Ladies and gentlemen, thank you for standing by. Welcome to the MEDNAX 2018 Fourth Quarter Earnings Conference Call. All participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like turn the conference over to our host, Charles Lynch. Please go ahead..

Thanks, operator. And good morning, everyone. I'm going to quickly read our forward-looking statements and then I'll turn the call over to Roger Medel. 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 section 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, annual report on Form 10-K and in the Investors section of our website located at mednax.com.

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

Thank you, Charlie. Good morning and thank you for joining our call. I'm happy to report that our EBITDA and EPS results were within the ranges that we provided previously, as well same-unit revenue growth improved compared to the third quarter with volume increases across all of our service lines except for neonatology.

Finally, we also met the 2018 targets that we established for our corporate and operating initiatives, and during the fourth quarter we also completed a $250 million share repurchase program.

Looking across our service lines, our women and children's services were affected by continuing softness in birth volumes with total deliveries at the hospitals where we cover the neonatology ICU declining modestly for the quarter.

Our other specialties within this service line including maternal-fetal medicine and pediatric cardiology saw modest volume growth, while newborn nursery growth was strong. This has been a focus area for us, as I have discussed in the past and we will continue to pursue growth opportunity in this area.

Our payer mix was also favorable compared to the prior year which is similar to what we saw during the third quarter. In anesthesia our results were largely in line with our own expectations, volume growth was modestly positive.

And while payer mix remains unfavorable the traffic level operational initiatives that we have developed had been effective to date in helping to offset these headwinds. Operating results in anesthesiology remained distorted during the quarter due to the non-renewal of a contract that we have discussed in the past.

But as of January of this year a significant part of that impact is now behind us. Finally, our radiology service line finished a strong 2018 in terms of both organic revenue growth and our strategic expansion. In 2018, we added five groups through acquisitions, representing both tuck-in addition to our existing practices and geographic expansion.

Our radiology organization now totals more than 785 physicians either affiliated with our on the ground practices or reading for vRad and reads nearly 12 million studies annually. I'm excited about the opportunities ahead for us both in the growth of the organization and the clinical innovations which we are pursuing.

This morning we also announced our preliminary expectations of 2019 adjusted EBITDA.

Given the many moving parts in our 2018 results, we believe this can give you a better picture of how we are looking at the year ahead and I would like to take some time this morning to discuss our thoughts behind those expectations and the priorities which we have established.

In terms of market trends at a high level, we're operating with the expectation that the headwinds that we experienced in 2018 will persist. These include clinical compensation growth, a payer mix migration towards Medicare in our anesthesiology services and soft birth trends at the hospitals where we cover the neonatal ICUs.

To varying degrees these have been the key external drivers of volatility in our results over the past couple of years. And our strategic plans revolve around addressing these factors through all the aspects of our businesses that we can control.

For that reason, we anticipate that 2019 will be a year of intense internal focus for us as we continue to execute on our operational and corporate initiatives.

Above all else the priorities that we have established within these initiatives have the common goals of stability of our business, consistency in our operating results and visibility of the trends that we see in the marketplace and across our organization.

From a financial standpoint, our goal remains unchanged to realize $120 million in annualized improvements by the end of 2019.

Based on what we achieved in 2018, we remain on track to achieve the target, but the steps we will take need to become more transformative in comparison to the more tactical steps we took in the early stages of these initiatives.

We have identified areas where we intend to invest further utilizing resources outside of our organization in order to either accelerate our plans or to expand them. We expect that these steps will be focused both on our practices and on our infrastructure support of the practices through the management services we provide.

The first of the steps that we are taking is focused within anesthesiology. This is an area where a lot of our activity from 2018 was very practiced-centered and focused on specific areas where we could make improvements for individual groups.

As we move through the year, our plans increasingly engage not just operations team but also our clinical leadership, our consulting organization, surgical directions and our information technology resources.

Through this involvement, we have been able to identify opportunities that aren't just practice-specific, but then can be targeted across our complete anesthesia organization.

In terms of the incremental investments, we've initially committed to the rollout of additional IT capabilities to improve our practices clinical scheduling systems and process efficiency. This should yield a better experience for our clinicians by reducing the amount of their time spent on non-clinically oriented tests.

In addition, this will allow our clinical leaders and operators to better measure, benchmark and manage their clinical teams, which we expect will ultimately result in enhanced productivity and reduced premium and agency labor costs. Finally, using a common platform and metrics, will enable the sharing of best practices among all groups.

I think this first investment we're making is a good example of the transformative steps we're taking through our operational initiatives.

To the extent that we're managing against the expectations that certain headwinds will persist in our business we also need to establish pathways for continuous improvement in processes, inefficiencies and in the productive use of our clinicians' time.

As we move forward, there will most likely be additional areas where we focus and consider investments and we will continue to discuss these initiatives throughout the year as we progress. I hope walking through this specific rollout, to give you a sense of how we will identify similar projects and what we're looking to achieve.

