Charles Lynch - VP, Strategy and IR Roger J. Medel - CEO Vivian Lopez-Blanco - CFO and Treasurer James D. Swift - Chief Development Officer Karl B. Wagner - President, American Anesthesiology.

Kevin Fischbeck - Bank of America Kevin Ellich - Piper Jaffray Ryan Daniels - William Blair Brooks O'Neil - Dougherty & Company Brian Tanquilut - Jefferies Gary Taylor - JPMorgan Dana Hambly - Stephens, Inc. Christian Rigg - Susquehanna Financial Group Chad Vanacore - Stifel Nicolaus & Company Whit Mayo - Robert W. Baird.

Ladies and gentlemen, thank you for standing by and welcome to the MEDNAX 2015 second quarter earnings conference call. At this time all parties are in listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions].

Now I'd like to turn the conference over to your host, Charles Lynch. Please go ahead..

Thanks and good morning everyone. I am going to read our normal disclaimer statement, and then I will turn the call over to Roger and Vivian. 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 its 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 Investors section of our websites located at mednax.com.

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

Thank you, Charlie, good morning. And thanks for joining our call today to discuss our results for the second quarter of 2015. It’s certainly been a busy one for us so I'll start with our results and then go through some other items notably vRad.

As you can see in our press release, we have added new information to our financial reporting, which was at least partially prompted by the acquisition of vRad. We will now report EBITDA and adjusted EPS, which we believe gives some additional information about our underlying cash flow and operating trends.

I hope these measures will be useful to you as well as you build your own models. In terms of the second quarter we continue to generate strong double-digit top line and EPS growth, which comes from a mix of acquisitions, same unit growth, and our use of capital to buy back stock.

We achieved this growth in the second quarter despite the loss of Medicaid parity revenue versus last year. Our patient volume growth continued to be strong, particularly looking at the almost 4% increase in our NICU days.

At the 370 or so hospitals where we cover the NICU, total births during the quarter were up just over 1% after being essentially flat for the past year. Obviously, one quarter doesn't make a trend, but from a longer term standpoint, we do expect total births in the country to grow as the Echo Boomer population reaches child bearing age.

And I'm sure you've all seen the data from the CDC that 2014 marked the first year since 2007 that total births in the country actually grew. So I'm optimistic that the growth we have seen, not just in our NICUs but in our other pediatric subspecialties as well, at least partly reflects this broader trend.

Anesthesia volumes were positive as well, as has been the case for the past several quarters. Here too, I think this reflects the broader trend of utilization growth.

There are probably a number of drivers behind this, from the rollout of the Affordable Care Act, to a stable economy, to the growth in demand for surgical procedures as the baby boomer population ages. We've also had a very successful quarter related to practice acquisitions.

During the second quarter, we acquired four practices, two in anesthesiology and two in neonatology. These follow the three groups we acquired during the first quarter. Our pipeline has, in fact, continued to grow and, based on that pipeline, I anticipate that we will have a very busy second half on the M&A front.

Finally, we're excited to welcome vRad into our organization. We think this is a great time to be investing in teleradiology. But I think what we're seeing in vRad's growth is the evolution of the radiology industry where practices can no longer look at teleradiology capability as a luxury.

It is now becoming an essential service and radiology practices need to be able to offer 24/7 access to subspecialty care, to invest in data and analytical processes, and to demonstrate clinical value to their customers. Through our platform, we can provide all of those capabilities, and I think this is what will enable us to continue to grow.

Since we closed this acquisition in mid-May, we've been busy continuing to learn about the company and their operations. The first thing I'll say is that everything we have seen has aligned up well with how we discussed the acquisition a couple of months ago.

Financially, vRad is performing as projected and the acquisition was about a penny accretive to our GAAP EPS in the quarter, which is what we expected. Through the June quarter, vRad's new contract bookings growth was very strong, and their contract retention has improved versus a year ago.

So I think we have good visibility into the high single digit organic growth that we laid out as our expectation when we closed our acquisition in May. We've also spent time with vRad on the sales and marketing side.

The company has a very strong team and we're beginning to collaborate with them in terms of sharing best practices and organizing our combined efforts. We have also spent time along with vRad's management with a number of our larger health system partners in order to educate them on what we can bring to the table for them on the Telemedicine side.

