Charles W. Lynch - MEDNAX, Inc. Roger J. Medel - MEDNAX, Inc. Vivian Lopez-Blanco - MEDNAX, Inc..

Kevin Mark Fischbeck - Bank of America Merrill Lynch Whit Mayo - Robert W. Baird & Co., Inc. Ralph Giacobbe - Citigroup Global Markets, Inc. Jason Plagman - Jefferies LLC John W. Ransom - Raymond James & Associates, Inc. Chad Vanacore - Stifel, Nicolaus & Co., Inc. Tejus Ujjani - Goldman Sachs & Co. Gary P.

Taylor - JPMorgan Securities LLC Gary Lieberman - Wells Fargo Securities LLC.

Ladies and gentlemen, thank you for standing by, and welcome to the MEDNAX 2016 Fourth Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. This call is being recorded for replay.

And I would now like to turn the conference over to Mr. Charles Lynch. Please go ahead..

Thank you, operator. I'm going to read our forward-looking statements and then I'll 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 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, or annual report on Form 10-K 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..

Thank you, Charlie. Good morning, and thanks for joining our call to discuss our results for the fourth quarter of 2016. The results we announced this morning wrap up a challenging year for MEDNAX, as we've invested in new businesses to diversify our company. So, it's been a learning curve decline, and that impacted our growth.

And while we continue to add to our acquisition pipelines, the timing of getting those that you've done is always difficult to pinpoint and that can also impact our growth at least in the short-term. Underlying all of this, the pace of birth across the country remains subdued, which have slowed the growth of one of our core businesses neonatology.

When all of these factors occur in the same period, you can see the effect that can have on our results in the near-term. At the same time though, we enter 2017 in a better position to add value to our partners and our patients, and also in a better strategic and competitive position in our industry.

The investments we've made to diversify our business may create some volatility in our quarter-to-quarter performance, but they also increase our opportunities to grow over the long-term. So, as we enter a new year, I believe that our strategy is very much intact.

And as a result, we do expect our pace of grow to improve through the course of 2017 from the level at which we ended last year. And I'd like to talk today about how we're looking at our different service lines and where we stand in our strategic plans for them. I'll start with radiology.

At vRad, after taking steps to begin addressing the challenges we identified last summer, results for the fourth quarter were in line with our expectations, for now, the second quarter in a row. We have also achieved our near-term goal of 500 radiologists under contract. And today, more than 400 of those physicians are already reading actively.

The remainder are so being on-boarded, and we expect them to come online through the first nine months of the year. We also continue to recruit, and we expect that physicians we recruit today will be on-boarded and actively reading by early fall.

So, I believe we have made great headway in addressing the capacity constraints we face in the second half of last year. And as a result, I also believe that vRad is well-positioned for organic growth through its sales and marketing efforts in 2017 and beyond. The steps we've taken at vRad go far beyond just recruiting new physicians though.

We've made changes to our contracting practices both for new customers and for new physicians in order to improve our ability to match supply and demand. We've taken steps to enhance physician productivity. And through all of this, we believe we have improved the visibility of this business significantly.

vRad has also enabled us to take, what I believe, is a very unique approach to adding on-the-ground radiology practices. As I've discussed in the past, we believe there's tremendous value in combining the technological capabilities at vRad with on-site radiology services. As we see it, this value can come in many forms.

For our underground physicians, vRad can provide a robust technology platform including data analytics and deep learning. vRad can also enhance a practice's productivity by providing read along during the day, night coverage and subspecialty reach. And we can provide our on-the-ground physicians with vRad technology in their own homes.

This way, even if they're on call at the hospital, they can do so from their own homes. For vRad, our addition of on-site practices can help us develop new clinical program, provide the benefits of hospital-specific areas of excellence and contribute more expertise and experience to what is already the world's largest radiology database.

Just as importantly, the physicians joining us will now have the opportunity to read for vRad. So, I fully believe that this hybrid model benefits both on-site practices and teleradiology. And this is the strategy that we have now put in motion.

I'm very excited that after last week, we've now completed our first practice acquisition, Radiology Alliance based in Nashville. This is the largest radiology practice in Tennessee with more than 60 physicians who serve hospitals in the TriStar System, as well as other facilities across Tennessee and also in Kentucky.

We're excited to have a group of this quality and reputation, be the first to join MEDNAX. And I expect us to continue to be active in pursuing practice acquisitions this year, as we execute our broader radiology strategy. We've also spent time integrating the sales efforts of our management services business, MedData and Cardon Outreach.

The solutions we offer, including eligibility services and patient pay collections, resonates well with our hospital partners. And we have now developed a pipeline of potential new business that is a direct result of our cross-selling efforts.

