AmSurg Corp. Q2 2008 Earnings Call Transcript.

AmSurg Corp. (AMSG)

Q2 2008 Earnings Call

July 22, 2008 5:00 pm ET

Executives

Christopher Holden - President and Chief Executive Officer

Claire Gulmi - Executive Vice President, Chief Financial Officer

Analysts

Ryan Daniels - William Blair & Company

Kevin Ellich - RBC Capital Markets

Adam Feinstein - Lehman Brothers

Darren Lehrich - Deutsche Bank

Erik Chiprich - BMO Capital Markets

Witt Mayo - Robert W. Baird

Shelley Gnall - Goldman Sachs

Bill Bonello - Wachovia

Robert Hawkins, - Stifel Nicolaus & Company

Jeffrey Englander - Standard & Poor's

Mark Arnold - Piper Jaffray

Mike Batesky - Nobel Research

David Bachman - Longbow Research

Dawn Brock - JP Morgan

Presentation

Operator

Welcome to the AmSurg Corporation conference call. (Operator Instructions) At this time for openings remarks and introduction, I would like to turn the conference over to the President and Chief Executive Officer, Chris Holden.

Christopher Holden

Joining me today is Claire Gulmi, Executive Vice President and Chief Financial Officer. I would also like to welcome everyone who will be joining us today on the webcast and it’s my responsibility at this point to read the disclaimer.

Certain statements in the conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect management expectations and are based upon currently available information.

These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of AmSurg to differ materially from those that are expressed in/or implied by the forward-looking statements.

These factors are discussed in more detail in the company’s reports that are filed with the Securities and Exchange Commission, including without limitation. AmSurg’s annual report on Form 10-K for the year ended December 2007 and quarterly report on Form 10-Q for the quarter ended March 31, 2008. Copies of these filings are available from AmSurg on request.

With that let me begin, and say that we are pleased that we produced solid growth for the second quarter of 2008 and met our expectations for EPS for the quarter. It’s important to note today we are going to talk about that we moved three centers into discontinued operations and I we’ll spent a few moments on the call today to describe the effect of that change and after my opening comments I’ll turn it over to Claire for the financials summary for the quarter ending.

The earnings overview for the quarter, we had net earnings from continuing operations increased 18% over prior year to $12.6 million. EPS increased to $0.39, 15% over prior year. Our performance is consistent with guidance for 2008 and operating margins remained inline with ’07 performance at 18.9%.

Regarding same-store performance, same-store revenue growth for the quarter was 3% including the negative impact of 1% for the revised Medicare payment system for ASCs. We’ve gotten a lot of questions about signs of economic downturn in our business and our performance for the first half of the year does remained consistent with guidance.

We do recognize that obvious terms in the economy today and we are confidently evaluating our global and regional trends and volume mix, bad debt, cash collections and similar metrics to try and triangulate weather the economy is impacting our performance and all we can suggest today is that our performance remains within guidance and any information we’d share today would be anecdotal at this point and there are no trends that are on the macro level to share at this point.

On the development front our highlights are as follows, their significant activity in the chain discussion, although this remains a very choppy process those valuations are still on the high-end. The pipeline for single center acquisitions continues to produce favorable growth opportunities.

Year-to-date we have completed and/or signed letter on intent on twelve transactions including in that year-to-date total, we have completed four acquisitions. We had five transactions that are in the LOI stage or signed LOI or similar development transactions, which we expect to bring online in the year 2008. Those nine that I’ve mentioned of the 12 represents 75% of our current year guidance at the lower end.

The remaining three transactions we expect to bring on mind in 2009 and just as a point of information, the mix of new centers is AGI, one I and three multi-specialty and we reiterate our guidance of 12 to 15 similar additions for the year. There has really been not worth change in icing multiples on the single center acquisitions, and little more color on the second quarter. In the second alone we added two centers one GI and one I, and at quarters end we had three centers, three GI centers under development.

We have one center, one GI center pending CON and we have five LOI’s, one multi-specialty and development, one multi-specialty and acquisitions, excuse me two multi-acquisitions and two in GI. We have one center held for sales and we expect that transaction to fund in the third quarter of ’08, and we divested two centers both GI. So our total lending at the end of the quarter, 176 centers, 123 GI, 36I and 17 multi.

I missed a few brief comments on some initiatives and some color on what we’ve been working on. I’ve spent a lot of time in the first and second throughout in the field, visiting centers and meeting with physicians, was in nine states in the second quarter, and I got to meet with quite a few physicians and several specialties and just briefly the conversations tend to focus on, concerns about the economy within the physicians, particularly in the economics of the healthcare economy going forward and where the next administrations may or may not take us and that is translated for the physicians and aggressively looking at ways to improve their efficiency and diversify their revenue operating opportunities and the identification of new junk lines of businesses within groups as we as we see a lot of groups forming super groups and coming together.

So it’s a lot of activity in the physician community to adjust to the new economic world order. We are working in through that process to find ways to facilitate bringing those physician leaders together from different communities to talk about what they’re doing and share best practices and use our strengths and rather as to help the system in that process and how that, lot of productive conversation in all of those states and it’s not uncommon for the meetings to around two hours to three hours with groups of five to 10 physicians and we want to take that process and elevated it to the next level over the third and fourth quarter.

Another element of that discussion that has bubbled up is just the importance of the IT, backbone and infrastructure support going forward to help the centers and to connect more favorably with physicians. We’ve really escalated our IT initiative, with the help of our new CIO, who started the same time I did, in October and I break that down into three components.