And lastly, the team at vRad has continued to invest in their own data capabilities. With a database of more than 30 million studies that continues to grow, there is a world of opportunity to mine that data for more predictive information and more ways to add value to the patient and the hospitals.

Overall we're -- obviously, still early in the process, after acquiring vRad in mid-May, but the company's earlier results are in line with our expectations. We continue to be very excited about the opportunities here, and we've had a very positive response internally from our hospital partners and in the marketplace, as well so far.

Before I turn the call over to Vivian, I also want to point out that we plan to host an analyst and investor event this fall, and we will provide details on this as we get closer.

I'm excited to share more information with you, to let you all know more about what we've been doing and to give you a chance to meet more of the leadership at MEDNAX later on this year. With that, I want to turn the call over to our CFO, Vivian Lopez-Blanco for a review of our results and then we’ll go into Q&A.

Vivian?.

Thanks, Roger. Good morning and thanks for joining our call. I want to give an overview of our operating results for the quarter and I also want to discuss some aspects of the vRad acquisition as well as our introduction of non-GAAP financial measures as part of this review.

For the quarter, our net patient service revenue increased by 13.6% to $677 million.

Most of this growth came from recent acquisitions with anesthesiology practices contributing roughly 40% of that growth, neonatology and related pediatric practices another 10% and the remaining 50% coming from non-practice acquisitions, primarily last year's purchase of MedData and our recent acquisition of vRad.

In terms of vRad in particular, we closed this acquisition in the middle of May. So it impacted our results for roughly half of the second quarter. For that period, vRad's revenues are been in line with our discussion in May, which was around an annual run rate of $85 million -- I'm sorry, $185 million.

And as Roger mentioned, based on vRad's strengths and new contract bookings and continued improvements in contract retention we continue to believe the company can generate organic revenue growth in the high single digits.

Moving on to our same unit metrics, same unit revenue grew by roughly 40 basis points with revenue increasing by 2.7%, offset by a 2.3% decline attributable to net reimbursement related factors.

This reduction reflects the reduction in Medicaid parity revenue versus the second quarter of 2014, as well as an unfavorable shift in our payer mix, partially offset by modest improvements in managed care contracting.

Excluding the impact of parity revenue of $3 million and $60 [ph] million from 2015 and 2014 periods respectively, same unit revenue would have increased by 2.6%. On the volume side, we saw good growth across our services.

NICU days were up 3.8% and we also saw strong volume growth in other pediatric services, primarily new born nursery and maternal fetal medicine. Anesthesia volumes also increased, partially offset by a decline in pediatric cardiology volumes.

In terms of payer mix, our percentage of patient revenue reimbursed by commercial programs declined by roughly 90 basis points compared to last year's quarter.

On an absolute basis, payer mix was essentially unchanged compared to the first quarter of this year while historically we've seen a seasonal dip in government mix during the second quarter that did not occur this year.

We recorded roughly $3 million in parity revenue in the quarter, or about $0.01 per share, after the impact from incentive compensation expense and income taxes, compared to $16 million or $0.05 per share for the same period last year. Our profit after practice expense for the second quarter was $229 million, up 14% year-over-year.

Profit after practice expense margin improved by 10 basis points despite the negative impact of the lower parity revenue. Our general and administrative expenses increased by 50 basis points over the prior year as a percent of revenue, which reflect increases due to the mix of acquisitions primarily those of non-practice businesses.

Our depreciation and amortization expense also increased by $5.1 million year-over-year related to acquisitions. This increase in depreciation and amortization partially reflects our acquisitions, including those of vRad this quarter and MedData last summer, which I'll address in a minute related to our introduction of non-GAAP measures.

Finally, our second quarter net income grew by 6.5% to $84.1 million and diluted earnings per share of $0.90 grew by 13.9% as compared to the prior year period.

On a GAAP EPS basis the acquisition of vRad added about a penny to our earnings during the time it was consolidated during the quarter, which is in line with the expectations we shared when we announced the closing of the transaction in May.

For the quarter, weighted average diluted shares were 93.5 million, down about 6.4 million shares from the prior year, due primarily to the repurchase activity we undertook during 2014 and the first quarter of 2015. As we discussed in our press release this morning we introduced the use of EBITDA and adjusted EPS in our financial reporting.