While our operational initiatives will be a key priority for us in 2019, the deployment of our capital will also be a focus area.

A hallmark of our organization has been our cash flow generation, which we believe provides us the opportunity to generate value to our stakeholders even in an environment as we anticipate for 2019 that may present headwinds to EBITDA growth.

During 2018, we devoted more than $420 million towards a combination of acquisitions and share repurchases a significant portion of which was funded by our free cash flow. In the year ahead, our intent is to commit capital towards both repurchases and practice acquisitions.

On the acquisition side, our pipeline has a similar profile to what we achieved in 2018 including attractive, small to mid-size potential acquisitions across radiology and women's and children's services.

While we haven't included any larger more strategic acquisitions in our outlook for the year, we will certainly pursue any such opportunity if we see it as having a significant benefit to our organization both competitively and financially.

With that in mind, we do expect to be buyers of our own shares during 2019 utilizing our own free cash flow and to the extent our ongoing process to identify a capital partner for MedData results in a successful transaction some portions of the proceeds of that sale.

In the near term, we do intend to repurchase our stock through open market transactions during the first quarter of this year. Lastly, I want to give a brief update on our ongoing search for candidates for our Board of Directors. That search has progressed well since we announced it last quarter.

And as of today we've developed a shortlist of candidates that our Nomination Committee is in the process of reviewing. Based on this progress we expect that we will make decisions over the next couple of months.

To reiterate what I said earlier above all else our priorities for the coming year has a common goals of maintaining stability and consistency in our operating results.

The initiatives we have been undertaking and we'll continue to undertake follow those priorities and are designed to enhance the effectiveness of the support we provide to our physicians, as well as the differentiation of the services we provide to our patients and our hospital partners as a true national medical group.

We believe the plans we have in place for 2019 represent a strong and balanced approach to address both the headwinds and opportunities across our business.

We also believe they reflect that the continued transformation of our organization enhancing our adaptability, our value as a health solutions provider and similarly our ability to add value to our stakeholders. With that, I'll turn the call over to our Chief Financial Officer, Stephen Farber.

Steve?.

Thanks Roger. And good morning and thank you for joining our call. I'd like to touch on a couple items within our fourth quarter results and then I'll walk through our first quarter guidance and preliminary outlook for the year including our source and uses of capital. And finally, I'll add to Roger's comments on our focus areas in 2019.

Looking first to the fourth quarter, our results were in line with our expectation in some places slightly ahead, but there are other few moving parts to call out. On the positive side, same-unit revenue growth is modestly higher than our 0% to 2% forecast primarily on the pricing side.

Our managed care rate growth was relatively good during the quarter, and we also did not experienced from any negative impact from payer mix with an unfavorable comparison in anesthesiology offset by a favorable comparison in women's and children's services.

Related to the non-renewals [indiscernible] anesthesiology contract our salary expense for the physicians affected by their non-renewal was $8 million or roughly $1 million less than we had forecast since there were a number physicians who took physicians elsewhere and thus were not on our payroll.

As a result, the overall impact to our EBITDA compared to 2017 was roughly $14 million in the quarter consisting of these salaries expense and the lack of EBITDA contribution from that contract. Separately MedData's EBITDA results were modestly below our expectations.

This was primarily due to a combination of revenue and expense items during the fourth quarter. Finally, as Roger indicated, we did hit our targets for operational and G&A, improvements for the year which totaled $35 million and $25 million respectively.

Below the EBITDA line, we completed our $250 million accelerated share repurchase late in the fourth quarter with the final settlement of shares received occurring earlier than we had forecast, benefiting EPS by roughly half a penny. A slightly lower-than-expected tax rate also benefited our EPS by roughly $0.01.

Partially offsetting these items we issued $500 million of 6.25% senior notes during the quarter and higher cost of these notes as compared to the revolver borrowings we repaid impacted EPS negatively by roughly $0.01. Turning to cash flow.

We generated $128 million in operating cash flow in the fourth quarter bringing our operating cash flow for full year 2018 to $290 million. This full year amount understates our true underlying cash flow generation since it includes $52 million of cash tax payments we made in the first quarter of 2018 that were deferred from the second half of 2017.

So I think adding that amount back due to better reflection of our operating cash flow and the good reference points for your own expectations for 2019, I'll touch on this in a few moments when I talk more about the year ahead.

Finally, turning to our balance sheet, we ended the quarter with total borrowings of $2 billion consisting of our revolver borrowings and senior notes. This represents leverage at year end of roughly 3.5 times debt-to-EBITDA. Now I'd like to turn to our guidance for the first quarter and our preliminary outlook for the year.

I am going to start with our view of the year as a whole in order to put our Q1 guide in context. As we reported this morning, we expect our adjusted EBITDA for 2019 to be in the range of $550 million to $580 million.

