 14.3% to $449.5 million from $393.4 million for the comparable prior year period. Our revenue growth attributable to the contribution from recently acquired practices was 10.4% while same-unit revenue grew by 3.9% for the 2012 second quarter when compared to the prior period.

Of this 3.9% same-unit, net reimbursement-related factors grew by 2.4% while revenue attributable to volume grew by 1.5%. Our same-unit revenue growth from net reimbursement-related factors was principally due to continued modest improvements in reimbursements received from third party commercial payers as a result of the company's ongoing contract renewal processes and an increase in the administrative fees received from our hospital partners due to the expansion of our services as result of internal growth initiatives, partially offset by a shift impairment to government payers from commercial payers year-over-year.

The percentage of services reimbursed under government programs increased by approximately 130 basis points during the 2012 second quarter compared to the prior year second quarter. Sequentially, however, our same-unit pair mix has remained relatively stable since the third quarter of 2011. Same-unit growth attributable to patient volume includes growth in our hospital-based neonatal and anesthesia practices, as well as other pediatric physician services, primarily newborn nursery services partially offset by slight declines in our office space, maternal fetal and pediatric cardiology practices.

For the 2012 second quarter, same-unit neonatal intensive care patient days increased by 1.4% when compared to the prior year period. Our profit-after-practice expense for the 2012 second quarter was $155.6 million, up 9.7% from $141.9 million for the prior period.

Profit-after-practice expense margin declined by 144 basis points, which can be attributed to increase in practice expenses primarily due to practice salary increases and increase in incentive compensation based on practice operational results, along with a variability in margins, due to the mix of practices acquired since April of 2011.

We generated operating income of $99.7 million for the 2012 second quarter, an increase of 7.1% from $93.1 million for the prior year period. As a percentage of revenue, G&A expenses decreased to 10.7% for 2012 second quarter from 10.9% for the 2011 period. Depreciation and amortization expense for the 2012 second quarter increased to 1.7% of revenue from 1.5% for the prior year period primarily due to amortization of intangible assets related to acquisitions.

Net income for the 2012 second quarter was $60.5 million, up 8.2% from $55.8 million for the 2011 period. We reported diluted earnings per share of $1.22 based on a weighted average 49.5 million shares outstanding, which compares with diluted earnings per share of $1.15 based on a weighted average 48.7 million shares outstanding for the 2011 second quarter.

Revenue for the six months ended June 30, 2012 was $872.1 million, an increase of $96.4 million from the prior six months revenue of $775.7 million. Of this $96.4 million increase, over 73% or approximately $71 million of the revenue growth came from acquisitions. While the remainder is from same-unit growth which increased by more than $25 million for the first half of 2012.

Same-unit revenue for the first half of 2012 grew by 3.3% with approximately half of that coming from same-unit volume, which was up 1.7% with volume growth in each of our physician specialties and sub-specialties, including hospital-based anesthesia and neonatal, other pediatric physician services, primarily newborn nursery services, as well as office space, maternal fetal, pediatric cardiology services.

The other half came from same-unit revenue growth from reimbursement-related factors, which was up 1.6% net. Through the first six months of 2012 we continued to see modest improvements in reimbursement from third-party commercial payers. Operating income grew of $179.1 million for the first half of 2012, up 6.1% from $168.8 million for the first six months of 2011.

For the first half of 2012, net income grew by 7.4% to $108.9 million, up from $101.4 million for the same period last year. We earned $2.20 based on a weighted average 49.5 million shares outstanding for the first half of 2012, up from $2.09 for the first half of 2011 based on 48.5 million shares outstanding.

Looking at our balance sheet we had cash and cash equivalents of $12.1 million at June 30, 2012. Accounts receivable at June 30, 2012 were $240.9 million, an increase of approximately $10 million as compared to December 31, 2011. (inaudible) sales outstanding improved by over two days for the 2012 second quarter from the 2012 first quarter as we show improvements at our existing units as well as continue to integrate our recent acquisitions.