The primary rationale for this is the increase in non-cash amortization expense related to our acquisitions of MedData and vRad over the past year and our view that these non-GAAP measures will provide useful information to compare and understand our underlying business trends and performance across reporting periods on a consistent basis.

Looking first at EBITDA we are using a non-adjusted calculation of this measure as you'll be able to see in the reconciliation tables we provided in this morning's press release. For the second quarter we reported EBITDA of $157 million, an increase of 11.8% year-over-year, and our EBITDA margin was 23.1% versus 23.5% in the second quarter of 2014.

That 40 basis points decline is largely related to the decline in parity revenue versus last year. In terms of our acquisition of vRad, that company's EBITDA margin was in line with our consolidated EBITDA margin for the quarter and in line with our expectations. Secondly, we introduced adjusted EPS to our reporting.

We define adjusted EPS as diluted earnings per share, excluding noncash amortization and stock compensation expense, which you can see in our reconciliation tables. On this basis for the second quarter we reported adjusted EPS of $1.02, an increase of 15.9%, as compared to $0.88 in the second quarter of 2014.

Also on this basis, vRad was about $0.02 accretive for the time it was consolidated during the quarter.

Finally, we provided these non-GAAP measures and the reconciliations for the fourth quarter of 2014 and the first half of 2015 on our Investor website in order to provide historical comparisons and for those of who'd like to make adjustments to your own financial models.

Looking at our balance sheet, we had cash and cash equivalents of $65 million at June 30th and accounts receivable were $381 million, an increase of approximately $28 million as compared to December 31. Days sales outstanding were 51 at the end of the quarter, up about a day from the end of 2014.

Our total outstanding debt under our credit facility was $1.3 billion at June 30, up from $568 million at the end of 2014, mostly related to acquisitions completed during the first half, and share repurchases we executed in the first quarter.

As we announced in June, we amended our credit facility, increasing it to $1.9 billion from $1.5 billion and with the flexibility to increase it additionally to $2.2 billion. Lastly, during the second quarter we generated cash from operations of $146 million compared to $134 million last year.

Moving on to our outlook for the 2015 third quarter, as we announced in this morning's press release, we expect that our diluted earnings per share for the three months ending September 30 will be in the range of $0.94 to $0.98 and that our adjusted EPS will be in the range of $1.07 to $1.11.

The range for our third quarter outlook assumes anticipated same unit revenue growth will be 1% lower to 1% higher year-over-year, including an approximately 2% unfavorable impact on pricing from decrease in parity revenue from the 2014 third quarter.

Excluding parity revenue from both periods, a non-GAAP measure, our third quarter outlook assumes same unit revenue growth of 1% to 3% year-over-year. Included in our third quarter is approximately $0.01 for Medicaid parity, net of the impacts from incentive compensation expense and income taxes compared to $0.05 in last year’s third quarter.

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

Thanks, Vivian. I'm very happy with how the second quarter and the first half of 2015 have gone for us. We've been able to grow our existing operation, diversify our business into new areas, and continue to add value to our patients, our hospital partners, and our shareholders. And I think we're very well positioned to continue doing so.

With that, let's open up the call for questions.

Operator?.

Thank you. [Operator Instructions]. Our first question will come from the line of Kevin Fischbeck from Bank of America. Please go ahead..

Great. Thanks.

I just wanted to try to dig in a little bit to the payer mix in the quarter because the volumes were quite strong and I guess from our perspective, the thought was that maybe it was the commercial volumes that had kind of held itself back during the down economy and so we expected that when volumes rebounded it would kind of be driven more by the commercial volumes rebounding but that doesn't seem to have been the case.

Any color there?.

I mean as you know, Kevin, we've talked about that payer mix remains somewhat volatile throughout the period. The one thing that I can say is that last year, we had really a big dip, a favorable dip, and so this year we didn't see as much favorability on that.

But as you know from the past, we really have no visibility to that as it relates to some of the variability that has existed. If you go back and trend it quarter-by-quarter for the last three or four years, there's been some variability within that, so we continue to see that sometimes..

Okay.

And then I guess as we think about vRad, can you talk a little bit about what's driving the improved customer retention and the contract bookings that you're seeing right now?.

Well, we have had some conversations with our longer-term partners, and I think there's some interest in having further conversations with vRad about that.

I think that in general terms, as we continue to perform and continue to -- as they continue to perform and continue to provide good services, I just think that that they -- that is translating into better contract retention..