That range encompasses a number of different scenarios in terms of volume, pricing, mix and operating costs, as well as our own operational and shared service initiatives. It also takes into account our experience through 2018 in terms of our end markets, in particular payer mix, anesthesia and birth trends across the country.

And as a side note, our guide does include MedData for the full year. We will adjust for that when and if we complete the transaction. Our views on payer mix dynamics in anesthesia are relatively unchanged and we do anticipate a continued migration towards Medicare based on demographic trends across our footprint of practices.

To put this into context, for the full year 2018 our anesthesia payer mix by volume shifted roughly 85 basis points towards government. All else being equal, that payer migration impacted our EBITDA in 2018 by roughly $15 million.

Should last year's trends continue, we would anticipate a similar headwind in 2019 and in that is incorporated into our guidance. On the neonatology side, while our own NICU volumes had varied quarter-to-quarter that's been against a persistently difficult backdrop.

As roughly 400 hospitals were managed to NICU total delivery volumes have been down roughly 1% to 2% in eight of the last 10 quarters. Unless and until we see some inflection point in that key driver of our volumes, we're incorporating a continuation of that trend into our outlook.

Again to put this in context every 1% change in our same-unit NICU volumes equates to roughly $5 million impact in annual EBITDA. Our outlook also contemplates our trends in labor costs inflation. As you can see in our P&L, our annual labor expense is more than $2.5 billion. And the vast majority of this expense is clinical.

Moreover this is far from the homogeneous labor pool, it encompasses highly skilled and in many cases highly specialized clinicians across multiple specialties and varied geographies. As a provider of the services we focus on.

It is our highest priority to ensure we can recruit and retain physicians and clinicians to care for patients in critical situations. And again the backdrop of relatively full employment across the country, we are not immune to inflation.

This is not a new phenomenon for us nor should you view it as new phenomenon, but I do think it's important to put our clinical compensation cost in the right context. The very diverse nature of our clinical workforce doesn't create broad levers that lend themselves towards universal efficiency measures.

And that more than $2.5 billion a year, it does not take a significant amount of inflation to create pressures for us, particularly if it's coupled as it has been in the past few years with additional headwinds to revenue growth in the form of volumes, payer mix and a challenging reimbursement environment.

It also makes sense for us to anticipate that there will be pockets of more significant pressure such as we've experienced in the past. I want to emphasize that we have identified a number of areas where we can deploy resources to bend this curve, and we're in motions to do just that. I'll touch on some of these specific areas in a moment.

But related to our 2019 outlook, I want to highlight some of the key pressure points we've been focusing on, particularly against the existing financial goals we have for operational and shared services initiatives. Lastly, our outlook contemplates a moderate level of acquisition spend in the range of roughly $100 million.

This is similar to our acquisition activity in 2018. And at this point, we would expect the profile of our pipeline activity to be similar, with a focus on smaller to mid-sized deals within radiology and within women's and children's care.

While there is always the potential for some larger and more strategic deals, we're not incorporating any such deals into our outlook. So those are the big drivers of our outlook for 2019, and obviously we'll revisit each quarter based on our experience as the year unfolds.

I'll also make a couple of comments related to our first quarter guidance, the details of which we provided in our earnings release this morning.

I know that the modeling the progression of our EBITDA from the fourth quarter to the first quarter can be challenging to begin with, and likely even more so this year given all the moving parts within our results over 2018.

To that end, we've provided additional detail in our press release this morning about the seasonal factors that typically impact our Q1 results. The greatest of these is the disproportionate share of our annual Social Security payroll taxes and 401(k) match that we incurred in the first quarter.

Historically, we've taken about 40% of these expenses in Q1, which impacted adjusted EBITDA by about $25 million all else being equal, compared to if they were distributed evenly throughout the year. We expect that impact to be similar in the first quarter of 2019.

Second, the first quarter of this year has one fewer week day than last year, which equates to roughly $4 million in reduced EBITDA. This adds to the expected seasonality of our earnings this year in terms of the expected contributions from Q1 to our forecast full year results.

As you'll be able to see, our Q1 guidance range equates to roughly 20% of our full year outlook, which is at the low-end of the range of that contribution over the past number of years. This day account also impacts a comparison of our expected first quarter result to last year.

In addition, as we disclosed in the past, the EBITDA contribution from the Southeast contract was roughly $11 million in the first half of 2018 and more specifically about $5 million in the first quarter of 2018. Now turning to our focus areas for 2019, Roger provides a broad perspective on the operating plan that we have in place.

I want to add some of details to those plans in order to give you some color on what kind of activities we're targeting. Since joining, MEDNAX, I've been heavily focused on our cost.

I've also spent considerable amount of time with our operating leadership to get a better understanding of the dynamics between - behind these cost trends as well as our ongoing operational and shared services initiatives.

These have been very effective so far but we've also discussed over the past couple of quarters that as we move forward, our initiatives begin to move away from taxable steps and towards more transformational ones. The primary reason for this is that while our clinical cost structure does not lend itself to uniform measures to offset inflation.