We are working on our core system deployment in part to the NextGen roll out, which will help us streamline the number of total systems that we rolled out under the 176 centers and that deposit has been accelerated and is moving in the right direction. We’ve done a similar process with an inventory controlled software that is also rolling out on schedule. The other two components of the IT strategy is one of our internal web strategy and photo strategy.

We had migrated to the Microsoft platform and implemented the SharePoint technology and we are getting some really immediate benefit of that technology that had improved communication and help us to catalogue and study our own business intelligence.

We are also using that technology to build portals for our key constituents, including the addition of our 1,500 physician partners and utilizers to build in that sense a virtual center portal that will help at benchmarking, best practices and a truly a real time dialogue between the physicians, our center administrators and our corporate resources.

Apart from that, we’re also engaged aggressively on our external web strategy, we’ve engaged on ASP vendor who has an expertise in healthcare site development to help us along in that process and we’ve developed our own content and navigation templates for GI at this point. So, we feel like that process is moving according to plan, both of those have a gestation period of the internal and external period will something we would be working aggressively on for the next year to two years. It’s an evolution in a note itself, but we felt a lot of immediate impact from that just in our own internal communication.

We also recover back in first part of around January of this year, we developed what we call the R&D department which is really our new clinical business development department and since that time they had identified over 40 new devices and procedures that we are tracking in their evolutionary process and that has sparked us to meet with several of those organizations and introduce ourselves and share ideas about how to work together and how to leverage our distribution system in the event of those products have a feature going forward.

Last initiative, I would touch on and there is several here, but I would touch on the on the quarter. We are nearing completion of the first study of our aggregated GI data and look for our publication in early 2009 on that and we are excited about that information and lastly I just comment, in the last several calls I want go overall elements of it, but we made a number of organizational changes and performance management process improvements here.

I think I fell good about the margin performance in this second quarter and hope that’s a sign that those changes are yielding some success here going forward in particularly the Medicare headwinds that we had to overcome in that period of time.

Two updates on some miscellaneous issues on our Naples litigation, we did file that in federal court in Tennessee and we have initiative discovery in the process. That process will be ongoing for sometime. In New Jersey and the Codey Legislation we are awaiting a likely reconciliation of the assembly and similar versions of legislation which won’t happen until the session begins in September.

In last comment we did announced that Royce Harrell, our Senior Vice President of corporate services announces intend to retire in 2009 and Royce has been with the organization for almost 16 years and he is a really special person and meant a great deals for this organization and we wish him the best as he plans to move onto that next chapter of his life and I wanted to recognize him here today in the call for all of his great work and service AmSurg, and with that I am going to turn the conference over to Claire to updates you on the financial performance for the quarter.

Claire Gulmi

As Chris said we had a good second quarter, we’ve experienced strength in a revenue growth of 3% and added two new centers to our portfolio. We have revenue growth of 18% and EBITDA after minority interest increased 21% to $28.7 million and our earnings per share from continuing operations increased to 15% to $0.39 of share.

During the quarter, we classified GI center in New Mexico was held for sale. This is a small one physician center and we have a letter of intent for the purchase of that center from the local hospital and we’re projecting that sale will close this month.

In addition we had two non-operational centers that we have classified as discontinued operations. One was the center in Florida, which Chris mentioned and which we discussed on our last conference call and the second center in Minnesota had generated no income in the last two years and we did really see a future opportunity in that location.

So, the combined basis we’ve recorded a net loss associated with these three centers in discontinued operations of $1.3 million and approximately half of that amount was due to tax evaluation allowance associated with the capital loss carry forward generated by these transactions. Because these centers were operating at a breakeven to a small loss, their disposition will have little, but no impact on us going forward.

Our tax rate for the quarter was 39.9% and it’s expected to average 39.8% for 2008 as we previously stated. We had strong operating cash flow for the quarter of $20.5 million; our capital expenditures totaled $21 million, which included $16 million for acquisitions, $1 million for developments and $4 million in maintenance CapEx. Our long-term debt decreased to a $198.6 million during the quarter and we have $115 million availability under our line of credit.

So, in closing we’re establishing earnings guidance today for the third quarter of $0.38 to $0.39 per share and reaffirming full-year guidance of a $1.53 to $1.55 and at this time operator, I’ll open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Ryan Daniels - William Blair.

Ryan Daniels - William Blair & Company

Chris you went through the new center outlook at the start of the call. I want to make sure I got everything right, I know you’ve done four acquisitions year-to-date, is it you have two multi-specialty acquisitions under LOI, two GI and then one multi-specialty that you anticipate opening for a total of five more at this point? Is that the nine that you’re coming up with, do I have that right?

The four done year-to-date and I think you said two multi-specialty under LOI which are both acquisitions. Two GI under LOI and one multi under development that’s going to open. Do you have that right?

Claire Gulmi

They do not open into 2009. The multi-development will not open this year.

Ryan Daniels – William Blair & Company

But there is one other de novo that’s going to open?

Christopher Holden

That’s correct.

Ryan Daniels – William Blair & Company

So you need three more back half of the year outside of that to get a little low end, is your comment.

Christopher Holden

Correct

Ryan Daniels – William Blair & Company

Can you talk a little bit more about the dispositions, I think this probably the first time we’ve seen the centers under operation go down in a few year’s and I’m just curious if you are kind of more actively looking at the portfolio and identifying those assets that maybe aren’t generating revenue and then a derivative question might be, what’s a typical processor. It sounds like those have been break-even for a while. Those assets that you may be given a year or two to develop, their business plans and grow and if not there comes a point where you looked at asbestos?