Okay. Thanks..

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

Good morning, thanks for taking the questions. I guess, Roger, just kind of following up on Virtual Radiologics, are there any metrics that you can provide us? I thought Vivian said it added maybe a penny to EPS this quarter.

But can you talk about growth metrics, volumes that they're seeing?.

Well, as I said there are about 30 million studies that they -- in their portfolio. And so we think that looking at that volume is able to provide better capabilities to -- as to how to take care of patients, how to order whatever studies are necessary, et cetera. I think from that standpoint we're seeing some positive trends there.

As far as giving you exact volumes, I'm just not prepared to do that at this point in time. I can tell you that it's growing. I can tell you that we're getting more contracts. And I can tell you that we're losing fewer contracts. But I can get back to you with more specifics numbers..

Great. And then maybe we can follow up offline on this too.

But have you thought about are you going to start breaking it out once it annualizes or have you thought about how you are going to report it in your revenues?.

So right now as you know, it's really not a material number. And so going forward as it becomes more material, as we've done with other specialties just like anesthesia we'll take a look at that, Kevin..

Okay. Great, Vivian. And then clearly you guys have added some debt on the balance sheet, which is good to see. I guess what's your appetite for, I guess kind of target leverage ratio. And Roger commented about a strong acquisition pipeline, and you had said a very busy second half.

Could you provide a little bit of color both on what you're willing to take on and Roger I guess what you're seeing in the pipeline for the back half of the year?.

Yes. I've always said for the right reasons, we're willing to put debt on our balance sheet, not for the financial gymnastics that I get offered every once in a while, but for the right reasons and we're happy to do that.

I think that we still have a low debt ratio on our -- in our company, and I think that if an opportunity were to come up that made sense, that made us put more debt we'd be happy to do that. I do expect that we will continue to acquire practices in the second half.

We do have a couple of mid-size to larger size practices that I think I expect that we'll get done in the second -- in the third quarter. And beyond that, there are other practices. So I think I am personally hoping and predicting and projecting that our second half will be somewhat similar to our first half..

Roger..

Excluding….

Oh, sorry.

Are those kind of mid to large size deals, are those anesthesia?.

Yes..

Okay. Great. And then lastly, comments on the birth rate improving. Good to see 3.8% same unit NICU growth.

I think that's the highest since did you say 2009, maybe?.

Yes. 2007, I think, Kevin..

2007.

So in general I guess, what's embedded in your outlook for Q3 and the rest of the year in terms of what type of birth rate growth we should see?.

I mean we don't get -- Kevin, we don't get to that level of preciseness, but we look at volumes overall.

So the third quarter outlook certainly has a weight, once I exclude parity, that 1% to 3% has some good volume growth, most of it coming from volume because we do expect, as you know, for the rest of this year to have the impact on pricing related to the parity shortfall of this year. So it's heavily weighted towards volume overall..

Great. Thank you..

Thanks..

Thank you. Our next question then will come from the line of Ryan Daniels with William Blair. Please go ahead..

Yes. Thanks for taking the question. Another one on the vRad acquisition. I'm curious, Roger, if that is yet enhancing your opportunities to compete for larger hospital contracts, meaning capturing more anesthesia, radiology, other services, kind of that strategy you've talked about in the past with your core business in a couple markets.

Is that getting enhanced with vRad or is it still too early to tell?.

It's too early to tell. I think that it works both ways. I'm hopeful that we will also be able to, given our relationships, that we will be able to expand our vRad footprint.

And again we have had conversations and meetings with our larger hospital partners, but we haven't yet been able to – I mean there's nothing I could point to, to say that in the last month that has generated any additional contracts for us..

Okay. Fair enough. And then I guess as my follow-up, just curious on Medicaid rates in NICU. The fiscal year has just started or about to start in a couple months.

Are you seeing any material puts and takes across your book of business as you look out or is that pretty stable?.

Well we've seen a little bit. Let me look at my notes here for a second..

Yes. I mean the physician fee schedule is out preliminarily as you know and we're basically seeing potentially a slight increase there but nothing that is material, Ryan..

Yes. Basically, what I can tell you is that we expect to see a small increase in Georgia with our prenatalogy [ph] codes and in Missouri, both the Senate and the House budget include another $4 million increase for neonatology. The Governor has signed that legislation and we expect those funds to begin distribution early next year.