What we've also learned is that the implementation of these contracts can take time, and that did have a minor impact on our fourth quarter results. But based on the positive feedback that we had received from our hospital partners, we believe the MSO services we offer represent a very large and addressable market.

In terms of anesthesiology, this has been a very stable business. (7:44) It represents our largest single clinical specialty in terms of revenues. Through the practice acquisitions we completed during 2016, we expanded our geographic footprint by two states and we added more than 20% to our national physician population.

The acquisition market remains very active, and based on our pipeline, I expect that 2017 will be just as busy. We're also well prepared for the changes in reimbursement that will affect anesthesiologists under the macro legislation.

Our own Quantum Clinical Navigation System is a CMS-certified data registry and our physicians are already submitting data through that registry. Based on the work we've done to-date, we believe the changes in payments under macro can have a positive impact for us, with the caveat that there's still time before those take hold.

Finally, in terms of women's and children's care, it's always hard to gauge from quarter-to-quarter the volume of patients that we'll serve in our neonatal ICUs, as you can see from our salient results this morning.

But we continue to believe that long-term demographic trends are positive and that we're only in the early stages of the Echo Boomer population, the children of the Baby Boomers entering their late 20 and thinking about starting their own families. We also continue to see opportunities for acquisitions in neonatology.

And we've started off 2017 at a good pace including a large multispecialty practice that we announced yesterday. In addition, over the past several months, we've had a number of very encouraging discussions with regional and larger health systems regarding the broader continuum of women and children's care that we can provide.

These discussions, some of which have now moved beyond the LOI phase, have focused on adding new service lines, assuming new contracts and generating additional organic growth. This is a direct function of the investments that we have made in our geographical realignment, our system relationships, our organic growth initiatives.

And I look forward to providing additional details as we begin implementing these programs throughout the year. Finally, we had a tremendously active year in 2016 utilizing over $760 million of capital to acquire 13 practices and two MSO companies. And in the process, exceeded $3 billion in annual revenue for the first time.

Despite this, we enter the year in a strong financial position with modest leverage and more than $900 million available on our line of credit as of year-end. Given the opportunities we see for acquisitions today across all of our specialties, I anticipate that we will have another very busy year in 2017 putting our capital to work.

Now overall, let me just say that we're certainly not pleased with our pace of EBITDA and earnings growth in the second half of 2016 and even looking into early 2017. I don't believe our guidance for the first quarter fully reflects the longer term opportunity that we have.

We have numerous avenues to improve on our growth through the course of this year by bringing a more diversified scope of capabilities through our hospital partners, through organic initiatives, cross-selling efforts and acquisitions. Our strategy is very much intact.

And, I believe, our growth over the coming years will benefit greatly from the investments that we have made. With that, I'll turn the call over to our CFO, Vivian Lopez-Blanco..

Thanks, Roger. Good morning, and thanks for joining our call. I'll provide an overview of our fourth quarter and some additional details in a couple of areas. For the fourth quarter, our net revenue increased by 12% to $831 million. Over 90% of this growth came from recent acquisitions.

Our practice acquisitions contributed roughly two-thirds of that growth, and our acquisition of Cardon Outreach contributed the remainder. Looking at our same-unit metrics, same-unit revenue increased by 70 basis points. This was modestly below the range of our expected growth and impacted our results in terms of EBITDA and EPS.

On the net reimbursement side, same-unit pricing grew by 80 basis points. We saw modest improvement in managed care contracting that were somewhat offset by an increase in our government payer mix and by a small amount of parity revenue that we received in the fourth quarter of 2015 that did not recur in 2016.

Related to payer mix during the 2016 fourth quarter, we had a 20-basis-point unfavorable shift towards government payers compared to the 2015 fourth quarter. On the volume side, same-unit volumes decreased by 10 basis points. We had growth in anesthesiology, radiology and other pediatric services.

But this was more than offset by declines in neonatology volumes and slight declines in maternal-fetal medicine and cardiology services. Our same-unit NICU days were down 1.8%.

Looking more closely at our NICU volumes, same-unit first at hospitals, where we cover the NICU, were down just over 1% for the quarter with all of our metrics, admission rate and length of stay fairly stable.

We did not see any particular geographical concentration where neonatology volumes were stronger or weaker, but instead saw variability from practice to practice. For the fourth quarter of 2016, our EBITDA was $168 million compared to $169 million a year ago. Our EBITDA margin was 20.2% compared to 22.8% last year.

In terms of the variance between our EBITDA result and our expected range of growth, the primary factors driving this difference were our same-unit revenue growth and timing of acquisitions, while the timing of implementation of new businesses at Cardon Outreach had a minor impact. Looking at some of the components of EBITDA.