Christopher Holden

We always look at the portfolio and evaluate it. In this case it wasn’t a matter of an intensified process, it was more of just an opportunistic outcome on how it happened and the second part of your question is correct. I mean we like to give ourselves a chance to rehabilitate before over time it would go into the extreme of closing the center.

Ryan Daniels – William Blair & Company

I know you mentioned up front that you’ve kind of done some initial analysis on what the environment’s during in regards to your surgical volume and I don’t know if it’s too early to say, but is there anyway to share more data i.e., is GI a little less susceptible than orthopedic at some of the multi specialty or are you seeing some weakness in certain markets that you guys have been able to call it in the housing market or is there really just not an update or too early to tell if any, if that’s the case.

Christopher Holden

That is daily discussing. Now every time you see something that goes -- if you have an unfavorable variance on anything, you immediately dive in to see it’s the economy and we’ve done that on a few different things and it’s been -- you have a position retires or one takes an extended vacation that you weren’t panning on or one gets sick or it’s anecdotal all over the place.

We have not at this point identified anything that’s systemic that we could without presence age relate it to the economy and we talk on it everyday looking at a different way to come at and we just had it -- nothing has bubbled up as an obvious or an obvert trend that would tie back to rationalizing it to the economy.

Ironically that surprised me and I think that’s why we keep looking at it, we keep expecting and I think as on an every conference we’ve attended for eight weeks or nine weeks, that’s the only question we get and you see the impact of the economy and so it made us paranoid that we weren’t looking at it as far as we should and so we really beat up all of our metrics and we just really haven’t come to that conclusion on any of the trends at this point.

Ryan Daniels – William Blair & Company

I guess it’s a healthy paranoia to given everything that’s going on?

Christopher Holden

Well, I would tell you that operational we are trying to, it motivates us to continue to clear for efficiency and outline it as if it were happening, but we really haven’t seen it manifest itself in any sort of reports or trends that we can point to here today.

Operator

Your next question comes from Kevin Ellich - RBC Capital Markets.

Kevin Ellich - RBC Capital Markets

Chris could you just give us a year-end view on the competitive landscape and give us a good idea of what the acquisition pipeline looks like in terms of the multiples, but are you seeing more competition for the deals or has that remained pretty much the same?

Chris Holden

The competition, we’ve got run into some of the major players very often. Even though I feel we have run into one or two just recently, I’ve never heard of, small players that are trying to build a foundation that surprised me and the first time I’ve heard of that in nine months really and paid pretty high multiples.

We were not willing to go to the level to the one or two that we’re out there. That was probably in this quarter, the first time that I’ve seen that in the three quarter that I’ve been here, but overall we’ve still been very successful and a steady run rate of what we’ve been used to with the multiples that have been there historically. Really on the same side, that which the same-store, it is just still a delta between what we believe are fair valuations and what the sellers believe that are fair valuations.

Kevin Ellich - RBC Capital Markets

When you kind of call the high multiples coming from this small-end players are we talking high single digits like eight or nine times or…

Chris Holden

Yes.

Kevin Ellich - RBC Capital Markets

Then the change that they are looking for is around ten times?

Christopher Holden

It’s all over the board and it depends on how you interpret the story. On this effect you will stay on a strict trailing 12 that would be right.

Kevin Ellich - RBC Capital Markets

You talked a lot about the strategic initiatives you guys are working on and you gave us, the one that I want to go back to is the clinical development with the R&D department? Are there any new devices or procedures that you guys are pretty close to adopting that have a positive outlook on?

Christopher Holden

Nothing that’s eminent. The incubation period is longer on the devices because of them a lot of the homework that we do is through the FDA trial logs. They are out there to search those. A lot of the searches are around ophthalmology, gastroenterology and a lot around obesity, and there’s a lot of devices being developed as many of which are deployed through a GI process so, we’re watching those very closely.

Kevin Ellich - RBC Capital Markets

On the pricing or the reimbursement outlook, it looks like you’re ASP came down just a little bit probably due to Medicare; can you talk about the reimbursement environment coming from commercial; probably should we think about this average revenue per procedure as kind of a new run rate?

Claire Gulmi

Average revenue per procedure, most of it is being negatively impacted by Medicare. We are really not seeing any follow-on from commercial payers at all. We’ve been effectively looking at small estimate reports that show that we were able to offset some of the Medicare with some good commercial price increases.

There was a little bit of a mix change during the quarter, where some of our multi-specialty and art centers we’re doing some lower reimburse procedures and I think that’s probably what’s driving that more than anything else rather than any actual reduction in revenue per procedure or because of pricing.

Kevin Ellich - RBC Capital Markets

You meant that maybe that’s going to harbor some place in between Q1 and Q2?

Claire Gulmi

Right, it tends to be. It jumps around $3 to $5 per quarter, so I would think somewhere in those ranges.

Operator

Your next question comes from Adam Feinstein - Lehman Brothers.

Adam Feinstein - Lehman Brothers

Could you just give us the revenue mix for the quarter, by specialty?

Claire Gulmi

Revenue for the quarter 68% GI, 19% Ophthalmology and 13% multi.

Adam Feinstein - Lehman Brothers

It’s just that it’s hard to know what’s going on out there and you guys have been trying to go through the data, but just one thing I wanted to drop in and just give you a feedback; the month of May a lot of different types of healthcare companies talked about a very weaker month of May.

I was just curious whether you saw that and I know you don’t talk too much about month-to-month, but I was just curious if things were abnormally low in the month of May and I heard similar feedback from hospitals and surgery centers, and it was just curious if that was the case for you guys?