We had no outstanding balance on our $500 million revolving credit facility at June 30, 2012. During the June 2012 second quarter we generated strong cash flow from operations of $117.1 million. This is an improvement from the prior years when we generated approximately $95 million from operations.

This increase in cash flow from operations for the three-month ended June 30, 2012 is primarily due to improved operating results and an increase in cash flow related to changes to our accounts payable and accrued expenses. We invested $41.3 million during the 2012 second quarter to fund three anesthesia group practice acquisitions and to make contingent purchase price payments for previously complete acquisitions.

Moving on to our outlook for the 2012 third quarter, as we announced in this morning's press release, we expect that our earnings per share for the three-month ending September 30, 2012 will be in a range of $1.25 to $1.30. This range includes estimated contributions from practices acquired since the end of the 2012 second quarter. The range for our 2012 third quarter outlook is determined by anticipated same-unit revenue growth for the period with we estimate to be 1% higher to 3% year-over-year on a same-unit basis. The same-unit growth rates assumes combined volumes across all of our physician specialties.

In addition, this range anticipates variability in the mix of our services reimbursed under commercial and government payer programs, as well as improvement from commercial payer contracts. Lastly, our third quarter forecast anticipates that same-unit growth will be approximately one half volume and one half net reimbursement growth.

Now I will turn the call back over to Roger.

Dr. Roger Medel

Good job. Thanks, Vivian. With that lets open up the call for your questions. Tony?

Question-and-Answer Session

Operator

Thank you very much. (Operator instructions) Our first questions will come from Ryan Daniels with William Blair. Please go ahead.

Ryan Daniels - William Blair & Company

Yeah, good morning, guys. Thanks for taking the question and congrats on the solid quarter. I wanted to talk a little bit about the pricing. It looked very strong in the period. Especially given the negative mixed shift you saw. So I'm curious if you can discuss what portion of that came from pure commercial price increases versus the administrative fees you're doing, I should say receiving giving the services you're providing to some of your host hospitals?

Vivian Lopez-Blanco

Yeah, Ryan, this is Vivian. Good morning and, well, typically, as you know, we don't break that out specifically, but I do want to give you some direction on that. So, we have been talking that some of that administrative service fees is related to some of the newer programs that we started. Some of the OB/GYN hospital list programs, but certainly the other piece is the commercial pricing, which, as I mentioned to a lot of you guys in the past, that those kind of vary from quarter to quarter depending on when the, no only when we're negotiating new contracts, but also the escalators kick in. So with the combination of all that.

Ryan Daniels - William Blair & Company

Is there a lot of room to still grow those services in your hospital base or have you ruled that out pretty broadly at this point.

Vivian Lopez-Blanco

No, I think, as I think Roger's mentioned in the past, as we're seeing some of our hospital partners wanting to engage in these other services with us. So I do think there's still opportunity for growth there.

Ryan Daniels - William Blair & Company

Okay. Great. And maybe one bigger picture, one for Roger. There's been clearly some noise, a bit of a hot-button issue regarding NICU utilization for mothers who has pre-39 week elective C-sections and I'm curious if you have any data you can share on that? How big of a piece of your business that is given new focus more on level three NICUs and maybe more broadly. Any thoughts on how this could impact you or has impacted you? Thanks.

Dr. Roger Medel

Hey, Ryan. Thanks. Good morning. We take a look at that and, obviously, we spent a lot of time after that report came out, going back and reviewing where we stood. We're not able to find anything that makes us feel any different than what we have said in the past.

We believe that babies should be born at 39 weeks. We have our own maternal field of medical specialists who do a lot of work and spend a lot of time trying to preserve these babies in utero until they're due and so we're 100% behind that.

Unfortunately, there are some small cases across the country where we do see that that happened, but it has a minimal insignificant impact on our business. We looked back. I went back and, first of all, the article that was mentioned in the publication was from 2008, so it's a four-year-old article. It mentioned one hospital, mentioned a couple of hospitals, one of which we happen to be in, ACA hospital. We went back and looked at the C-section rates from that hospital and, in fact, the rates are up in 2012. They were down just a little bit in 2010, but they're up prior to the 2008 numbers higher.