There are in fact a number of areas where we believe we can drive more consistency and more efficiency. From my own perspective I believe there are significant opportunities to harness data, analytics and technology to drive performance across the enterprise.

I also believe this will require meaningful IT and operational investments in areas like technology-enabled process, change shared service expansion and improvement and also meaningful deployments of administrative tools and technology directly into our practices.

To that end, we've been contemplating different areas where we intend to supplement our own internal resources with external resources in order to accelerate the rollout of new technology and tools while we support for the implementation of these tools as well the analytics.

The first commitment we've made is to support the rollout of a robust scheduling and clinical resource management tool across our anesthesiology organization which Roger referenced in his prepared remarks.

We anticipate that the cost we will incur for this rollout will be roughly $15 million to $20 million and we intend to complete it over the coming four to six quarters. That's a significant acceleration from what we might achieve across more than 40 different practices without outside resources. So there is a distinct time benefit right there.

But to put dollar cost in a different perspective our total clinical compensation expense to anesthesia alone is north of $0.75 billion of $1 billion. It doesn't take a significant percentage change in the trajectory of that cost trend to pay back our $15 million to $20 million investment in very short order.

And that's how we're thinking about initiatives like these compressing the time to value from implementation to completion and accelerating the time line on ROI. As we indicated in our release this morning we will be breaking out the cost of transformational investment like this one as we move forward.

I think this will help clarify which investments we're making proactively and our decision making process behind this is heavily dependent on the returns we expect to achieve.

I think it's a little premature to place a hard dollar figure on what we'll commit to in 2019 but a good way to think about it is that we expect to move forward on two or three additional similar investments through the course of 2019 and quite likely several more in 2020.

And we're committed to providing you with details on our areas of focus we'll have in the rational for our decisions. Lastly, I want to touch on our cash flow and our plans for uses of capital in 2019. Since I joined MEDNAX one aspect of this organization has continually impressed me is our cash flow profile.

Adjusting for various timing issues such as the tax payments we deferred in 2017 into 2018, we generally convert between 60% and two-thirds of our EBITDA into operating cash flow. In 2019, we would expect a similar conversion of EBITDA to cash flow. Against that our CapEx requirements are fairly minimal.

2018 capital spending was only roughly $50 million that included roughly $20 million from MedData.

Our current outlook for acquisition activity this year is fairly modest given our internal focus such that our expected capital deployment per deal as part of our 2019 forecast would utilize only about a third of our free cash flow with the remainder available for share repurchase activity we intend to undertake and other uses.

So overall, we believe that we can fund both a modest acquisition pipeline and a meaningful return of capital to our shareholders through internally generated capital. And as we indicated in our release this morning, we intend to utilize some portion of our share repurchase authorization by open market purchases during the first quarter of this year.

Finally, in addition to our free cash flow we do intend to utilize any proceeds from our previously announced plan to sell MedData toward the combination of debt repayment, share repurchases and acquisitions.

We remain relatively early in that process but so far I'm pleased with the level of interest we've seen in MedData which I believe validates our views that it will represent an attractive platform for the right capital partner.

From a modeling perspective, we expect that MedData will move to discontinued operations when we reach an agreement for sale. And for modeling purposes MedData's EBITDA for 2018 was $42 million and we have budgeted $45 million for 2019. I'll also want to point out that a significant portion of our historic CapEx has been related to MedData.

So the potential of that business - the potential sale of that business will have a fairly nominal impact on our ongoing free cash flow.

Overall then we believe our cash flow profile supplemented by potential proceeds from MedData sales that will be available for a combination of debt repayment, share repurchases and acquisitions will enable us to pursue significant value-added activities through 2019 and moving forward. And with that I'll turn it back to Roger..

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

[Operator Instructions] Our first question comes from the line of Ralph Giacobbe with Citigroup. Please go ahead..

Thanks. Good morning.

Details were helpful, but hoping you could help bridge a little bit more in terms of embedded core growth expectations in the guidance both in terms of revenue and EBITDA?.

Sure, Ralph. Good morning. Other than the key assumptions that we've outlined, I'm not exactly sure what it is that you are looking for. I mean, when you put all the different pieces together I mean essentially if you look at the midpoint of our guidance it's essentially fairly consistent with the results that we reported for 2018. And Charlie….

No that's helpful. I guess there's obviously, a lot of moving parts with some of the contracts coming off and some of the pressures you saw, and I understand the continuation of the pressure. But some of the pressures also continued in the fourth quarter, and the results are better than seemingly the guidance looking ahead.

So that's what I was trying to bridge in terms of just core growth when you look at the business and say, when we strip out some of the core one-time items, what's the baseline growing or not growing for that matters?.

Sure. Yeah, I mean, we did add a lot of detail in our disclosure, in our written comment, and in our release of this morning.