The rest are pretty much what we have said. Our Colorado full parity increases will continue through the middle of next year. But basically those two are the most significant ones..

Okay. That's helpful. I'll hop back in the queue. Thanks..

Thanks..

Thank you. Our next question then will come from the line of Brooks O'Neil at Dougherty & Company. Please go ahead..

Good morning, and congratulations on another great quarter..

Thanks, Brooks..

I'm curious with the vRad acquisition, there's been some, I guess, question of whether you will ultimately determine that you need to have feet on the ground in the radiology department, as well as your extensive teleradiology capability.

And I'm curious as you dig into that opportunity, what are you seeing now? Has it changed any and do you think it will change down the road?.

Yes. We definitely will have boots on the ground. It's going to -- it's not going to be our main strategy, but we've had a significant, I would say, number of groups that have expressed interest in talking with us. And I think that it makes sense in specific markets and specific groups and strategies to do that.

So although it is not our number one projected growth method, I do expect that we will have boots on the ground maybe even before the end of the year..

That makes sense to me, Roger. I'm happy to hear you say that so I think that's good. Second question, I would love to hear you talk a little bit about what you see in the telemedicine area, as it relates to the opportunities you want to pursue in that area and when you think you might be actionable in that arena..

Okay. We do think the telemedicine is another add, which is clearly why we are in teleradiology and we see that as our initial entry into the telemedicine world. Yeah, so we do think the telemedicine is definitely an answer to some of the problems in healthcare as we move forward. We are very heavily involved in teleophthalmology research.

We believe that there is -- our next step into telemedicine will be teleophthalmology. There are a significant number of children, newborns, that suffer from what's called ROP, which is retinopathy prematurity, which is blindness mostly related to oxygen in the very premature babies.

And we think that -- and these babies need to be screened and these babies can be helped tremendously if they are screened and there are systems in place to manage. But the screening is difficult. There aren't that many pediatric ophthalmologists in the country, and some of them need surgery, et cetera.

So we're working on a plan to put a screening program in place through telemedicine that would allow us to provide this service not only to our babies but to other babies in other NICUs. There are now cameras being developed that can provide enough -- a clear enough picture that you can make diagnoses, et cetera, et cetera.

So I think anyhow maybe within -- again, hopefully before the end of the year, we will be able to point to us having started into this second path of telemedicine for us which is teleophthalmology..

Great. And then last thing, I was hoping you might just give us a little update on the other non-practice acquisitions and progress you're making, any significant developments you want to highlight would be great..

We're just on track. We're happy with what we have acquired there both, both of those practices. We think that they are helping us on the one side with our surgical partners and on the other side as we go into these new specialties, we think they'll help us save some time in getting our revenues, cycle management programs off the ground.

So basically we're happy with where they're going, they're on track and we think they're going to grow, continue to grow as well..

Great. Thank you very much..

Thanks Brooks..

Thank you. Our next question then will come from the line of Brian Tanquilut from Jefferies. Please go ahead..

Hey, good morning. First question for….

Good morning, Brian..

Good morning. Vivian, first question for you. So as I look at gross margin, you had a little bit of lift on a year-over-year basis and I'm guessing some of that’s from vRad.

So how much more opportunity should I be thinking about in terms of gross margin expansion as vRad rolls in? And also on the G&A line? Is this the right run rate to be thinking about, roughly $72 million per quarter factoring on seasonality of course..

Yes. So for the gross margin, obviously, vRad and MedData both contribute favorably to that because they have a -- it's just how the expenses line up.

Right? So I think it's going to depend really on what happens with some of the other -- our core business, right? And so we were able to have ten basis positive in spite of the fact that we had lost some of that, some of that parity. So there could be -- there could be a little bit more favorability there.

We just have to see how that ends up as it relates to the third quarter, what happens with the p-mix, with parity, with same unit, all in, and so that's a factor in there. So we're happy with the ten bps. On the operating -- on the G&A line, so I think the 50 basis points is a good range. Could it be slightly more, slightly less? Yes.

But it's a good range to look at that..

Got it.

And then, Roger, now this you've got vRad in the fold, as you look at it, I mean do you still feel as confident as you were at the time of the announcement of the deal about that company's ability to grow organically sort of in the 10% range or high single digit range?.