So, again, it isn't just keeping us up at night. We believe it should be done that way, but it's an insignificant number as far as we can tell and these are initiatives that have been in place for a long time. This isn't anything new. If you go back and look at the March of Dimes initiative, back in the 1960s they started to put out their first program. They repeated in the 70s and in the 90s. So this is something that's been going on for a long time.

Ryan Daniels - William Blair & Company

Okay. Great. Thanks again for all the color.

Operator

Thank you. Our next question in queue will come from the line of Kevin Ellich with Piper Jaffray. Please go ahead.

Kevin Ellich - Piper Jaffray Companies

Good morning. Thanks for taking the questions. Just wanted to focus on the Anesthesia acquisitions, obviously we’ve seen some really good activity out of you guys. Wondering, Roger, if you could provide any color on these deals, with the deal analysis yesterday since it was larger. Is it safe to assume you paid a higher multiple for that? Then, could you also tell us how much you had to pull on the line of credit to pay for these deals?

Dr. Roger Medel

Yeah. Hey, Kevin. We’re not paying higher multiples. We’re sticking to our game plan. We have said from the beginning that we have a game plan. There is some competition, and I think it’s a fair question to ask, but we’re not buckling to that. We have our plan in place, and that’s what we’re doing, so no.

As far as our line of credit, we did borrow a bunch of money to pay it off. We’re not going to tell you how much, but you’re smart. You’ll be able to figure that out pretty quickly. We think we have a lot of cash to pay for these practices. We think we have access to cash. We’re not worried about the access to the rest of the dollars to be able to pay for these practices.

One of the things that we always talk about is the practices, not only come with a lot of earnings, but they also come with a lot of cash flow. So, every time we buy one of these practices, we’re also including the cash flow numbers. So, I think we’ve got plenty of dough available to pay for this.

Kevin Ellich - Piper Jaffray Companies

Sounds good. Okay. Then, the second question I had was, going back to your comments on the Medicare rule that came out in early May. Could you give us, what’s the average rate differential in the pediatrics division between Medicare and Medicaid. I know years ago, it’s always been 30%, but I believe Texas bumped up their rate in 2007, and just wondering what type of impact that had.

Vivian Lopez-Blanco

Kevin, this is Vivian. The 30% average is really the national average. I think, as we’ve talked about before with pediatrics, that will be south of that. We’re not going to give any specifics into any one of our states. Obviously, that will impact our overall average, which I’ve said to many of you guys, will be south of that. But other than that, we don’t want to get into the specifics.

Kevin Ellich - Piper Jaffray Companies

Okay. Do you have any color information on the timing of when we’ll see the final rule come out for Medicare?

Vivian Lopez-Blanco

Yeah. What we hear from our folks obviously is that sometime this fall, because as Roger said in his prepared comments that it’s supposed to go effective in January of 2013. So, all of our folks are telling us that it should be sometime this fall. We don’t have any more specifics than that. We tried to get something more specific, but frankly, no one is willing to comment on that. So, we do think it’ll be this fall. We have nothing to think otherwise.

Kevin Ellich - Piper Jaffray Companies

Got you. Thanks, Vivian. I’ll hop back in queue.

Dr. Roger Medel

Thanks

Operator

Thank you. Our next question in queue will come from Kevin Fischbeck with Bank of America. Please go ahead.

Kevin Fischbeck – Bank of America Merrill Lynch

Okay, great. Thanks. The commentary here about the deal pipeline being robust, how do we think about that setting up for 2013? Is there any initial view into that? You provided guidance for the first time on the anesthesiology deal this year. Given the way the pipeline is, do you think that 200 of anesthesiology is a decent way to think about it, or any thoughts there?

Dr. Roger Medel

Hey, Kevin. Nice headline this morning, by the way. That was really…

Kevin Fischbeck – Bank of America Merrill Lynch

Well, thank you. We try.