And I guess really the only thing additive that I would say, Ralph is when you look at the various buckets of headwinds, and you look at all of our activities that we have underway, additional activities that we are working on, I think the goal for the year is you try and have them largely offset each other and to focus on a year of stable and consistent results..

Okay. Fair enough. And then if I could, you talked a lot about the strong cash flow that company generates. Any thoughts or updates on how you approach or think about of dividends.

I mean, we talked a lot about repo and M&A, and may be debt pay-down and even stability of that cash flow and sort of where you are in the maturity cycle, is there any increase thoughts or discussion around a dividend?.

Hey, Ralph, good morning. We haven't really spent a lot discussing the possibility of a dividend. I think that we've made it pretty clear that we intend to be buyers of our own stock, you know, going into the year and into the quarter. We've got a board meeting coming up, and I'm sure that's a topic that will come up again.

But as of this point, I don't really have anything else to say about the dividend..

Okay. And then just real quick, I just want to clarify.

The non-renewal of certain contracts that you mentioned in the press release, there's nothing incremental, that's just related to the SAC [ph] contract, is that correct?.

That's right..

Okay. All right. Thank you..

Next, we'll go to the line of Brian Tanquilut with Jefferies. Please go ahead..

Hey. This is Jason Plagman. So a question on the G&A spend, in Q4, it stepped up a little bit more than people were expecting.

Given the cost initiatives there, should we expect that to trend down throughout 2019, where do you think will end 2019 from a G&A dollar perspective?.

Yeah. Jason, good morning. We haven't really cracked out at that level of detail in terms of our guide. Our primary goal was to expand from a one quarter forward guide to a full year guide, so you can have a sense of what we're working toward.

And also really, there is a lot of moving parts over 2018, so we were just trying to make it easier for you to get an overall sense of 2019. So hopefully, that was helpful and constructive. In terms of G&A, more qualitatively, I would say, you should expect that number to bounce around a little bit, because there are so many different parts in that.

I mean, I'll give you a couple of examples. Our revenue cycle operation is in that. Our IT is in that. Our rent expense is in that. There is just a significant, significant number of items that comprise it and to try and delve into that is fairly complicated. And I'm not sure how useful it would be in terms of understanding our overall outlook..

Okay. That's fair. And then just thinking about from a margin perspective, so, if I back out the Charlotte salary from the Q4 results I get an EBITDA margin of $15.5 million or approximately.

Should we expect that to be where you end next year for Q4 2019 as well or what kind of - given the cost savings that you're driving is that the way you're thinking about it with the savings offsetting the headwinds that you've mentioned?.

Yeah, you know, I mean the way that I would think about it probably is that we are not at a margin focus as we are EBITDA-focused. So we provided our guide for 2019 on adjusted EBITDA because that is precisely what we are looking at from a financial perspective as our primary objective.

And so there's bunch of parts that sort of move around that which impact margins up and down.

And if you think of 2019 as a largely stable consistent year in terms of our expectations relative to our reported performance of 2018, I'm not sure that focusing too hard and put it takes is really going to let you to a better place because all of those elements haven't baked into the 550 to 580 guides that we provide..

Okay. Thanks for the question..

Next we'll go to A.J. Rice with Credit Suisse. Please go ahead..

Thanks. Hi, a couple of questions if I could first appreciate your comments on the Q1 outlook. I was wondering you had comparable growth of 2.8% in the fourth quarter but you're guiding for 0% to 2% in the quarter. I know you got the one less day and it looks like it was probably a tough comp a year ago that you're dealing with.

Is there any other change which relative to what you saw in the fourth quarter and trends that you're incorporating in your first quarter outlook within the business lines or is it pretty much accounted for with those two things?.

Well those are it basically. Good morning..

Okay. And now Steve but outlook it sounds like gets your legs already there.

The 3.5% debt-to-EBITDA which you guys are at now what's your thought about comfort with that or would you like see that move in one direction, do you guys have an updated target you're looking at?.

Yeah you know A.J. I mean you know look I'm fine at 3.5%. And I think we've historically described our comfort in the sort of 3%, 3.5% sort of range moving up and down. I think clearly for a little while or probably going to be at the higher end or a little above given what we view as our longer-term range.

And I think over the next couple of years you should see as we get incremental traction on all of these initiatives that we have in place and all the new ones that we expect to launch.

I think our expectations is some combination of a debt reduction and EBITDA growth over time we will bring that ratio back to a more normalized level within that sort of lower half of 3% to 3.5% type range..

Okay. And then press release this time, I think last quarter as well it referenced that the payer mix the language is slightly different, but basically the payer mix was steady year-to-year in some form of fashion as it was described. I know you made the comments about the overall impact on 2018 of payer mix pressures in anesthesia.

But has it more steady down in the last two quarters that that's less of an issue as you move into 2019 or do you think that's still a bit of a headwind for you?.