Claire Gulmi

No, we really did nothing. May and June looked about the same for us.

Adam Feinstein - Lehman Brothers

As you think about geographies as well I was just curious if there were any geographies that really stood out this quarter either very positive or at negative?

Christopher Holden

There is some anecdotal, Ohio and Michigan I think we did hear the most anecdotal information from their physicians and that would be it.

Adam Feinstein - Lehman Brothers

You were talking before about the competitive landscape and talked about multi still being somewhat high. I guess just a question just as you think about the business; for the right multiple would you guys buy a chain so if the right opportunity came out are you guys interested in buying a bigger group of assets?

Christopher Holden

Yes, we will and we’ve looked at that, we’ve added so many in the last six moths and I couldn’t begin to tell you how long the list is, but I think we developed a 20 point criteria list of things that we go through that just whether that makes sense or not and the shorter answer out of your question is yes we would, I just asked (Inaudible).

Adam Feinstein - Lehman Brothers

Just with the multi specialty centers I just wanted to get an update; it sounds like things are ramping up nice there, but just thoughts in terms of a how that side of the business is going?

Christopher Holden

I thinks its across our performances, pretty much across the Board, that the smaller population inside of our portfolio, so don’t have the same statistical validity; some of others do, we get your ups and down like as if we were a smaller company on that. I think in the long run, our pipeline is normally heavily weighted and the multi specialty are pleased with that and I don’t think the chain discussion is going to dictate a lot of that going forward.

Operator

Your next question comes from Darren Lehrich - Deutsche Bank.

Darren Lehrich – Deutsche Bank

You’ve talked a lot of about what you’re doing with the physician groups and I know you’ve got real close to your physician partners everywhere. I guess just one direct question for you and one just qualitative one; the direct question would be, do you envision yourself employing physicians or doing anything along those lines that would alter the relationship that you currently have with partnerships?

Christopher Holden

No, I don’t see us going in that direction and I do think that we may add a corporate resource here to facilitate with because there are so many of our centers that are aligned with single groups or one or two groups and a lot of those groups struggle with the process of recruiting new physicians into their groups which is a fundamental process issue and how you do it.

We’ve gotten a feedback and my discussions out in the field with the doctors and feedback from our operations teams here that having someone to help coordinate that with the base groups would be a big assets, so we may make that change here.

Darren Lehrich – Deutsche Bank

As far as that goes, we are definitely seeing more physician employment models by hospitals; I guess just can you comment on whether your group see that as a new or heightened obstacle to recruiting into their own groups?

Christopher Holden

They could have got more aggressive. The hospitals have on employing physicians in certain markets. I think the short answer is it is a slight increase in competition for that tool, but there is just a fundamental, a cultural issue there with physicians on wanting to -- whether to be employed or not to be employed and Don I think the observation that I’ve had is it tends on the age of the physician.

Right now where they come out, the younger ones I think may be inclined to go in that direction, but more I think the leading criteria where young physicians go is geographical and family related. In light with that is a strong group that knows how to recruit. We got a group in Baton Rouge that does a great job, they’d actually turned away people because they had such a good job and such a good job; same thing and some in Southern California, some in Florida; it just depends on the quality of the group and the quality of their process.

It’s far more than you wanted to know, but that’s what I end up talking to the doctors about for a couple hours every time.

Darren Lehrich – Deutsche Bank

Yes and these super groups, I mean can you just characterize for us how many you now have and where you think the opportunity is to get to over the next maybe year or two?

Christopher Holden

I can’t get you an exact count of how many, but I’m going to -- get me some rounded figures, roughly 10. Some are super markets to where the groups aren’t dead integrated, but we are -- Orlando is a good example; New Orleans is what I call super group, Baton Rouge; Marilyn is a 73 main group coming together. There is Tacoma, Nashville and there are some secondary markets where there is only one group or two groups in the community anyway and they generally are partners, so those in my mind qualify to some extent.

Darren Lehrich – Deutsche Bank

And generally, will all of those situations or most of those situations result in development of new centers or do you see it going the other way in terms of consolidation of some centers.

Christopher Holden

I think speaking out of that small population it’s generated more growth than consolidation.

Darren Lehrich – Deutsche Bank

Okay and I guess just clear -- a question about these non-operational centers. How many would you characterize as sort of inactive now?

Claire Gulmi

Many in the portfolio

Darren Lehrich – Deutsche Bank

Yes, I mean how many do you have that reported your numbers that are basically inactive like the Minnesota one that it sounds like.

Claire Gulmi

Zero.

Darren Lehrich – Deutsche Bank

Alright and then my last question here just is you said the revenue mix, can you just give us the procedure mix as well, that’s been helpful for our modeling.

Claire Gulmi

Sure, I think I’ll take it. Procedures GI is 80%, ophthalmology 13 and orthopedic 7.

Operator

We will take our next question from Erik Chiprich with BMO Capital Markets.

Erik Chiprich - BMO Capital Markets

I just want to get a little bit more clarity on the same store revenue growth for the quarter, the 3%. Was that all volumes or volumes were a little bit higher and you had the 1% offset from the Medicare changes in the quarter?

Claire Gulmi

Right, the volume continued to be higher and they will be all year because of the Medicare price reduction.

Erik Chiprich - BMO Capital Markets

Okay, so your volumes were closer to a 4% same store growth, is that the way to think about it?

Claire Gulmi

And even a little bit more than that this quarter, because we did have some mix change in some centers where we had volume increase, but at a lower revenue.