Dr. Roger Medel

That was really clever. (inaudible). We are going to beat our 200 million number for this year, I believe. It’s like you’re not going to have people here having heart attacks (inaudible). But I think it’s too early to give you any kind of guidance for ’13. Clearly, there’s a lot of interest. There are a lot of groups out there that are talking to us. It doesn’t mean we’ll convert all of those deals. But I think it’s a very exciting time. I think there’s just a lot of interest. As we get closer to the end of the year, we’ll be able to maybe give you a little more insight what we’re thinking for ’13.

Kevin Fischbeck – Bank of America Merrill Lynch

Okay. Then, as far as, you mentioned the Medicaid rate boost, and I know that some people are talking about it more in the terms of kind of a one-time item, if you will, in that it’s in place for 2013 and 2014, and then expires. How do you guys think about that rate boost, and how that will be treated kind of on a go-forward basis?

Dr. Roger Medel

Well, obviously, that’s what the law says. The question becomes are they going to want to take that away at the end of 2014. Obviously, I don’t know. We think it’s difficult, because once, as you see with the [FDR] and everything else, once you put something like that in place, people get used to it and if you take it away, then our experience has been that people drop out of the Medicaid program. So, we don’t know, but we think that there is some possibility that that will become longer term.

Kevin Fischbeck – Bank of America Merrill Lynch

If I could just stick one last one in. It’s kind of the makeshift going on in the quarter, how do we think about that between the two different business lines that you have? Is there a big difference between how a makeshift is trended there? Is one driving it versus the other?

Vivian Lopez-Blanco

Good morning, Kevin. It’s Vivian. Yeah. So, really as you guys know, in our anesthesia practices so far, there’s really just not a lot of government payers period. Obviously, as we kind of extend into that, I’m sure that won’t be the case. But basically, for the most part, when we talk about the government mixes, it’s primarily related to the pediatrics units.

So, as I said, it’s been relatively stable since the 2011 third quarter, and we’ll see what happens with the 2012 third quarter. We do have some variability built into our guidance there because it hasn’t performed within the historical variability. It’s just kind of stayed stable since the 2011 third quarter, so we’ll see.

Kevin Fischbeck – Bank of America Merrill Lynch

But is a way to think about it then, is that if anesthesiology is relatively low government, and I guess relatively more stable that if we looked at it just in NICU that we would see a larger year-over-year change in government services there?

Vivian Lopez-Blanco

You’re saying because of the expansion into anesthesia?

Kevin Fischbeck – Bank of America Merrill Lynch

Well, just that it sounds like anesthesia has been the more stable of the two businesses. So, if that’s been relatively stable, but the entire number goes up 130, then does that mean that NICU is up more than 130?

Vivian Lopez-Blanco

No. It’s just basically the weighting of that. But like I said, we just don’t think that - we’ll see what happens with NICU. It’s not only NICU because as I’ve tried to tell you guys in the past, there’s maternal fetal services, there’s pediatric cardiology, there’s all of those services that either slightly go up or down. But pervasively, when we talk about our government mix, you’re talking about Medicaid.

Kevin Fischbeck – Bank of America Merrill Lynch

Okay. Great, thanks.

Operator

Thank you very much. Our next question in queue will come from John Ransom with Raymond James. Please go ahead.

John Ransom - Raymond James

Hi. We’ve seen a couple deals get done in anesthesia with financial buyers. Could you just compare and contrast what they’re willing to pay and what kind of competing vision they offer these anesthesiologists versus MD? Thanks.

Dr. Roger Medel

Hey, John. Well, as you know, it’s a different proposition. If you’re taking money from private equity firms, first of all you’re not getting all of the money up front, so you’re getting a percentage of your equity. Then, you’re taking the risk that there will be more deals that they’ll be able to do. That at some point, depending upon their window, whether it’s five or six years, you’re going to get flipped, so you don’t know where you’ll end up working. Or if there is a market availability, I suppose you could do the IPO.