First, our profit after practice expense for the fourth quarter was $265 million, up 4.2% year-over-year. Profit after practice expense margin declined by about 240 basis points, primarily related to the impact of lower same-unit revenue growth, impacts from the mix of businesses we've acquired in the past year and impacts from vRad.

Second, our G&A expenses were 11.7% of revenue in Q4, an increase of 17 basis points over last year. Our interest expense was $16.4 million, up from $8.5 million last year. This increase is related to the incremental interest for the notes we issued in December 2015 and higher average borrowings.

The difference in interest cost between our senior notes at 5.25% and our revolver at roughly 2% impacted our EPS in the quarter by roughly $0.03 compared to the prior year.

Finally, our fourth quarter results reflect an effective tax rate of 39% compared to 35.8% in 2015, which included a favorable impact from certain discrete items that did not recur in 2016. This increase in our effective tax rate impacted our earnings per share unfavorably by $0.04 compared to the 2015, all else being equal.

Our fourth quarter net income was $78.1 million compared to $92.7 million last year, and we reported diluted earnings per share of $0.84 versus $0.99 in 2015. On a non-GAAP basis, adjusted EPS was $1 compared to $1.13 last year.

At the end of the quarter, accounts receivable were $495 million, an increase of approximately $51 million as compared to December 31. Day sales outstanding were 55 at the end of the quarter, flat as compared to December 2015.

For the fourth quarter, we generated $131 million in operating cash flow, up from a $104 million in last year's fourth quarter. For the year as a whole, we generated $444 million in operating cash flow compared to $369 million in 2015. Our total net outstanding debt was $1.7 billion at December 31, up from $1.3 billion at the end of 2015.

This increase was primarily related to acquisitions completed in 2016. At the end of December, our available borrowings under our credit facility were approximately $916 million. Moving on to our outlook for the 2017 first quarter, I want to reiterate Roger's comments.

As our organization has diversified, this diversification can indeed create more volatility in our results from quarter-to-quarter. Our guidance represents our expectations for our consolidated results, but there is no assurance that we'll always capture this potential volatility.

As we announced in this morning's press release, we expect that our earnings per share for the three months ending March 31, 2017 will be in a range of $0.69 to $0.73 and that our adjusted EPS will be in a range of $0.86 to $0.90. The range for our first quarter outlook assumes anticipated same-unit revenue growth will be 1% to 3% year-over-year.

For the first quarter of 2017, we expect that our EBITDA will increase by 3% to 7% compared to the first quarter of 2016. As a reminder, our results for the first quarter of every year are also impacted by some timing issues that affect our results on a sequential basis.

For the first quarter of 2017, these factors include a significant increase in expenses associated with Social Security payroll taxes that are higher at the start of each year when compared to the fourth quarter of the prior year, as well as impacts on net revenue because there are two fewer calendar days than in the fourth quarter.

These recurring items impact our operating income, net income and earnings per share and are included in our financial outlook for the 2017 first quarter.

It's also important to remember that we typically have negative cash flow from operations during the first quarter of every year as we use cash and amounts under our credit facility to pay bonuses and 401(k) plan matching contributions that have accrued throughout the prior year. With that, I'll turn the call back over to Roger..

Thank you, Vivian. With that, operator, let's open up the call for questions..

And our first question is from the line of Kevin Fischbeck with Bank of America. Please go ahead..

Great. Thanks. Wanted to understand a little bit more about the margin compression in the quarter, because that was, I think, the thing that kind of surprised us the most. I think, Vivian you said that the same-store revenue growth was kind of the biggest contributor too.

Is there anyway kind of break it into the three buckets that you mentioned is kind of putting pressure on to the business?.

Yeah. I mean by far, same unit coming in at what it did is, is the biggest component, Kevin. I mean, acquisitions did impact it. And like I said, ramp up of Cardon, but the biggest impact is definitely same unit coming in, at 0.7%..

So, I guess, then the commentary that you expect same-store revenue growth to be accelerating off of this space is important, I guess both from a revenue perspective but also I guess from a margin perspective.

Can you provide a little more color around what those drivers are and the confidence that visibility, I guess, you have in that ramp as the years goes on?.

Well, so, we certainly, as Roger said, we're not expecting. I mean, we think there's been volatility inverse. And certainly, if you go back to last year, there was volatility throughout the quarter.

So, we do believe that that will turn around, and plus we're excited quite candidly that we've had pretty good volume increases at EBIT, vRad, anesthesiology and certainly now as we kick off Radiology. And so, I think that as we've said before, as you know certainly, the NICU specialty is one that has a lot of fixed cost components to it.

So, as that improves, we do expect that to favorably impact margins..

Okay. So, I guess, last question. You've mentioned, I think last quarter that vRad was like a 3% to 4% drag in Q3. And you thought there's going to be similar to that in Q4. And then I think you said it came in line with your expectations.