More so. As I see the opportunities and I see the team that they have put in place there -- their business development team and the idea that they have to continue to grow, I'm more confident than -- than I was when we made the original acquisition that this is going to provide us with a good same store organic growth avenue..

Got it. All right. Thank you..

Thank you..

Thank you. Our next question then will come from the line of Gary Taylor with JPMorgan. Please go ahead..

Hey, good morning..

Good morning, Gary..

Welcome back..

A few questions.

One, I don't know if the final purchase price allocation of vRad have been completed, but are you still triangulating to that acquisition alone contributing about $20 million of annualized intangible amortization? That’s still in the ballpark?.

Yes. That's in the ballpark, Gary. So, obviously, we did do our opening balance sheet and purchase accounting is -- the first estimate of that is reflected in our balance sheet for the quarter. And so, yes, we're still on track with that. Obviously, we had third party valuation and all that, so it's roughly in that range, yes..

And the majority of the remainder is related to MedData?.

The majority of the remainder of what, I'm sorry?.

Of the quarterly intangible amortization expense..

Yes. Yes. MedData and then, of course, you still have, primarily in the anesthesia space you do have some amortization related to that because they do have some of -- the smaller practices have some stipend revenue that we do have to also value. But that has been -- that has been in the numbers before.

The bigger drivers were these last two acquisitions, MedData and vRad..

And then I just want to go back, I guess, to Kevin's question just on the payer mix.

I guess when I read that initially this morning, my expectation was perhaps anesthesia might have been a driver of that with some exposure to some of the expansion space, but it sounds like you're saying that was -- that was consistent across the lines of business both in neonatal and anesthesia that you saw more Medicare -- or Medicaid mix?.

Yes, we did..

I just want to make sure.

On that 90 basis points, that is still just 1% of revenue across all service lines? That's how the figure is calculated?.

Yes..

Okay. And then my last question if we look at this quarter and we exclude the effect of parity on both revenues and earnings, revenue was up 16%. Earnings were up 20%, which is great. Obviously, the share repurchase has been a driver of that earnings leverage.

So just kind of coming back to the balance sheet again, Roger, I mean you're definitely at a leverage level that most companies would view as quite conservative, but it's a little bit higher than you guys have run for a while.

How do you think about repurchase heading into ‘16 and ‘17? Did we revert back to repurchase efficient to offset share count dilution or do you think repurchase could play a bigger role in earnings leverage for the next couple years?.

Yes. I think that -- The way I'm thinking about it is that we -- in the -- if you remember when we were just in the neonatology business we would repurchase our shares at the end of the year, if we had cash left over.

And I think that during those years, we ended up buying back $500 million if not more worth of our own shares prior to going into anesthesia. When we went into anesthesia, we said, look, we prefer to, obviously, put the money to work. And so that was how we managed our balance sheet. But moving forward, I think that we will reevaluate that.

And this year we have spent, obviously, including vRad, a lot of money. So I would not expect at the end of this year that we would be announcing any additional share repurchases.

As we go into 2016, I think that we will -- if we are not spending a significant amount of money in acquisitions, which is what we, obviously, would prefer to do, then, yes, we will revisit the idea of putting another share repurchase in place, not just to handle the dilution but to actually do additional share repurchases..

Okay. Thank you..

Thank you. Our next question, then, will come from the line of Gary Lieberman with Wells Fargo. Please go ahead. And Mr. Lieberman, your line is open. Mr. Lieberman, maybe your mute's on..

We can go on to the next..

All right. Thank you. And our next question will come from the line of Dana Hambly with Stephens. Please go ahead..

Thanks. Good morning..

Good morning, Dana..

Keeping on the vRad, as I learn more about the industry it sounds like maybe for years now the first reads are kind of under attack. Maybe they shouldn't exist and we should just do final reads, and that would seemingly be a threat to the vRad business. But I'm guessing you have a different view on that.

Maybe just describe the opportunity if the first reads went away..

Well, we think that there will always be opportunity to do both. We definitely want to move more towards the definitive read world. But we think there are always going to be opportunities for both. Our percentage of definitive is increasing, and we expect that we will continue down that path..

Okay. Thanks. And then on the -- on the NICU days up near 4% and, obviously, birth rate was a contributor. I know last quarter you talked about the neonatal abstinence.