There’s no built in research, education, government relations, you’ve got to build all of your human resources infrastructure. You have to build the whole thing with the hopes that you’ll be able to roll up some practices, and in the future end up working for somebody that you like and get a higher multiple for whatever remaining stock you have left. I don’t know what these private equity firms are willing to pay for these practices. I will tell you that, with one exception, we have gotten all of the deals that we wanted to get and the practices that we have not obtained have been practices for one reason or another we decided to pass on.

So, there are venture capitalists out there. They are focused on this specialty. We do expect that somebody is going to throw stupid money at some of these practices, but that’s not going to take us off the large [rack]. There are so many other practices out there that are desirable and that are interested in talking with us. It’s just a very large universe.

John Ransom - Raymond James

Okay. Thanks. We had heard something like there might be ten or 12 deals out there right now, or some crazy number. I don’t know if that’s right. The second question was…

Dr. Roger Medel

I’m sorry. Ten or 12 venture capital deals?

John Ransom - Raymond James

No, no. Ten or 12 active M&A, anesthesia practices in the marketplace being worked on.

Dr. Roger Medel

Yeah. Probably more than that, I would say.

John Ransom - Raymond James

Wow. Okay. The second question I had, just getting back to this 39-week issue. Could you give us some sense of - I think we’ve heard in the past that over a half year, NICU beds are level 3. But can you give us some sense of - I don’t know how you’d describe it - maybe high acuity versus low acuity revenue in your NICU, what the breakdown is between the two months?

Dr. Roger Medel

Well, I don’t know that I can do that. A child that’s admitted to the NICU is either going to be critical or not, and independently of what the diagnosis is. So, it’s the same revenue. A child that gets tagged as a critical child, whether it’s a repeat C-section or whether it’s a child who’s got an infection or a respiratory disease, or whatever the reimbursement is basically the same. So, I don’t know if I answered your question.

John Ransom - Raymond James

Well, I’m just trying to understand if there continues to be a little bit of pressure on the 39-week delivery. Is it just affecting a relatively small part of your business? Wouldn’t most of your revenue be generated by the high acuity, longer lengths of stay anyway, where the need is not driven by an early point of delivery? We were just trying to size the exposure to…

Dr. Roger Medel

Yeah. Well, it’s actually more complicated than that, John. First of all, every child that’s delivered by C-section is not going to end up in the NICU. Most kids, who are delivered by C-section, even at 37, 38 weeks, are not necessarily going to end up in the NICU. It’s only those that show some (inaudible), early signs of prematurity.

John Ransom - Raymond James

Okay.

Dr. Roger Medel

That maybe have a little respiratory problem or something like that, that are going to be admitted to the NICU. Second of all, the first thing that obstetricians elect to do when they are going to have an elective delivery is not to do a C-section. They try to deliver the mother vaginally. So, they’ll give her some drugs that will institute the contractions, etc. Most of the times, it’s only the failed inductions that will end up having a C-section. That’s not the first thing they would normally gravitate towards.

So again, the number just is not that significant. When we go back and look at our numbers, it’s a nonissue.

John Ransom - Raymond James

Well, you didn’t help me in my simplistic SEC [grab]. I was looking for a simple little number, but you guys always make things complicated. That’s fine.

Dr. Roger Medel

Well, I’ll call you later.

John Ransom - Raymond James

All right, thanks so much.

Vivian Lopez-Blanco

All right.

Operator

Thank you. Our next question in queue will come from the line of Gary Taylor with Citigroup. Please go ahead.

Gary Taylor – Citigroup

Hi, good morning. I have a few questions. I guess the first is the same store revenue, the 3.9% that beat your guidance for the quarter of one and a half to three and a half, so I guess my question is, what was better than you guys were looking for?

Vivian Lopez-Blanco

Well, we were happy with just the volume, and certainly the volume, as I mentioned, in the NICU was pretty good, Gary. So, that was certainly a piece of it. Just the net pricing was good as well. So, frankly, overall it was just good on the high-end, and obviously beating our expectations. But overall, it was just a really good quarter as it relates to same-unit, both on the volume as well as the net pricing side.