So, does that mean, it was a 3% to 4% EBITDA drag year-over-year in Q4?.

Yes. Yes..

Okay. And then....

Yeah. And vRad, as I think, Roger said in his prepared comments, they've been delivering what we expect as albeit not what we originally had expected, but nonetheless, they performed to what we thought. So, yes, it's definitely in that range..

Can you just remind us when the comps get easier when you think that turns into a year-over-year kind of tailwind to growth?.

Well, even in the first quarter we are expecting some favorable contribution from vRad, but again I think what we've said is that, we'll see that continuing to improve as we go throughout 2017 as we on-board more of these physicians and so they'll reduce some of the bonus pay that's there. They still have some bonus pay to the physicians.

And so, I think you'll continue to see that happening, but we do have some slight positive contribution from them in the guidance we gave for the first quarter, sorry..

Okay. Great. Thank you..

The next question is from the line of Whit Mayo with Robert Baird. Please go ahead..

Thanks. Yeah. Maybe just looking at the fourth quarter anesthesia volumes, any way to parse out how the underlying growth trended within the fourth quarter? And can you just comment on any of the volatility you saw across the months within the quarter? Thanks..

So, I'm sorry, operator, but that question came across all durable, and so we didn't hear it..

Mr.

Mayo, would you like to repeat your question once?.

Yeah.

Can you hear me?.

We can hear you..

Yeah. We can hear you..

Something about profitable growth – try it again..

Yeah. No. Sorry about this, just looking for some color on the anesthesia volumes within the quarter. And if you can comment on the month-to-month trends that you saw within the quarter..

Well, no – are you talking about anesthesia or NICU?.

Well, I'm talking about anesthesia specifically..

Okay..

How did those grow in the quarter? And then, if you can comment just broadly across all the specialties, the volatility that you saw across the months..

Yeah. So, anesthesia volumes have been positive, not only throughout the months, but throughout the year. And so that's been a positive contribution.

We did have some slight negative volumes on our maternal-fetal medicine business, as you guys know, it's a smaller component as well as some cardiology, it's been favorable in some months and unfavorable in others, but overall it's been a slight favorable for the year. And then neo, as we said, has been up and down throughout the year..

Okay. And maybe just for Roger, if you can spend a second on Radiology Alliance. Obviously, you have a partnership with TriStar already, and I'm just curious if that was a factor for the group. And I think that they really want to grow within middle Tennessee and Kentucky.

So, if you could talk about their growth plans, and how vRad maybe fits into their strategy and what they're doing?.

Yeah. Good morning. Look, we're very excited about this strategy. It does seem to be resonating across the country with a number of practices with whom we're having conversations.

This practice is specific with a very specific target for us, because not only the relationship with TriStar but also, as you pointed out, their willingness and interest in growing and in pursuing a strategy of growth throughout their state and even beyond their state.

The only impact that it had in their relationship with TriStar had was, it just made it very easy to go have a conversation with the hospital, and say, we're looking to acquire the practice. And it just made those conversations just very easy, because we've got a really good relationship with them.

But in general terms, what's exciting about what we're doing is, we have this asset, that is vRad, that is 500 radiologists now; 75% of them are subspecialty trained, which means that they're not just general radiologist, but they're subspecialty trained, they're pediatric radiologists and neuroradiologists, breast imaging specialists, et cetera.

What that means is that we can now offer the hospital 24-hour a day coverage by the subspecialty training to physicians without the hospital having to spend additional dollars in supporting having this kind of reads available on a 24-hour a day basis, which is expensive.

So, we're thinking of this as kind of a hybrid new model or the radiology model of the future, where vRad can read along with the radiologists on-the-ground, so that if there is a sudden spike in study in the afternoon or something, their turnaround time don't have to suffer because vRad can now pick up two or three or whatever percentage of that spike.

They can provide weekend and nice coverage if the practice so desires. We can supply the physicians the technology at home. One of the practices that we are having conversations with have two or three physicians who are on call in the hospital every night.

They can just, as we, be on call at home if they have that technology that was able to transfer those studies back and forth. And so, you can see where that becomes very attractive for the radiologist, because everybody would rather be at home than stuck in a hospital room somewhere all night long.

And then what came from the radiologist was, if I'm at home, I'm already read, and I have the technology at home, can I read for vRad and pick up some extra dollars at night. And of course, the answer to that was, yes.

So, we'll see a hybrid here that allows for the expansion, which was your specific question I guess, because if the group plans to expand to another hospital, the first thing that I would do is, I would take two or three of my better physicians and put them at the new hospital, but now I have a hole, I have to backfill those two or three physicians or whatever that I've moved out.