Is NAS really the biggest driver of the growth or there are some other factors that we should be considering?.

Well, birth -- admissions to the NICU are always going to be a percentage of birth. So as births go up, you can expect that maybe 10%, 11%, 12% admission to the NICU. So as births go up, NICU admissions are going to go up. Neonatal abstinence syndrome is a big contributor to that.

I also think that if you follow what's going on in obstetrics, hospitals have gone to in-rooming their babies with their mothers. And so the old concept of a nursery with 20 kids in it, the nurse what’s feeding and taking care of, that's probably gone in most, if not all, places across the country.

And what that means is there are more -- there are always babies now staying with their mother. And that makes the pediatricians nervous because if anything happens to a baby while they're in the room with the mother, the mother is not likely to pick up on it.

If the baby whatever turns a little blue or… And so I think there is less tolerance from the pediatricians to leave these babies rooming in with their mothers. And at the first sign of any change in the baby, they're likely to want to admit the baby. So the only place we can admit them which is the level 2 neonatal NICU.

Perhaps if that baby was in the nursery with all the fat eight pound babies around and nobody was -- the baby turns a little blue the nurse knew enough to not worry about it or to at least tell the pediatricians, reassure the pediatricians that the baby was okay, et cetera.

If that happens in a room with a baby and the mother, chances are that baby's going to end up in the neonatal ICU..

Okay. That's helpful. And last one for me -- Roger, you talked about I think in the last couple of calls about the OB hospitalist program and I feel like maybe any day we could hear something on that. But just curious as to how, if that's an area where you're looking to grow.

Is that one where you grow via acquisition or is it one where you grow via an extension of an existing practice?.

Yes. No. We continue to grow that program very nicely. And it's all -- it's not acquisitions. We may at this point be the largest group of pediatrics -- of OB hospitals in the country and all of that growth is organic. There hasn't been any acquisitions.

I think we -- Jim, what did we have, ten of those?.

Ten in the pipeline..

Ten of those programs across the country so, yes, it continues it grow. That's a nice area of growth for us as well..

Thanks very much..

Thank you..

[Operator Instructions]. Our next question, then will come from the line of Chris Rigg with Susquehanna Financial Group. Please go ahead..

Good morning. Roger I just wanted to follow up on the comments you just made about the nursery versus having the baby in the mother's room.

I guess I'm not fully understanding, are you trying to say that this may be providing -- the change in sort of how you treat the baby after the birth is providing sort of an artificial tail wind to NICU buy ins? I don't think I'm interpreting that right but that's also how it could be interpreted.

Can you flesh that out a little more?.

Yes. No, I'm not saying artificial. I'm saying that in the old days, there was a nursery with some newborn nursery nurses who had experience caring for these babies and who could identify -- there are babies that do well for the first 12 hours and then something happens, and they end up when their duct just [ph] closes, they end up in the NICU.

And so there are a number of admits to the neonatal intensive care unit that come not from the delivery room but from the NICU as the baby -- maybe develops an infection or sepsis or something and it takes time for those symptoms to express themselves.

That -- when the baby is in a regular nursery with nurses who know what they're doing who have been taking care of these well babies for a long time, the nurses are able to pick it up immediately and to determine, make the call and get the baby taken care of.

When that happens in a regular room with a mother who is not used to seeing sick babies and transitional babies, et cetera, it's likely to be a while before it gets picked up.

And what I'm saying is that I think some of these admissions are cautious pediatricians who recognize that if there is any -- if there are any of these symptoms that happen while the baby is rooming, they're not going to take any chances and say, well, let's wait three hours and see how the baby proceeds.

They're going it say let's get the baby into the step down, the level 2 nursery, not the level 3 NICU but let's get the babies to the step down nursery and make sure he gets monitored and we've got somebody looking at the child who knows what they're doing. So I think some of the admissions are allowed.

The question was why the increase in admissions, and I said was it all related to do neonatal abstinence and I said no I think births are going up, and admissions are a percentage of that, I think neonatal abstinence is a percentage of that, and I think that this also may play a role..

Got it. And then just the follow up is, obviously, you've got the core neonatology business. Now you've got anesthesia. Now you've got vRad. Have you at all changed sort of your marketing patterns, or is that still something that is in your mind a few years away with regard to going to hospital partners and pitching more of a bundle? Thanks..