Yes, you know, A.J. I mean, we were - we did speak a lot about payer mix in our prepared remarks sort of on purpose. The - I guess I think about it this way. In Q4 we did pretty much have a wash right? Some beneficial payer mix in women's and children's basically offset the anesthesia mix.

And frankly our anesthesia mix in Q4 was a little less than we had seen in other quarters and women's, children's are better than we have seen. So our view on anesthesia mix is that it's probably a - we view that as a persistent headwind. And that's one of the reasons why we talked about it separately.

It's simply demographic-driven, and so we view that as likely more persistent. Women's and children's we have good impact and we had some good benefits but it's really based on a number of other factors.

And I think the probability weight it while we've enjoyed it of late if you probably weight it it's likely to move around a bit more than the anesthesia mix is. So we've incorporated in outlook along those lines as part of our 2019 guide..

Okay. All right. Thanks a lot..

Next we'll go to the line of Kevin Fischbeck with Bank of America. Please go ahead.

Okay. Thanks.

So I guess when you think about the guidance is it right to think about $60 million wasn't sure there's any deal out there about run rate of 120 versus actual realized synergies this year?.

Yes. I mean look I think Kevin our goal is to get to the 120 by the end of the year. And we do have that baked into our guide but it's not 120 run rate during the course of the year. There is a ramping in over the course of time..

Okay.

So it's going to be something less than 60 realized in the year is that the right thing to think about?.

Yes..

Okay. So like when we look at the guidance it looks like you're talking about up 2% down 3% kind of the number and if you assume I don't know half of $60 million is realized this year that kind of says that the core - is down 3% to 9% on an organic EBITDA basis even though you're doing I guess some deal there too.

Is that the right way to think about it? And it sounds a little bit what you're doing on the cost side kind of said that you're always thinking you're going to have to save $30 million or $60 million dollars every year going forward but just don't understand what you think the core business is doing and whether you're setting yourselves up to be able to announce and deliver another round of cost savings next year to kind of keep a similar growth profile of in 2019 into the future years..

Yes, Kevin let me sort of try and address that in a couple different pieces. I think pretty much every healthcare provider has a similar dynamic to MEDNAX. I don't really think we're all that unique need where everybody's got reimbursement pressure, everybody has cost inflation, particularly on the labor side.

I think in some areas, we have a little less cost inflation than, say hospital company might, because we don't have a bunch of a pharmaceutical spend for example. The flip side is 70% of revenue is labor for us, and most of that labor is relatively high cost specialized clinicians.

And so we probably have a bit more labor cost pressure than others, but we have other cost pressures that may serve to offset that a little bit. So I do think it is fair to say, as it would be for just about any health care company, that it's really just part of the business that every year you're always looking for ways to be more efficient.

Now I guess I would add to that, there are some unique benefits to the fact that we have this remarkably heterogeneous and geographically distributed $2.5 billion workforce.

In that, there are a significant number of opportunities to every year create incremental efficiencies, whether it's through technology or analytics or the other stuff that we've talked about. It would be very different if there is some monolithic cost and we were trading barrels of oil, which we of course are not doing.

So I think from our general mindset that is the case. In terms of, like specifically quantifying how much the drag is that we need to offset, I think there will be varying views on that, but from a general dynamic, I mean that's just the life of healthcare provider..

Okay. That definitely makes sense. And then I guess if you think about the issue that's going to outline - these are the headwind in 2018 I think a lots you're going to fix it in 2019, the payer mix headwind of $50 million. I guess that's happening during the period of generally strong economy. So that feels like, I guess good as it's going to be.

The first one in theory should be reversing at a, we all kind of expect at some point first to improved, but you point not seeing you had some better, because of fare and labor cost.

I guess love to hear thought about, do you think same pressure in anesthesia stay this way like when you think about it long-term or does it get better or worse in the labor pressure than it gets better or worse over time.

I appreciate that you can provide 2020 guidance but it's not over the long period of time, how do these things going to bear out?.

Yeah. I mean look Kevin, far be it for me to try and project more than one year in the future. But in a general sense, I would say, you definitely called it right Kevin in that. Each of these areas, it's kind of in the extreme. We have full takeaway. We've got full employment across the country. We've got a three point whatever percent on employment rate.

Health care, you have a decent amount like depending on what study you read and who's saying what, things like being sort of national estimates for labor inflation are somewhere from the mid-two's to the low three's, and that's before you talk about subset which is health care which is usually more challenged.

And then another subset within that which is the fact that we have some highly specialized people, where scarcity of those people is an incremental factor. And then you look at some of the states that we do business in where they're even more competitive in terms of certain specialized health care providers.

So - but it does seem to be in extremist if you believe that there is full employment environment until the end of time then that's one view. I don't think we really share that view. And so I think these factors are all - we haven't called perfect storm but I guess I will say we feel all those pieces are somewhat in extremist.