Erik Chiprich - BMO Capital Markets

Okay, that’s helpful and then also on the managed care side, I know you guys have done quite a few acquisitions over the last year. Are there many centers there that there’s opportunities to renegotiate those managed care contracts at a higher rate of those contracts that are up for renegotiation or any benefits on those lines going forward?

Christopher Holden

Probably, too early to give you an answer; that’s a question that we talk about reorganization efforts. In the first year we restructured how we go about that and that new team is compiling the database and using that information to answer the question that you just asked and so we just, we’ve got a little bit longer to get the database loaded and to get an accurate answer.

Erik Chiprich - BMO Capital Markets

Okay, well I think we can revisit that in the future and then finally could you just discuss a little bit, the bad debt levels right now, where that is as percent of revenue and has that stayed consistent since the first quarter?

Christopher Holden

Sure, yes I’m sure all of you remember. It popped up a little bit in the first quarter. It’s a 3.1% of revenue and we’re back down in our normal range of 2.8% in the second quarter, so we’ve had a few unusual items and clean-up in the first quarter, so we feel good that we’re maintaining kind of our historical bad debt rate.

Operator

And we’ll go next to [Witt Mayo] with Robert W. Baird.

Witt Mayo - Robert W. Baird

Just looking at the cash flow statement, it looks like you spent just over $15 million on that one GI, the one I center; where those larger than average centers relative to what you are now and that just seems to be a little bit high than what you’ve historically paid for those specific specialties, so if you could just kind of frame that up for us?

Claire Gulmi

Sure, one of the centers, the GI center was larger than our standard centers and that’s why you see that comparable purchase price, higher purchase price. That’s probably in line with our average size.

Witt Mayo - Robert W. Baird

Okay and just looking at the supply expense a little bit, it’s been relatively stable for sometime now, just any additional concerns, worries, areas that your watching besides the IOL’s?

Claire Gulmi

I don’t think so. I think what we’ve seen with this new inventory management system is an increased focus on materials management that we’ve been able to offset. We hear there’s price increases up, we hear fuel surcharges by some of the vendors and so we feel pretty good about the ability that we’ve had to maintain the pricing in kind of the tough market.

Witt Mayo - Robert W. Baird

Great and just two quick housekeeping items, just Claire can we get the pre-tax stock-comp expense for the quarter?

Claire Gulmi

Yes, it was $1.295 million for the quarter.

Witt Mayo - Robert W. Baird

Okay, great and I’ve kind of loss count of the number of centers in you same store account with the divestures, where are you now, 155 maybe?

Claire Gulmi

With the divestures we’ll be at 157 centers in the same center trade.

Operator

And we’ll go next to Shelley Gnall with Goldman Sachs.

Shelley Gnall - Goldman Sachs

A question on the supply expense; it looks like its still pretty much inline. I’m just wondering can we expect to see any pressure on the supplies expense going forward. I am wondering if you’ve heard from any of your suppliers. Pay tax really let you to -- the rise in commodity prices and if so when might we expect to see some pressure on those lines based on the length of your contracts?

Christopher Holden

Shelley, we’ve been hearing anecdotally that some are putting fuel surcharges on because of the gas prices, but I think we generally feel -- we see with the increased focus on purchasing and purchasing in compliance with our contract that we probably have the opportunity to try to offset anything that might happen on those.

Shelley Gnall - Goldman Sachs

So is all products as simple as pre tax growth that are not impacting you?

Claire Gulmi

Not that it’s not -- I’m not close enough to that specific products but I have not heard that, no. We can check into that, but I don’t believe so.

Shelley Gnall - Goldman Sachs

Okay, okay great and then just a quick question on the Medicare recovery audit; is this anything that causes you concern?

Claire Gulmi

No, I think we do a normal chart audits across all of our centers each year and see very little issues. Again part of it is the simplicity that we had in our billing; we got some few codes and not a lot of discretion about which quote to deal, so there is very little issue about over payment.

Operator

And we’ll take our next question from Bill Bonello with Wachovia.

Bill Bonello - Wachovia

Just a couple of really simple questions; one is just when I look at the guidance and you are talking about adding 12 to 15 centers for the year, is that net of the centers placed in discontinued operations are not counting that?

Claire Gulmi

We really didn’t count it because again they were not really adding to the bottom-line anyway, so we’re really looking at that on a growth basis.

Bill Bonello - Wachovia

Okay and then just so that I understand the moving parts on those and just by the math from the discontinued operations it looks like maybe they contributed about a little over $3 million of revenue last quarter and maybe a penny or so; is that the right way to think about it?

Claire Gulmi

No. In the quarter…

Bill Bonello - Wachovia

Because you reported $0.35 and then now you’re calling it $0.34, so I’m just trying to reconcile the difference.

Claire Gulmi

In earnings, not in revenue, that’s fair…

Bill Bonello - Wachovia

No, in EPS and then I think it’s the same thing on the revenue. You had reported I think $131.7 million and now you’re calling at a $128.4 million.

Claire Gulmi

Alright, walk through those numbers again with me Bill. What are you looking at a…

Bill Bonello - Wachovia

I think last year, if I have my number right when you reported the revenue that you reported was $131.726 and then on the income statement this year for the second quarter, you have $128.406 and I think…

Claire Gulmi

Yes, okay. I’ve just understood the questions, yes. Is that you’re comparing this quarter to last quarter and we put the revenue in the 2007 quarter for the discontinued operations. Okay, okay I’m sorry I thought you meant last quarter; yes, it’s about $1 million a quarter.