And what vRad allows is, we have to go out and recruit more physicians. And what vRad allows you to do is to provide that same growth without having to make the investments in going out and hiring additional physicians right away to cover backfill with a hole that you left behind. So, there is a number of competitive advantages here.

It is a hybrid practice, where the local practices can utilize, however, many of the services of vRad they feel are adequate for them, and it provides the ability to grow without having to make significant investments on the part of the existing practice. So, it's a very exciting opportunity for us. It has resonated well across the country.

And I expect that we will do additional radiology acquisitions within the foreseeable future..

Sorry, I might just squeeze one quick one and real quick. Last year, you bought back some stock to offset options dilution. Should we think that that's recurring this year, or is that capital really going to be earmarked for acquisitions instead? Thanks..

So, every year, we will usually buy back, you know that. And so, we will expect to do that this year again. As we said, we have plenty of availability on our line of credit. So, we'll continue to do that..

Okay. Thanks..

Thanks, Whit..

A question from Ralph Giacobbe with Citi. Please go ahead..

Thanks. Good morning..

Good morning..

Would organic growth of 1% to 3% drive any margin leverage at this point?.

Well, it will certainly improve from where we ended up in the fourth quarter, because as I've said, Ralph, on the organic growth side needs to be pretty much north of 3% to have some favorability on margins. But certainly, it will impact that from 1% to 3%..

Okay. So, I guess, what I was trying to get at, look, when we look back at some of the deals that you've done over the last year, we're estimating kind of just under a $10 million sort of incremental EBITDA contribution for the first quarter, which would drive in and of itself about 6% EBITDA growth.

So, just wanted to understand, first, I guess, if that's fair, and then, is the pressure or the pressure on sort of the core growth, if you will, just a reflection of sort of the inability to drive the top line to get that margin expansion?.

Yeah. I mean, it has to be a combination of both. So, what we've said is that, with the organic growth, we've said north of 3% because you do have physician contracts that are being renewed as well as just the fixed nature of the NICU business.

And so then, as we continue to expand into anesthesia, as we know and radiology, those margins are slightly below the neonatology. And so that's what you've seen a combination of all of those things occurring..

Okay. All right. That's helpful. And then just my last one. Roger, you mentioned potential for, I guess, partnerships with regional systems and you talked about women's and children's care. And you're sort of already beyond LOI and you talked about new service lines. It sounds like a lot going on there.

So, I was hoping you can just flesh that out for us in terms of where you are, what the new service lines are, does that mean you have to sort of acquire service lines or new service lines meaning what you already can deliver? So, just hoping you can just flesh it out for us? Thanks..

Yeah. Ralph, all of that growth is organic. We do expect that we'll be able to make some announcements in the next quarter. They are significant growth opportunities for us in women and children's services and includes neonatology, and it includes maternal-fetal medicine and some other pediatric subspecialties.

And without going into any specifics, we do think that it's a very exciting time for us. A part of our strategy is to become the preferred partner for women and children services for our clients across the country.

As we've said in the past, we have put together teams of physicians and other growth people to go out and having the one MEDNAX and having all of our geographic management being done under one individual, all of that is starting to pay off for us.

And we expect to have some announcements to make along those lines within the next three to four months..

Okay. And then if I could just squeeze one more in. Just trying to still understand this. Are these partnerships or are these outsourced arrangements, do you already have business with and it's just an expansion of a contract. Just trying to get a little bit better sense of just what the opportunity is..

Yeah. Well, it's a combination of all those things. In some instances, we're being asked by our hospital partners to assume care at different facilities, not an acquisition but just a straight organic growth.

In some instances, we're being asked by our hospital partners to assume the responsibility for some services that they originally started on their own and now will prefer to see us manage for them. So, it's a combination of all those things. And we'll have details, like I said, within the foreseeable future..

Okay. Thank you..

We have a question from Brian Tanquilut with Jefferies. Please go ahead..

Hey. It's Jason Plagman in for Brian.

Just following up on Ralph's question, how much margin pressure would you expect if organic growth came in at the low end of your 1% to 3% guidance range? I mean, obviously, the improvement of vRad will help offset that somewhat, but I'm just trying to get a feel for how we would think about the impact if organic growth came in at the low end of your range?.

I mean, it's hard to compare to the fourth quarter, because, as you know, the first quarter has other margin compression related to adjust the payroll taxes and all of that.

But again, it would be hopefully better than the fourth quarter, right, all else being equal because we are expecting it to be more than the 0.7% that we saw, but it was a big component of it. I don't know exactly, but because you have to look at the other factors impacting it.

But certainly, we do expect it to be favorable from what you saw in the fourth quarter..

Okay. Thanks..

A question from John Ransom with Raymond James. Please go ahead..

Hi. These radiology deals, just directionally how does the revenue per physician compare, and what does the margin profile look like, say, compared to anesthesiology and neonatology? Thanks..