Obviously, the p mix, as somebody else had mentioned, we were able to absorb that with all the other factors in there, namely as I said earlier, the timing of some of the pricing that does vary from quarter to quarter. But we’re just happy overall with the volume in all of our specialties and certainly very happy with the NICU patient base the quarter.

Gary Taylor – Citigroup

Okay. Yeah. Good. You beat our numbers, so no complaints there. It’s kind of a technical question, maybe also a strategy question, but we were looking at the CRNA count from the 10-K of 536 Cranes, and I think your June deal added about five but the reported count jumped to about 580. So, I guess the question is was there just some technical issue in that count, or is there any active strategy by your practices to grow and expand productivity by hiring CRNAs?

Dr. Roger Medel

Hey, Gary. It’s probably a combination of both. We do always have openings, and we’re always hiring anesthetists and so it’s probably more a reflection of that. But I’d have to go back and recheck the numbers. But off the top of my head, it would seem that that’s the right answer.

Gary Taylor – Citigroup

Okay. That’s all I had. Thanks.

Dr. Roger Medel

Thanks, Gary.

Vivian Lopez-Blanco

Thanks, Gary.

Operator

Thank you very much. Our next question in queue, that would come from the line of Ralph Giacobbe with Credit Suisse. Please go ahead.

Ralph Giacobbe - Credit Suisse

Thanks. Good morning. Just wanted to go back to, sort of the top line certainly came in better, we didn’t necessarily see the sort of the margin pull-through. I guess I just want to think about top line sort of growing this quarter 14%, but EPS growing sort of 7%. Can you maybe just help us bridge that gap and when do you think you can ultimately sort of close that or narrow, so that your EPS sort of more or less can grow inline if not even better than the top line trend?

Vivian Lopez-Blanco

Well, we talked a lot about margins over the last six months or so, and as I said, there’s going to be some variability in it as we continue to expand in some of these service lines. Then, in any given quarter, there’s variability to it, depending on what the operating results of the practices are. Like, this quarter we had, as I mentioned in my comments, Ralph, we had the additional bonus related to the performance of these practices. So, we’ll see some of that going forward.

We will have leverage, obviously, on the G&A side as it relates to expanding our platforms, because these practices don’t come with G&A. So, for the most part, we do have some step function. Obviously, we have to continue to expand our infrastructure, but certainly it won’t be one for one. But I think there will be some variability in the margins there going forward. This quarter, like I said, we did have some bonus accruals because of the performance of the specific practices.

So, as I’ve talked to a lot of you guys, what I tell you is it’s best to look at that on an annual basis because in any given quarter, we will have variability based on some of these items, like bonus, etc.

Ralph Giacobbe - Credit Suisse

Okay. Then, going back to the admin fees, can you help quantify? I think in some of your filings, you’ve talked about admin fee representing, I think it was about 6% of total revenue.

Vivian Lopez-Blanco

Right.

Ralph Giacobbe - Credit Suisse

Is that significantly higher today? What exactly is driving that? Are you having more conversations? Is that sort of subsidy revenue that you’re asking hospitals for to make up for sort of margin differential that’s not there. Just help us understand exactly what that is and sort of the sustainability of that, and if we should expect that to be significantly higher kind of going forward as a percentage of total revenue.

Vivian Lopez-Blanco

We’ve looked at that in the estimate for this year. It’ll be slightly higher, but it won’t be significantly higher. Where they come from is what we’ve been talking about a little bit over the last couple of quarters, is that we have seen some expansion in the services that we provide to these hospital partners, namely these OB/GYN hospital programs, etc.

So, it’s not necessarily related to subsidies, because we’re in a NICU and are asking for that to be able to cover the profit, or with anesthesia. It’s more related to the expansion of these services. So, some of these hospital programs are definitely more subsidy intensive.

Ralph Giacobbe - Credit Suisse

(inaudible) Did that help pricing marginally in the quarter? When we look at the pricing number, was that part of the driver of the increase?