And that the likelihood of everything staying like this on a persistent basis seems pretty well. At some point we have to be rewritten to that we which will be a benefit for us in terms of earnings..

And let me just add that the payer mix shift that raising in we're seeing in anesthesia is probably in my opinion and this my opinion is probably as bad as it's going to get simply because that is being driven by the elderly population.

And so most of what we are seeing there is really based on semi-elective procedures right? So if you need artery bypass you're not going to wait in your 60s you're not going to wait to have it done. On the other hand if you need a hip replace or a knee replace you might walk around with a cane for a couple years until you reach that age.

And so I think if that is what I believe and I think we believe that that is most of what we're seeing the increase in volume which is good being driven by the elderly population needing more procedures. But at the same time with a payer mix that reverses you less for those procedures.

So I really - my own personal opinion is, I don't see where that's going to get any worse. I think that that is where it is for the time being as we cycle through this elderly population..

Great. That's very helpful thanks..

Next we'll go to Ana Gupte with SVB Leerink. Please go ahead..

Hey thanks good morning. Following up on the cost efficiencies which you say more just looks like back loaded.

What type of assumptions are you building into that for the re-contracting that you're doing with the - risk sharing on revenue and cost metrics like maybe a five year period rather than seven you talked about? And then what has been the progress that is being made on changing those contracts for any additional groups?.

Sure. Good morning Ana. I would - I think probably the simplest answer is that we have - our forecast is based on a detailed budget process which goes down to the practice level and it does include our assumptions for each of the re-contracting situations that our schedules for this year. So I would say those are baked in.

I'm not sure if you have anything you like to add to that..

Hi, Ana.

I would just add that when we're looking at that kind of a transition in comp structure for our practices I would to just keep in mind that the underlying goal we have in that kind of a transition is to reengage the physician and the practice to have them retain some autonomy over what they're doing and engagement in their own productivity performance and growth.

It's not as it's not designed to reduce their compensation, in fact as we go into those discussions without getting into too much detail, we're still looking to solve for the appropriate level of compensation that they deserve.

On a go-forward basis, the goal is to have an equitable sharing up-and-down side between the corporate entity and the practices of the success of that practice it. And that's what we've achieved so far in the early stages of some of these recontract and we have other discussions are ongoing and will update as we go through the year.

But that's the real goal is to have that engagement of the practice is to have them share in a first dollar benefit when they identify ways to grow, ways to enhance their own productivity..

Okay. Thanks for that color. I would love to hear more updates as you move throughout the practices. Another piece on the guidance to think, you know, you had some tailwinds on the managed care, small tailwinds on the managed care contracting in the second half of last year.

Is that - in there is there any incremental to go and is there any upside or is that at the higher end of your guidance there may be some upside, I guess?.

I think again probably the easiest way to answer it is - we've made assumptions in our forecast that are specific to most of the contracts that are significant enough to move the needle within our overall results. So the guidance would effectively bake in our aggregate expectations..

Okay. Thank you. Then final one on the NICU and the growth rates. You've talked about cross-selling additional to hospitals and that well-baby care with pediatricians that are going to hospital based bringing them onboard.

What point would you feel that your own effort to offset some of the sectors would get you to a point where you don't have to bake in this 1% - everyone with the NICU you have a potential $5 million headwind it becomes flat - even flat to even better may be..

Hi, Ana. Good morning. I think it's fair to say that we're making some good progress there. I think that it is an area of focus for us that is producing some good results. If you look at our press release every area within women and children's services grew during this quarter with the exception of neonatal intensive care.

So that's really a reflection of the efforts that we're making. When you think about the services that are tied in or built around neonatology you have maternal-fetal medicine which is a very hard to come by group of specialists.

There may be a couple of thousands of them across the country and these are high-risk obstetricians which everybody wants because they drive business into the hospital. But they are hard to get.

We're talking about in well-babies which is an area again that we have placed specific emphasis on and which is growing for us because that's an obvious area of growth for us.

We're talking about OB Hospitalist which is our fastest-growing area right now where we're providing the hospital with obstetricians to be in the hospital around the clock ready to handle any emergencies that might go up. We're talking about pediatric cardiology. We're the largest group of pediatric cardiologist in the country.

We're talking about pediatric intensive care. So anyway, there's host of these services, which is why we can focus on that and tell you that if you look at neonatology that's more than 50% of our revenue. And the impact on birth has had obviously a material impact on our results. And yet, we've been able to overcome that and that is the goal.

This is the year of stabilization for us. This is the year where we want to make sure that we're providing the stability in our performance that our stakeholders want. And that is one main area of focus for us.

It's not just the cost savings on the side of anesthesia and its growth on the maternal-fetal side and its growth on the radiology side, which is also growing as well, and we haven't talked very much about that. That's what we're focused on..

And that's kind of right now in the midpoint of your EBITDA guidance for the full year?.

I'd say it's less than that. We have a lot of room for growing, if I understood your question correctly. I think we have a lot of room to grow, particularly again in well-babies and OB hospitals, yeah..