Bill Bonello - Wachovia

$1 million a month...

Claire Gulmi

It’s not $3 million for the quarter, I don’t think…

Bill Bonello - Wachovia

I’ll probably go off line and figure out how that…

Claire Gulmi

We got the number here; we’ll have it here in just one second I believe. Okay, go onto your next question and we’ll have that before we end the call.

Operator

And we’ll take our next question from Rob Hawkins with Stifel Nicolaus

Robert Hawkins, - Stifel Nicolaus & Company

Thanks. Most of my questions have been asked, but I’m curious about a couple of things still. the next general out, its sounds like you guys are trying to start that up sooner in some of your IT initiatives, pretty resistant to change, what’s kind of driving that?

Christopher Holden

Well one thing we have there in our portfolio is there’s a good sub set that are just ready for the change, because it’s been a while since they changed something or they’ve got a fairly limited system now, so we have a good starting to get through and almost all the groups are looking at upgrading in the next two to three years anyway, so that’s -- we haven’t really thought about resistance which you talk about.

It’s really more of a excitement Bob of being able to access a very high end system at a lower rate through our relationship with NexGen has been an advantage for us and the discussion with the doctors is something that’d appreciated.

Robert Hawkins, - Stifel Nicolaus & Company

So, some early adopter’s maybe not anything coming out of the pilot program that’s got everybody charged up? There’s some sort of revenue improvement or efficiency improvement that all said and everybody’s got to have it or you feel like you got to move it forward faster?

Christopher Holden

No, no. I think it’s more of a recognition on our part that we’re heading faster than we thought we would be and though we’re -- and that’s a testimony to what Eric and Claire are doing to get the company ready.

Robert Hawkins, - Stifel Nicolaus & Company

Okay, and then I guess the last piece; anything more -- I know you did a re-organization in February and I know it’s still kind of early. As you mentioned on managed care improvements may have happened, but is there anything kind of going on really on with these as you call them supermarkets or super groups or anything related to marketing in general or the internet progress or the internet program that you guys are lining up to adopt later this year. Any kind of new step on marketing that might kind of change the top line outlook?

Christopher Holden

We’ve got -- I’ve got the same phenomena on there that the new matrix manager for that’s been there in place since January. We’ve now appointed one of the members of the team of the low end of system to form that group together and looking at those best practices and rolling up those results and doing them, so they are still in the inventory and the management information phase of pulling that all together, so its too soon for me to give you an answer as a sure answer to the question.

Robert Hawkins, - Stifel Nicolaus & Company

And I guess one final is, just looking at the growth on a -- I guess the revenue per facility or center basis rather than the procedures and I understand what’s kind of going on in the procedures, but I’m having trouble kind of reconciling it. Is it just a way that your adding some multi-specialties there and therefore that’s kind of driving kind of the higher growth rate or increase there?

Claire Gulmi

I’m sorry, would ask that question again Rob.

Robert Hawkins, - Stifel Nicolaus & Company

Well, you got like kind of an 8.9% increase and if you look at on kind of revenue per facilities and that seems to be picking up and accelerating and I’m just wondering is it because you’re adding a few multi-center or multi-specialty facilities in there that might be higher revenue per facility or is there something else that might be driving in that?

Claire Gulmi

Well, I think that’s probably most of it but just all because we in that fourth quarter of last year that we added several large multi-facility centers that you are now just beginning to see that growth there. Again in the GI center that we added in the second quarter were much larger than our average too, so that would help.

Operator

And our next question comes from Jeff Englander with Standard & Poor's.

Jeffrey Englander - Standard & Poor's

Just a quick question; most of the -- kind of getting back to the economic impact and I’m just curious as to kind of what indicators your looking at. Most of the hospitals have stated that what they see is more of a correlation with, job growth or lack thereof and employment more so than housing and I am wondering if you’ve tried to correlate any of the things you are seeing to any of those factors?

Christopher Holden

Well the two states that I mentioned we saw, we have gone through that exercise and we tried it in Florida, but we would -- and our market reported poor economic indicators would have a center that was doing well and so it didn’t match up, so that’s an example of our analysis has gone. At this point I am trying to correlate the macro economic standards against the performance of the centers.

Jeffrey Englander - Standard & Poor's

Is there anything you’re seeing in there, because there are couple of factors you mentioned earlier that seem to be more center specific, as you said either a doctor leaving, retiring, taking vocations, anything more specific economically that you’re seeing across any other centers at all that you could point too?

Christopher Holden

It’s only anecdotal just being out in the field with the physicians that -- actually the GI physician that I’ve spoken of generally have not felt a decline in their practices. The out, the miles just that I’ve spoken with is not really either, so it’s really and I haven’t got into the same proportion of multi-specialties yet, so it would be soon to be any feedback from those discussed. I’ve been in a few, but actually the one I went in was in Southern California was doing great, so now we’re in the good case study.

Jeffrey Englander - Standard & Poor's

Anything on the orthopedic front?

Christopher Holden

No, I’ve been, I’ve touched base with all of my peers in the other companies and I think they would -- we share that that has been an issue in the higher, elective Orthopedic procedures that I don’t think we have the sample size to draw that conclusion.

Jeffrey Englander - Standard & Poor's

Right. One other question; in terms of you mentioned multiples in the multi-specialty, what you think it will take and we haven’t obviously been in the greatest economic environment; what do you think it will take from multiples to come down or you just think their stuck in the high-levels?