Vivian Lopez-Blanco

Yes. I think Ryan was asking me that question. Definitely, that is a component of it, just like it was a component in the first quarter. I’m not going to quantify specifically how much of it, it was, but it’s trending pretty much like it did in the first quarter as we kind of have expanded these service lines and these programs that some of them started in the latter part of last year.

Ralph Giacobbe - Credit Suisse

Okay. Then, just my last one if I could, just the midpoint of guidance for the organic top line, which sort of suggests a little bit of a deceleration in trend, just trying to get a sense whether you’re seeing anything that would give you pause? Or it’s just you all trying to be a little bit conservative in terms of the outlook, just given the volatility we’ve seen?

Vivian Lopez-Blanco

Well, there are a couple of things there. Number one is that, I don’t know for you guys, if you don’t remember, last year in the third quarter, we had a great quarter. We had same-unit coming in at 5%. So, some of it is related to that. There’s nothing that we’re currently seeing that would have basically had us concerned. But it is coming up against the (inaudible) it was a very good quarter last year. So, part of it is that.

Ralph Giacobbe - Credit Suisse

Okay, all right. That’s helpful. Thank you.

Operator

Thank you. Our next question in queue will come from the line of Brooks O’Neil with Dougherty & Company. Please go ahead.

Brooks O'Neil - Dougherty & Company

Hey, everyone. I have a couple questions, but congratulations on a terrific quarter. I’m curious. I was pretty impressed that you were able to go into Knoxville and grab what looks like a premier group. So, maybe you could just give us a little color on that and maybe you could give us - if I understand it correctly, that practice generates a considerable amount of revenue, probably reasonably profitable. If you could help us understand that, that’d be great as well.

Dr. Roger Medel

Hey, Brooks. It is a great practice. We are very fortunate to have been able to partner with them. They’re in a great location. They just have a great model. We think they utilize (inaudible), and they have great relationships with their hospital administrators. We were just very fortunate to have been able to partner with them. We like the state of Tennessee a lot. We have some existing prenatal and other practices there. We’re going to try and do more deals in Tennessee. We think that’s a great state for us.

Brooks O'Neil - Dougherty & Company

That’s great. The second question, it strikes me, if I understand it correctly and I’m thinking about it correctly, that the parody reimbursement increases that we expect will likely have a positive impact on your same-unit statistics. I’m curious if you think it will have any impact on your same-unit volume?

Dr. Roger Medel

I don’t know why it would impact the volume. Surely the pricing will be affected, but I don’t know why it would impact the volume. There are no children that are going uncared for…

Brooks O'Neil - Dougherty & Company

Sure.

Dr. Roger Medel

… at this point in time. So, I don’t think we expect that, no.

Brooks O'Neil - Dougherty & Company

No impact, okay. Good. Then, just the last one, I’m curious, historically I think you’ve said on average about 12% of babies born in the hospitals you serve show up in the NICU. Have you seen any change in that statistic in the recent past or this quarter?

Dr. Roger Medel

No. The numbers are pretty much the same. I think they were up slightly a couple of basis points for this quarter over last quarter, but basically within historical limits.

Brooks O'Neil - Dougherty & Company

Great. Well, keep up the good work.

Dr. Roger Medel

Thanks, Brooks.

Operator

Thank you. Our next question in queue will come from Kevin Campbell with Avondale Partners. Please go ahead.

Kevin Campbell - Avondale Partners

Good morning. Thanks for taking my questions, just two quick ones. I was hoping perhaps you could give us a pro forma revenue number for the second quarter if you included all the acquisitions for the follow-up period, including the two that you’ve announced in the last two days. Is that something you can maybe give to us to help us with modeling going forward?

Vivian Lopez-Blanco

Yeah. Well, we definitely would have included the acquisitions that we’ve done. Yeah, absolutely.

Kevin Campbell - Avondale Partners

But I guess what I’m asking for is can you give us a pro forma revenue number that has a full quarterly run rate including the acquisitions you’ve done to date.

Vivian Lopez-Blanco

No.