The margins are very comparable to the anesthesia margins..

Yeah..

We expect that that will continue and in fact could improve somewhat if they elect to utilize more of the vRad services that are available to them..

And what about the revenue per physician?.

I would say it's probably pretty comparable as well.

Maybe do you want to add?.

Yeah. Yeah, I mean, we have limited experience so far, John, but I agree with what Roger says. I mean, I think that it's pretty – what we've seen so far similar to anesthesia, I think there is some room for improvement given some of the things that we think we can do from a business perspective. But that's what we've seen so far.

Again, limited exposure here..

And when do you think – I know you made some commentary about vRad staffing, but when during the year do you think you'll be fully staffed at vRad? And do you think by the third quarter, you'll be back to year-over-year growth in that business?.

Well, we have seen volumes tick up. Again, they've had some change in the mix of their business, but their volumes have been positive even now.

But, to answer your question more directly, I do think that by the third quarter, they expect to have fully staff these physicians that they've hired now that they're going to be fully on-boarded, but that's always changing.

And so, what I want to make sure that everyone understands is that they're always looking at supply and demand, and that's why what we want them to do and what they have been doing and they've been doing it pretty successfully is to continue to on-board these physicians because the volume there is hard to perfectly match, John.

It's kind of like a logistics business, if you will. But given where they're at now, we do expect that you'll see certainly a lot more favorability on the staffing by the third quarter..

Yeah. And I'd say, John, by staff I mean, we mean recruiting..

Yeah..

Not reading, right? So, as far as the recruiting is concerned, we have all the physicians recruited that we had originally predicted we would seek to have recruited by the beginning of the year. The problem or the issue is getting them on-board and getting their licenses throughout the states and their credentials within the hospitals, et cetera.

But it's also an ongoing process because as the business grows, you're going to need to continue through recruit and on-board physicians. And as we add more contracts to the vRad group, it still takes eight to nine months to get these people on-boarded.

And so, whatever contracts we're selling now where if we need more physicians to service those contracts it's still going to take eight months to provide the service or to add the additional people..

So, just to be clear, third quarter, you won't be at full productivity or just have them in the chair, or am I hearing that wrong?.

No, you're hearing that wrong. I expect that by the end of the second quarter, we'll have them wheeling on the chair..

Okay. So, I got you. And then just lastly, I mean, the strategy to acquire radiology groups to accord to go and sync with vRad. Is that a new strategy or was that always what you were thinking about doing when you bought vRad? It seems initially you were talking about being more virtual and now you come around to the view of kind of combining the two.

What change you're thinking or was that always the plan?.

Well, we always said that vRad was it had to be a solution to help to one of the healthcare issues.

There is no way that being able to provide 24-hour backup by all the subspecialists to the hospitals et cetera wasn't going to be attractive and that we would go and have conversations with our hospital partners about our ability to provide those services for them.

But we also always said that we were going to acquire some on-the-ground radiology practices. The idea of providing this hybrid structure evolved as we sat down to talk with the on-the-ground practices and offered to them the opportunity to use some of the vRad services as well.

And so, it kind of evolved from our original idea of having on-the-ground practices and having teleradiology practice at the same time, as we identified that. We could, in fact, provide our on-the-ground practices with significant competitive advantages as we brought both services together..

That's all from me. Thank you..

Thanks, John..

Thanks, John..

We have a question from Chad Vanacore with Stifel. Please go ahead..

Hey. Good morning all..

Morning..

Morning, Chad..

All right. Just thinking about the vRad staffing.

Are you actually seeing the volumes now that that are appropriate for the staffing level that you have?.

Yes. Our turnaround times are back to where they needed to be. And so we're very happy with that. Our clients are happy. We're not losing contracts. And we have a team of business development people out there, specifically for vRad that are selling and obtaining new contracts.

So, what we are doing is, delaying the implementation of those contracts because we don't want to get into that same position again where we sold contract and now we're not able to meet their turnaround time demand because we don't have enough people reading x-rays.

So, instead of starting their new contracts next month, we're saying we're starting the contracts in five or six months..

Okay.

And then just thinking about, so fair to say revenues came in line with your revised expectations and margins in that business?.

Yes. It is fair to say that..

Yes..

So back half of the year, how should we think about margins improving as you optimize that structure?.

Well, I think we have to see what happens with the physician compensation there as we kind of move towards that mix of business that's more related to x-rays. And so, they're actually working on their productivity metrics for that.

And so, I do think that there'll be some improvement with the business as well as just with the staffing of that because they still are paying, as I said earlier, a little bit of bonus dollars. And so, we do expect that to continue to improve throughout the year..

Okay. And then, you know, you touched on mix as well.