Christopher Holden

It’s a bad comment for me to answer that question. I mean honestly it’s going to take a continued poor performance of the economy for an extended period of time. I think for us to have a substantial impact I think where its most likely that we felt services in the smaller chains who have to go to the capital markets to sustain their growth rates or otherwise fund their operations, I think that can be a problem spot.

The single centers with cash flow -- in fact I would tell you one of my observation is that I think there is sort of a hunkering down right now and trying to weight it out, so it may have slowed that process in the short-term on the change and that’s purely my speculation, but it wouldn’t -- if I were in their shoes I might not have had the financial, the way we thought to do it, that’s what I would do.

Operator

And we have a question with Mark Arnold, with Piper Jaffray.

Mark Arnold - Piper Jaffray

Thanks, most of my questions are answered, just one expense item. The minority interest expense jumped up quite a bit in the quarter on a percentage of revenue basis, is there any reason for that and is that a level that we should look at it being a little bit higher going forward here?

Claire Gulmi

The reason you saw that Mark was because there the growth EBITDA margin increased so much and when that goes up, it went up 70 basis quarter-over-quarter, from first quarter to second quarter and when that happened obviously the partner sharing 49% of that and get a higher minority interest at the margins for the overall centers improved. It balances around as you think from past records, but we’re thinking that we’ll probably end in about the 20% range, 20% or 20.1% minority interest.

Mark Arnold - Piper Jaffray

Okay. So, up a little bit from last year and I guess what made it standout to me is a fact that it was up sequentially here like 60 basis points in here, you mentioned 70 basis of EBITDA expansion just seemed a high ratio.

Claire Gulmi

That’s really what’s driving it though, just the performance.

Mark Arnold - Piper Jaffray

Okay, and then just on that I mean, back to the Super Groups, and the questions raised about hospital employment, it’s amazing how things going cycles. When you talk about Super Groups, I assume you are talking single specialty groups is that correct?

Christopher Holden

Yes.

Mark Arnold - Piper Jaffray

And are you seeing any multi-specialty groups forming, and is that a -- I guess I’m curious are you seeing anymore of these larger multi-specialty groups forming; is that creating any opportunities?

Christopher Holden

Yes, it does and it has. I think one of our multi-specialty developments is a function of that happening.

Mark Arnold - Piper Jaffray

And what type of specialties are coming together in situations where you’re seeing that?

Christopher Holden

For the multi?

Mark Arnold - Piper Jaffray

Yes.

Christopher Holden

Usually, trying to think in the case of the one that we’re -- actually it includes general surgery, ophthalmology and they can be orthopedics. It’s traditional, I wouldn’t say there is any -- I don’t know that it’s a formally driven thing to answer your question. This we could tell you now what’s in the market, but now see lots of GI grouping and the Anastasia, radiology, the emergency department, those are all making our urology all turn in that direction.

Mark Arnold - Piper Jaffray

Okay and then just one last question. The Medicare legislation that was just past, does the fact that you’re seen physician -- well, I’m getting at the professional revenues that these physicians are generating, do you see or have you seen in the past periods where physicians have received a little bit bigger updates from Medicare on total payment on the professional side have any impact on how they perceive selling an ASC or wanting to develop a new ASC; have you ever been able to ascertain that, whether it drives physicians to either want to affiliate or want to grow their revenues on the technical side?

Christopher Holden

Well, the more pressure and uncertainty they feel, I think the more activity is generated even for a general role for us. In this case and where we are to date one thing is an interesting question; I haven’t really thought about it honestly in the three or four months, but as we -- where to put your money these days is such a difficult question. It’s a combination of the liquidity doing and the lack of another place to put your money. It’s kind of a hard sort of facts when you’re making a decision, but you really haven’t heard of a pipeline right now.

I think there is still the uncertainty about where governments headed, what the next administration will do. I think there is -- some believe if we are in an economic downturn, this is a good time to liquidate because the multiples haven’t changed that much on the centers and redeploy your money on the market or another undervalued asset at this points, so I mean the positions are pretty saggy about all that and know how to play that out. So, I don’t know if I’m answering your question, your question, but…

Mark Arnold - Piper Jaffray

No, you were. I didn’t expect a clear answer. It wasn’t a very clear question, and it’s not one that’s easy to answer, so on at that level...

Operator

And we have a question from Mike [Batesky] with Nobel Research.

Mike Batesky - Nobel Research

Just a couple of questions real quick; Claire could you drill down, just following-up on an earlier question regarding the volumes and pricing, is it fair to say that volumes were kind of up 4.5% maybe pricing was down 1.5%, is that something that you could say?

Claire Gulmi

That’s the right range.

Mike Batesky - Nobel Research

Okay, and then just I guess following on the line of questioning on the economic impact of all that’s going on. Chris when you think about different I guess important procedures that could be affected I guess my mind naturally goes to some of the orthopedic procedures as well as even possibly calling off could be -- you guys have a plan in place as far as local marketing.

I don’t know what you do on something orthopedic stuff, but I would suspect that maybe there is ways that if calling off of these start to trend down or some other things where you can do something at the local marketing level, I guess can you just comment on that?

Christopher Holden

Yes, the good news is the CDC just published their report this last month, it was in the Washington Post that showed that 50% of the Americans who are in the target group for screening still don’t get it, don’t have one and the interesting part of the statistic was on behalf of the proportion that didn’t get it, who went to a doctor, the doctor didn’t tell them to go, which is disturbing and given the efficacy of that diagnostic tool, so on the GI side we’ve got a couple of programs.