Kevin Campbell - Avondale Partners

Okay. Then, any thoughts on the physician fee schedule outside of the Medicaid parody rule, but just the other fee schedule that came out, and any impact on pricing for anesthesia in particular?

Vivian Lopez-Blanco

Yeah, we’re still looking at that. As you know, it’s basically still in the comment period. So, we’re looking at that to see what the impact would be. We’ve got to look at the conversion factors and some of the geographic factors that typically don’t come out right away. So, we’ll be looking at that.

Kevin Campbell - Avondale Partners

Any initial thoughts, is it pretty much neutral or not a material change sort of one way or another? Or is it still too early to say?

Vivian Lopez-Blanco

Yeah, it’s still a little too early for us to say. I don’t want to comment on it until our managed care folks are taking a look at that.

Dr. Roger Medel

I’d just say overall that just the overall numbers do say that there’ll be a slight decrease for emergency room and anesthesia and an increase for (inaudible) in general what the early read on that.

Kevin Campbell - Avondale Partners

Okay, thank you very much.

Dr. Roger Medel

Yep.

Operator

Thank you. We have time for one final question and that will come from Rob Mains with Stifel Nicolaus. Please go ahead.

Robert Mains - Stifel Nicolaus & Company, Inc.

Thanks. Glad I made it in under the wire. Vivian, a different type pricing question, are you seeing a difference in your pricing leverage that you’ve got on the NICU side versus anesthesiology?

Vivian Lopez-Blanco

Well, I don’t want to use that word because our GC is not here at the moment, but he wouldn’t be happy with that. But no, we have been able to really have some pretty good rate increases in both, actually in all of our specialties, because, as I was saying before, there’s also maternal fetal, pediatric cardiology, and all of that. So, we’ve been able to continue… I think it has to do with, obviously, as an organization we have professional managed care folks in each one of our operating units. So, we have anesthesia folks as well as pediatric folks.

Robert Mains - Stifel Nicolaus & Company, Inc.

So, use it as maybe a better noun, you’re having equal type of success across the business lines?

Vivian Lopez-Blanco

Yeah. Yeah, I would say, in both the business lines year-to-date, we put together a plan every year of what we believe we’re going to be able to as contracts come up for negotiations. We’re hitting our plan and slightly exceeding it for these specialties. So, we’re very happy with the results so far this year.

Robert Mains - Stifel Nicolaus & Company, Inc.

Okay. Then, a question on just the top line, [X acquisitions], kind of thinking about revenue generation, I always think that third quarter seasonally is kind of the best for the NICU business. Are you far enough down the road now in anesthesiology that you wouldn’t suggest that there’s any particular seasonal impact on your top line?

Vivian Lopez-Blanco

Yeah, I mean I haven’t really noticed that because, as you know, there’s been variability with that. What I can say about the anesthesia volumes is that they have been very good. I know that some of the hospitals have reported some sluggish volumes as Dave and I have been on the road. But honestly, we haven’t seen that in our practices. The volume for anesthesia is very good, and I haven’t really noticed that seasonality, no.

Robert Mains - Stifel Nicolaus & Company, Inc.

Okay. Then, last question on the Medicaid parody. Obviously, your governor has said that he’s not interested in a Medicaid expansion in 2014. Are you getting any buzz in your states of any resistance to the Medicaid parody, or congressionally to the outlays?

Vivian Lopez-Blanco

I have not heard that. I don’t know, Roger, if you have?

Dr. Roger Medel

No. We keep pretty close tabs on that.

Vivian Lopez-Blanco

Yeah.

Dr. Roger Medel

We’ve got lobbyists and people at the state level, and we have heard nothing.

Robert Mains - Stifel Nicolaus & Company, Inc.

Okay. All right, great. That’s all I have. Thank you very much.

Operator

Thank you. I’ll turn it back to the hosts for any closing comments.

Dr. Roger Medel

All right. Thanks, Tony. I appreciate everyone listening this morning. We’ll look forward to talking with you again (inaudible).

Vivian Lopez-Blanco

Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude your conference call for today. We do thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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