What is the mix of read that you're doing on this business compared to where you want to be?.

What do you mean reads in total or our prelims or finals or what do you, more specifically?.

Prelims, finals or maybe x-rays versus something more at higher acuity and more time intensive..

So, the business has been moving more to more finals, and that means more x-rays as well. We do believe that there is an opportunity to do some higher acuity because that's basically part of the model that we like about them, they have a lot of these subspecialty trained.

And I think, as Roger said, as we get some of these on-the-ground practices, there's opportunity for that as well. So that's really how we see it..

All right. And then just thinking about the neonatal volumes, weaker than expected that's probably two out of four quarters this year. And then for this year, I guess, negative same-store volumes there.

Is there something systematic or is there something regional going on, anything you could point to?.

No, not really. We don't see anything either from a geographic standpoint. The other two variables we look at are percentage of admissions to the neonatal intensive care unit and average length of stay, and both of those remain constant within historical limit.

So, what we're seeing is, in the fewer burps and fewer burps just means fewer admissions to the NICU. We do staff our neonatal intensive care unit as such though they're going to be fully utilized, because we can't predict which hospital is going to have fewer admissions on a given day.

And so, it's basically a fixed cost business, it costs X amount of dollars to put a neonatologist in the hospital around the clock. And if he sees three patients or 15 patients, the costs are exactly the same. So, of course, when the volumes are down it hurts our financials, when the volumes come up it helps the financials..

All right. And then just one last thought from me or a question. So, last quarter, you expressed enthusiasm about your pipeline LOIs under contract, but you only really closed one in the first quarter.

Does it look like that the pipeline is dragging out in time to close or how should we think about that?.

Well, we have closed three deals so far in the first quarter..

Okay..

And those three deals really slit from the fourth quarter and mostly as a result of the expectation that the new administration would do something about capital gains, tax rates. And so that affected our guidance for the first quarter.

Obviously, if we had had those three practices on board for the full first quarter, our guidance would have been different. Now, obviously, they'll be probably – for the second quarter and so we can expect the benefit from that, and we expect that we would close more deals in this first quarter.

We don't believe we're done closing deals in the first quarter. But we have, of course, three significant, I would say, deals so far in the first quarter..

All right. Thanks, Roger. I'll hop back in the queue..

All right. Thanks..

We've a question from Tejus Ujjani with Goldman Sachs. Please go ahead..

Hi. This is Tejus Ujjani. Thanks for taking the question. Just a follow-up on that same question about the radiology practices and acquisitions there.

Can you touch, share any color on the valuation multiples that you're seeing and any trends on that front as well as on the anesthesia side?.

Yeah. I don't really want. I talk a lot about that. We don't want to inform our competition of what we're paying for our practices. The anesthesia multiples, as you know, are higher than the neonatology multiples. And we haven't seen any change in the multiples required for most of those anesthesia deals..

Okay. And with regards to your on-site radiology practice strategy, can you give a sense of the underlying clients mix of like HOPD settings versus freestanding that your radiologists are reading for? I'm just trying to get a sense of that, I guess there's been some industry dialog around site neutral payments.

I'm just wondering that if your underlying hospital clients get pressure there, is there any kind of risk for you?.

Most of the practices that we're dealing with are really – although, I mean, they invariably will do some outside the hospital read. The bulk of what they're doing are in the hospital reads. And the practices that we're looking at are just providing those services in outpatient centers.

They are not owners, co-owners or joint ventures with these centers..

Okay.

And so they're only getting paid the professional component, right?.

That's right. Okay. Thanks for the question..

Yeah..

We have a question from Gary Taylor with JPMorgan. Please go ahead..

Hey, good morning..

Good morning, Gary..

Good morning..

Had a couple questions. The first one maybe just a clarification on one comment of Vivian. You talked about, for vRad, the EBITDA contribution in the first quarter being positive.

And I didn't know if you meant just that it will generate positive EBITDA in total or if you meant that year-over-year the vRad EBITDA would increase?.

Year-over-year..

Okay..

Yeah..

So, that's even. I don't believe vRad was really causing issues in the first quarter of 2016, right? It seemed to be 2Q and....

Yeah. Yeah. It was all incremental..

Okay..

Yeah..

Another question is, can you help us just kind of think about conceptually, if we look at the fourth quarter where EBITDA and earnings were down. As you move into the first quarter EBITDA and earnings, EBITDA up 3% to 7%, earnings at the midpoint of your range, flat to slightly up.

I know some of that is the some of the increased acquisition opportunity even though it was pretty modest in the 4Q. And you've done a few deals here in the first quarter.

But I guess, it does seem to imply to me that maybe you do have better margin expectations on a same-store basis for the first quarter even at the lower end of your revenue guidance.