No. We're definitely changing our marketing patterns, and we have definitely had a number of conversations with not just one, with our hospital partners. And so, yes, we are looking to be a solution for our hospital partners for whatever problems they might have.

And you probably heard me say in the past that we have three pediatric surgery practices and one pediatric GI practice, et cetera, and those are just a reflection of some of these conversations that we're having with our hospital partners..

Got it. Thanks a lot..

Thank you. Your next question will come from the line of Chad Vanacore with Stifel. Please go ahead..

Hey good morning..

Good morning Chad..

Good morning Chad..

So I want to apologize up front for this question if it's been answered but I hopped on late.

Is the weak pricing growth just a function of negative mix shift, or have there been commercial pricing pressure or is there anything else, as well?.

So commercial pricing has been pretty challenging over the last, I don't know, couple years already. So that continues to be the case. But this -- this quarter was specifically related to lack of having that favorability because we had a big favorability in the last quarter. So that was really pretty much it, as well as, obviously, the parity decline..

Right. Vivian.

Should we assume pricing pressures ex-parity continue into the third quarter?.

So for the third quarter historically there is a slight increase in payer mix, not really that large. So there could be. But given that we had such an increase in the second quarter, we're not expecting that to be so drastic. But, again I keep cautioning about payer mix because it has been something that has been volatile over the last years.

So we have in our guidance, as I think somebody else had asked Chad the drivers of the same unit, a big chunk of it is volume and less on pricing similar to what you saw in Q2..

All right. That's it for me. Thanks..

Thank you..

Thank you. Our next question will come from the line of Whit Mayo from Robert W. Baird. Please go ahead..

Hey, thanks. My first question is I get asked often about just the general shift in patient to outpatient and what does this mean for the anesthesia coverage and the contracts that MEDNAX has.

When you have a hospital contract, are you doing the inpatient coverage and outpatient coverage for all of their ASEs? And just how does the shift, however slow just play into your strategy?.

Yes. I mean I don't know that I would say for all of the ASEs, but certainly for most of them depending upon the hospital contracts, if the hospital owns a couple of ASEs, we are very likely to have the coverage of those ASEs.

Now if there's a hospital system that has six hospitals within a community and we're providing coverage in four of those hospitals and somebody else is in two, then we wouldn't..

Okay. And I guess my last question has just been the conversation around Perioperative. And I know there's been some emphasis around trying to get the anesthesiologists closer to the pre-op.

Where are we in that cycle and is this an effort you have under way to try to accelerate?.

Yes. This is Karl. So in talking to a few items and I’ll talk a little bit about, as Roger said the volumes going to outpatient, we are seeing outpatient volumes growing but they're growing both for hospital outpatient to the part [ph] of the hospital so he we would get those as well at outpatient surgery centers and it is a mix.

It depends if we have a system-wide contract or specific hospital within a system so whether we necessarily get that new surgery center. Clearly, if the system is opening a new surgery center, we are pushing to be part of that.

And we are seeing growth in addition outside of the ORs in the hospitals, so we're seeing things in the cath lab and GI and EP. We're seeing a significant movement of using anesthesiologists in those areas of the hospitals and we're seeing volume growth from that.

And that's been moving across a lot of hospital systems so we expect that we’ll continue to see that.

As far as the Perioperative process, yes, there is a big movement to try to get anesthesiologists more involved in that, whether it's pre-op, a lot of our practices are already involved preoperatively with the patients, but there is a push to do more of that.

There has been an initiative by the ASA on the Perioperative surgical home on getting anesthesiologists much more involved. We actually have five practices involved in that collaborative, and actually we're currently working with hospitals and all of those require the hospital to be involved in that process as well.

And we are working with hospitals on how do we move that forward, more systematically in the future. So we're involved in how the patients get prepared for surgery and actually some post-surgical work as well to make sure that we can help the hospital with the pre-admissions, and design process around that.

We also have other programs around recovery after surgery that we're rolling out in multiple practices. And we've seen that have some significant impacts on length of stay..

Okay. Thanks a lot..

Thank you. At this time I am showing no further questions in queue..

Okay, if there are no further questions, then I will just thank everyone for participating today, and we will look forward to speaking next quarter. Thank you..

Thank you. Ladies and gentlemen, that does include our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect..