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

Thank you, Justin. I'm going to read our forward-looking disclaimer and then we'll turn the call over to Roger. Certain statements and information during this conference call may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by MEDNAX's management in light of their experience and assessment of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Any forward-looking statements made during this call are made as of today and MEDNAX undertakes no duty to update or revise any such statements whether as a result of new information, future events or otherwise. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the Company's most recent annual report on Form 10-K and its quarterly reports on Form 10-Q, including the sections entitled Risk Factors. In today's remarks by management, we will be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this morning's earnings press release, our quarterly report on Form 10-Q or in the Investors section of our website located at mednax.com. With that, I'd like to turn the call over to our CEO, Roger Medel.

Good morning and thanks for joining our call to discuss our results for the second quarter of 2016. It's been a very busy quarter for us. So I want to discuss a number of topics in some detail. First, we continue to have one of our busiest years ever from an acquisition perspective. Similar to the first half, we acquired seven physician practices and since the end of the quarter we've acquired our eighth practice for the year. In anesthesiology, we've acquired four practices so far this year and our pipeline continues to grow. Anesthesiology groups increasingly see the need to be a part of a larger organization that can support them and invest in the data and technology capabilities that their hospital partners are asking of them. So we see the opportunities to continue to grow our footprint as significant and I anticipate that we will have additional acquisitions to discuss with you in the near future. This quarter, we also added a neonatology practice and within our pediatric subspecialties, we announced our first acquisition of a pediatric ophthalmology practice. The scope of our hospital relationships continues to grow and this acquisition reflects the ways our partners are asking us to help them to build out additional pediatric services. In radiology, we continue to have good conversations with high-quality groups and I am optimistic that we will be able to announce our first practice acquisition this year. So overall, our practice acquisition pipeline remains very robust and we're on track to have a very busy year in 2016. In early July, we also closed our acquisition of Cardon Outreach. This is an exciting acquisition because it complements the services we added last fall with the acquisition of Alegis and significantly expands MedData's capabilities in revenue cycle management. This combination…

Thanks, Roger. Good morning and thanks for joining our call. I want to give an overview of our operating results for the second quarter and provide additional details in a couple of areas. For the second quarter, our net revenue increased by 14% to $772 million. 86% of this growth came from recent acquisitions. Our practice acquisitions contributed roughly two-thirds of that growth and our acquisitions of vRad and Alegis contributed the remainder. Looking at our same-unit metrics, same-unit revenue increased by 2%. Excluding the impact of parity in the 2015 period, same-unit revenue increased by 2.5%. On a net reimbursement side, we saw modest improvements in managed care contracting and modest flow-through of price increases, partially offset by the unfavorable impact from parity revenue that did not recur this year. After excluding the impact of $3 million of parity revenue from last year's second quarter, our net same-unit growth from reimbursement-related factors was 2.7%. During the 2016 second quarter, we had a favorable 50 basis point shift towards commercial payers compared to the 2015 second quarter. On a sequential basis, our payer mix also shifted favorably by about 50 basis points compared to the first quarter of 2016. On the volume side, same-unit volumes decreased by 20 basis points. Our NICU days were down 2.1% against a very strong 3.8% comp in the year-ago period. This decline was offset by good growth in our anesthesia and other pediatric services while maternal-fetal medicines volumes were down year-over-year. Our EBITDA increased by 7.4% to $168 million. Our EBITDA margin was 21.8% compared to 23.1% last year. Operating trends at vRad impacted our EBITDA growth as did the timing of acquisitions we completed during the quarter. Looking at some of the components of our EBITDA. First, our profit after practice expense for…

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

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

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

Yes, no, not at all. I mean, the big problem here is that we're seeing a higher volume. I'll just tell you that in February, we saw 23% volume increase year-over-year from the prior month and for the first half, we saw 16% growth in volume year-over-year during the first half. So the volume really is coming in much higher than we expected. The problem is that we have contracted for turnaround times and so we when get an x-ray or a CT scan or an MRI, by contract, we have to return -- we have to produce the report at a specific amount of time. So what we've done is given the fact that we're at over full capacity right now, where we've slowed down our growth. We have, in fact, we have sales but what we're telling, our marketing people are telling our new contracts is that we can't bring them on until November or December. We expect that by the end of the year, we'll have this problem corrected. So what we're doing is we're just slowing down the growth because we just don't have the capacity to read these x-rays and to turn them around in the required amount of time.

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

No, not at all. Clearly, the more services that they're asking us to provide, the more we can charge for the services, so that isn't the problem. It's that like I say, for example, one of the things that I talked about in my prepared remarks is that we're seeing a really very high demand from practices to assume all of the care at nighttime. It used to be that we would -- they would say, Well, you read the MRIs or [indiscernible] and they want us to provide them with final reads. Because if you provide them with temporary reads, what happens is when -- so when they show up in the hospital tomorrow morning, they have -- and they're just temporary. So they have to review all of those studies and to provide them their final analysis. And they don't want to do that anymore. It takes a lot of time to do that and they just want to come into the morning, have all these finals done and then go on to read whatever new studies are coming in. And a lot of the things that happen in the middle of the night are really more -- tend to be more simple x-rays. Somebody's got a broken bone, so they have an x-ray of the arm or somebody's got pneumonia and -- they're not the complicated MRIs and all that stuff tends to be more scheduled ahead of time. And, of course, that's a lower reimbursement procedure. So all of that is impacting our ability to generate the kind of results that we think we can generate.