Is that correct?.

Yeah. Certainly at the mid, yeah, it's slightly better. And also what you said, Gary, the deal contribution and given that in that deal contribution we have neonatology deal. And so that impacts it too overall. And so, all those contributors..

And then last question, just for Roger. I think there is some investor perception that for a hospital-based physician, you just sit there and you wait to service the patients that show up.

And so, I just thought, maybe could you talk a little bit about in neonatal and in anesthesia and radiology, what are some of the things you can do in terms of engagement with some of the referring physician groups et cetera to help drive same-store? And then the other part of that, just kind of touching on, you've got a partnership with the hospital as well.

So, we're hoping and presuming that your hospital partners investing in its service lines and investing in capital and trying to grow their surgical service lines, which will benefit your anesthesia business, et cetera.

So, I don't know if there's any noteworthy comments to make on that side?.

Well, first of all, I'd say, it's just not totally related to that, but, and not to sound like a politician, but I'd say that we like the neonatology business. Look, neonatology multiples are very low. The margins are the best margins that we've seen. And we do expect that because of demographics, we do expect that the volumes are going to come back.

I mean, volumes for neonatology have been down, births have been down for 10 years from a high of almost 4.4 million births down to 4 million. That the birth would be down 10% sequentially over a 10-year period, I would have never predicted 10 years ago.

And so, because of demographics, et cetera, we do expect that those volumes are going to come back. And as I said earlier because it is a fixed cost business, once that happens you will see the benefit from that flow right straight down to the bottom line.

What we do with our hospital clients are, first of all, we encourage our physicians at the hospital to expand the services that they provide at the hospital. They are our neonatologists, for example, they are in the hospital around the clock.

And so, we introduce them to things like hearing screens that they can do, which help the hospital out because there is legislation that all hospitals, all babies need to have their hearing tested before they leave the hospital where they are born.

As I've told you in the past, there're 4 million babies born annually in the United States, we'll screen 1 million of those babies. So, they're more productive.

We started a well baby program a number of years ago, which again means that because the neonatologists are in the hospital around the clock, they're not able to serve the sick babies, they're able to go over to the regular nursery where the big fat 8-pound babies are going to be there for a couple of days and they will help the pediatricians by seeing those babies for the pediatricians and then just referring them through their private practice.

We do outreach in our community. We send our physicians out to smaller hospital where they do deliveries, but don't have neonatal ICUs in the whole that you develop relationships with those physicians and nurses, so that if they do get a sick baby or when they do get a sick baby, they will call us directly and refer the patient to our NICU.

So, from a neonatal standpoint, there're a number of things like that that we program that we have in place, that will hopefully lead to better productivity from our neonatal. From a surgical standpoint, there probably aren't that many things that they can do as far as increasing the patient population.

Now they can, and this is an area that's growing pretty fast for us which is the group can go out and start providing services in physicians' offices.

And the office-based practice of anesthesia is an area that is growing pretty fast for us whether it's one week at a dental office or one day a week at a plastic surgeons office or at an ophthalmologist office or whatever that is an area that, that's growing and that helps them being more productive.

At the end of the day, it's a matter of attracting more surgeons who are the ones who are bringing patients to the hospital or more obstetricians. And that's not an easy thing to do, but it is something that we try to also provide them opportunities to take obstetricians or surgeons out to lunch and talk about the services they provide et cetera..

Got it. Not entirely in your hands, but you've got a role in it. So, I think I understand it. That's all I had. Thank you..

Thanks, Gary..

Thanks, Gary..

A question from Gary Lieberman with Wells Fargo. Please go ahead..

Good morning. Thanks for taking the question.

Can you just remind us what relationship, if any there is, between integration trends and birth rates in the U.S.?.

None that we've been able to find. We look at that 10 years ago, when we thought that maybe because of the economy there were fewer immigrants coming across our border states. And we specifically paid close attention to that, and we didn't see any kind of impact..

So there is no concern, if the current administration puts any restrictions on border crossings or whatever they might do that that would impact you guys?.

We're not. Again, we didn't see any 10 years ago, and that is a big concern of ours at this point of time..

Okay.

And then you mentioned the contracts with new hospitals for the radiology contracts, are you making any changes to those contracts that might alleviate some of the margin pressure at the beginning of those contracts or anything that you're doing on current contracts to try to do that?.

No. I mean....

No..

No. We think that the benefit there for us is, or for them and everyone is going to come from better coverage for the patients as well as ability to cover weekends and retirements, et cetera with our teleradiology component..

Okay. Great. Thanks very much..

Thanks, Gary..

At this time, there are no further questions in queue..

Okay. If there are no further questions, let me just thank everyone for participating this morning, and we'll look forward to speaking with you next quarter. Thank you, operator..

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