We do the recall program where if you’ve had a strain you need to comeback and we’ve gotten I think pretty sophisticated at that process. We’re beating up our efforts and working with the groups on our primary care position we call it or education process where we go position to position, GI to primary cares and this resting phenomenon is really above our conservations in the field and something I guess I had forgotten since my hospital days but the admin of the hospitals, in the hospitals, that GI position used to meet that primary cares and develop those relationships during rounds and then the doctors dining rooms everyday, well those primary care positions don’t go to the hospital anymore.

So it’s a whole new methodology for getting the GI, in front of the referring physician and we also have a program for directing doze, but it doesn’t come through the primary care physician under a narrow bandwidth of criteria that certain patients will qualify for, so we are doing that as well and we’ve got now with the new marketing teams there all trying different things.

We’re doing a Saturday programs just for physicians to come and have their screens done through it. It’s just to remind them how important it is and we set up and make that work and we’ve worked on looking at access, adjusting hours, weekend hours, later day hours, we are looking at some technology that we hope to deploy through the Internet, because we know that for the patients who don’t get the screen it’s generally for a couple of reasons and of them the biggest one of which is they dread the prep time which really isn’t so bad anymore and really don’t know how the process works and there is some online education that helps prepare. It’s called expectation management that helps get the patients ready for that.

Right now we have no way to effectively communicate that with the patient, because we don’t have the IT backbone to do that and we will have that shortly and we’ll deploy that through the web strategy, so we are working on things like that. That’s a short list of a few of the highlights and I hope that answers your question.

To just add on to that, just recall that in the GI procedures a little over two-thirds of those procedures are a function if someone has a problem. I mean we are not there for the diagnostics, only a third are diagnostics, so when you dive into the question of the electives nature of the colenstrophy, it’s really about a third of our base and if you cover that with the fact that half the people that should get it done, we feel like we’ve got the opportunity to not only address the issue, it is not really that elective and its at a low price point and all that, but they’re billed on top of that.

Operator

And we have a question from David Bachman with Longbow Research.

David Bachman - Longbow Research

Okay great thank you and I believe that all of my questions and some of them have already been answered except just one last question on the acquisition front. This being a election year, potentially a change in capital gains pack being discussed, can you talk about it said something that physicians that you’re hearing out there that might have an impact on maybe pulling acquisitions quite a bit if there were to happen.

Christopher Holden

I would say that’s in the top two drivers of the decision process or criteria for the physicians. In fact one of our marketing campaigns on the fliers to physicians is around that specific issue, so its clearly top of mind and the physicians are aware and it makes a difference in the decision.

Operator

We have a question from Dawn Brock, with JP Morgan.

Dawn Brock – JP Morgan

I just wanted to quickly ask you guys, Claire this is probably a question for you; on the procedure mix, you said that you saw some lower price procedures on the multi side and I guess I’m just wondering. I mean that’s kind of interesting in this kind of economy that we are seeing the volume increase even though it’s a lower price point, so I guess the question is which procedures are they on the multi side?

Claire Gulmi

If straight against multi and ophthalmology centers and it’s not like a massive trend from one procedure to another. If I just looked across some centers where maybe before we were doing 50% orthopedic and 40% paying, it might now be 50 paying and 40 and 50 orthopedic, it would be those kinds of things but there is not a consistent trend from one center to the next, each center is unique.

Dawn Brock – JP Morgan

Okay, but you are seeing a volume increase, because that’s essentially making up for some of the pricing that you’re losing.

Claire Gulmi

That’s correct.

Dawn Brock – JP Morgan

Okay. So, I mean, that is really kind of an interesting point in this kind of market that volume is really carrying the revenue.

Claire Gulmi

That’s correct.

Operator

And again we do have a couple of follow-up questions; the first one comes from Shelley Gnall with Goldman Sachs.

Shelley Gnall - Goldman Sachs

Hi, thanks. Claire just a quick follow-up; just want to make sure I’m thinking about this correctly; the 4.5% procedure growth, and if you think of it as a 4.5%; is it right to think of that as up from last quarter which you said about 4% or the comparables issues to the sort of same-store procedure numbers last year?

Claire Gulmi

It’s about the same as last quarter; they’re in the same range.

Operator

And our final question comes from Kevin Ellich, with RBC Capital Markets.

Kevin Ellich – RBC Capital Markets

Yes, just two quick follow-ups. One with the IT backbone and infrastructure you guys are implementing, are you able to track the patients that are delaying the procedures or is those a schedule procedure and you need to call back to cancel or rescheduled at a later point in time?

Christopher Holden

They are not as a function of the IT infrastructure. We have these type of operational manual processes for tracking cancellations, just overall bulk rate, those types of things, so we have another data point to get at the same question on the economy.

Kevin Ellich – RBC Capital Markets

Alright and have you notice any increases in that bulk rate?

Christopher Holden

Not really.

Kevin Ellich – RBC Capital Markets

Okay and then last question; have you notice any increases in multi-program IOL procedure when that’s launching?

Claire Gulmi

Yes, that’s really to tell fairly consistent. We had a ramp up about two years ago in that and it remained consistent quarter-to-quarter since then.

Operator

Mr. Holden, I’ll go ahead and turn the call back over to you for any closing comments.

Christopher Holden

Very good and we appreciate everyone’s time today and all of you listening here. We are pleased that the second quarter have produce some solid results and we still feel good about the pipeline and very pleased with the underlying fundamental financials of the company and like to add for those folks, some answers to you on the line and my position to partners, also appreciate you and all the hard work that you’re doing and with that operator we’ll adjourn the meeting.

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