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

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

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

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

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

Okay, well, that's a good question. As I said, you have to source out the physicians and then you have to screen them and then you hire them and then at that point, they have to get state licenses. And many of these -- all of these physicians we get them licensed in 10, 15 or 20 states. The state licensing process is one that can easily take six months and there's nothing I can do about that. That's just how long it takes to get a state license and then once they're licensed in the state, they have to be credentialed in all of the hospitals and facilities that we have contracts with. And so that might take another couple of months. So I think that what we're saying here is that over the next two to three quarters, we're going to get all of these physicians' online. Obviously, the ones that we started to recruit back in March and April will come online sooner or earlier than the ones that we recruited in June. But as they -- as we move through the next two to three quarters, we will -- they will all come online. I don't have a better answer for you as to how many are going to come online in the third quarter and I can get that information, but basically we believe that by the end of the year, early first quarter, we'll have the problem solved.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Would there be what? I'm sorry.

Geographic. No, no--

Geographic.

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

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

I would say no more than in the past. We feel -- we still have full pipeline and we still think that we're going to do a number of acquisitions this year. As I said in my remarks, I do expect that we will be doing more anesthesia deals and we expect that some in the not-too-distant future and I also expect that we will acquire our first radiology, on-site radiology practice this year which has been our plan all along. So I would say no. I think that we're right on track. Some of the timing can be off a little bit for whatever reasons. People go on vacation. We had a deal that we thought we were going to close a couple of weeks ago and somebody went on vacation and we'll get it closed, but the point is that it's just in the normal flow of deal flow.

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

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

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

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

Yes. So what we're seeing is that the -- first of all, the volume that they are seeing of studies has increased. We think that that's mostly due to the increased volumes in ER, et cetera. So that -- and then they were mostly contracting with us over the last couple of years to do preliminary reads and not final reads. And what we have seen at a much higher rate than we anticipated is that they are coming to us and they are saying, instead of me sending you the complicated studies at nighttime, so let's say, from whatever, 8 PM to 6 AM instead of me sending you those, we're -- we want to send -- we want you to take over the night. So anything that happens for radiology in their facility at nighttime, they are asking us to do and we want you to provide us with final reads, not preliminary reads. And so what that -- and it's just -- it just takes more time to do that. Now so the night -- taking over the night means we get much more simple x-rays than complicated studies. So again, broken bones and abdominal films and chest x-rays, et cetera, as opposed to functional MRIs and CT scans, et cetera. And so those get compensated at a lower level, but it's a lot of volume. So you need to have the physicians around that are going to be able to address that volume. And then on top of that, they're asking us to provide them with final reads which because when they come in tomorrow morning, if it's a final read, they're done. This patient has pneumonia and they don't have -- that's what the radiologists said and it gets reported and they're done. If it's a preliminary read, when I come in tomorrow morning, I have to provide the final read. So I now have to go over all of those studies and come up with the final read and that could take me -- if there was a large volume of x-rays and studies in the prior night, that could take me two or three hours before I can even start looking at this morning's films that are coming in. So that is what we're seeing when we talk about a mix in modality and that is happening very quickly and we think it's great. We love it, but it's a problem and we have a problem and we have to fix it.

And you're seeing this nationally?

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

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

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

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

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

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

Yes. Exactly.

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

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

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

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

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

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

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

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

Yes, that's a question I've been asking myself for 30 years. Really, there are a couple of things that are relatively significant. Number one, bringing more transports and we do have outreach programs. So if there's a local hospital that doesn't have a NICU, we know that they're still going to get a number of sick babies and so we try to establish relationships with hospitals to have them call us to transport the babies to our facility when they do get a small or sick or premature baby. But again, that doesn't have any -- that doesn't have -- make any real impact. The other thing that we do is mothers still go where they -- to have their babies where their obstetrician suggests that they go. And so recruiting obstetricians is another way to bring more babies into your facility. And we help our hospitals to try and go out and the obstetricians and the community talk to them about coming to our hospitals, but that's hard to do because the switching costs are very hard -- are very high. And I mean, really, the number of admissions to the neonatal intensive care unit are a function of the number of births. I can tell you that if you have X number of births depending upon the population that the hospital takes care of, you're going to have X percentage of those babies admitted to the NICU. And so other than getting back to the historical -- right now, births still are fluctuating around 4 million babies per year and the high number, back in 2007, 2008 was almost 4.4 million babies. So other than getting back to those levels of birth, we're not predicting that we're going to see any significant increase to the babies admitted to our NICUs.

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

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

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

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

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

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

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

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

Yes, sure.

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

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

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

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

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

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

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

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

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

Sure, we'll follow up off-line.

Yes.

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

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

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