Okay. Good to hear. Yes. Thanks, Roger..

Thank you..

Operator, I understand that we have a number of questions still lined up in the queue, but in the interest of time I think we'll take two more questions..

Okay. We'll next go to Gary Taylor with JPMorgan. Please go ahead..

Hi. Good morning. Does that mean I get to ask 10 question or? I just have three quick ones. The first one is, I'm going to Steve and make sure I understood what you're saying about some of the transformational expenses. So you said, $15 million to $20 million over four to six quarters related to the IT scheduling and clinical management.

I think you said two to two other similar initiatives and maybe several more in 2020. But similar in terms of size of spend or is there - so we're saying it could be two to three times the $15 million to $20 million.

I was just want to get a sense of what you think that total amount is for 2019? And it sounds like 2020 is going to be the investment year as well..

Yeah. Gary, the way that we are thinking about it is that these projects are all likely to have some scale to them. We're not really intending to separately breakout or separately report ordinary run-of-the-mill $1 million, $2 million, $3 million type of projects. We are intending to breakout larger ones that we expect to have larger impacts.

So I don't think they will all be $15 million to $20 million. You could have some that are $5 million or $10 million or $12 million or $8 million. I think it's unlikely that we'll have any of them that are really over $20 million individually. And we have a whole lot of things that we're looking at.

So the one specifically that we've talked about today is the one that's pretty fully based is inflate. We've got people working on it. We've engaged consulting firms that are working with our people who make them happy. And so we were able to quantify it.

We've got a bunch of others where you should think about it almost like we'll make a number of little seeds investments, right, spend a few $ 100 dollars scoping the opportunities prioritizing the opportunities and some of them we'll move forward with, some of them we won't.

So I am not suggesting that in 2019 you will see us do three or four projects that are $15 million to $20 million of spend all of which occurs in the year. I think you will see staggered, staggered starts of projects in the call it $5 million to $20 million range of several over this year several over next year.

And honestly with the sorts of ROIs that we are finding with some of the things that we are looking at these are exactly the sorts of ways you would imagine you and our investors would want us to be spending our money because they are quite meaningful..

Got you. Two more quick ones, I'm not sure this was exactly covered but just thinking about conceptually your fourth quarter seems to revenue volume against the comparisons you have was surprisingly strong yet the EBITDA performance.

I think third quarter EBITDA was down $11 million fourth quarter was down $18 million even though you beat the high end of your same-store revenue guidance and we were expecting. So we're all sort of trying to attempt to model the sensitivity revenue the same-store revenue and some of the inflationary factors you called out.

Is there a single one or two item that impacted those fourth quarter EBITDA performance versus 3Q?.

Hi Gary, it's Charlie. I don't think there's anything I would call out specifically. As we go I mean look over more than just one quarter over the previous or even one quarter over the last two previous there's always moving parts related to that.

We always have a lot of changes that we've historically whether it's deal contribution in any given quarter or not. And as we look at the fourth quarter in particular of 2018 was one thing that notable is in the prior year we did have the addition of a couple of - radiology practices at the end of the year while annualizing out - 2018.

So I think that's one reason among many others that we're trying to provide a pretty robust view in total of our 2019 outlook because there will be instances like that we are looking at one quarter in itself may not be the best gauge of all those pieces you're talking about..

Last one maybe just maybe 30 seconds from Roger. I do want to allude to the fact then talk about much.

But as you look at for you a relatively restrained acquisition spending target for 2019? And then what you laid out for us on goal in terms of building out radiology does that suggest radiologists a larger percentage of that 2019 expected acquisition spends or is there anything else to update us on in terms of the build-out?.

Well I can tell you that - good morning. I can tell you that we have been pretty successful in obtaining growth within radiology from our local - on-the-ground practices growing into - with the assistance from vRad growing into local hospitals. So a lot of that is working exactly how I would have predicted.

I do expect that there'll be more growth coming from our Houston practice. I think there are opportunities for growth there as well. We just can't overpay for these practices.

And so the way the acquisition market for these larger radiology practices is right now it's pretty - the multiples that are being paid for those practices are higher than we would like to pay. So I don't think you will see any significant investments from us in radiology.

There are a couple of larger practices that we are interested in and that would be very nice and important for us to have. But it's going to be a matter of negotiations and whether they like to come with us or not.

But having said everything that we said I mean I wouldn't be surprised if you saw that at some point during the year there was a larger radiology practice that we invest in..

And our final question comes from the line of John Ransom with Raymond James. Please go ahead..

Hi. Just on the subject of radiology.

If you look at 2019 over 2018 at a practice level EBITDA basis is it up down or sideways?.

I don't know that we want to tell you that.

I'm sure we've got a lot of competition in radiology and Charlie have we addressed that?.

We haven't broken it out specifically..

Okay.

I mean - at a more high level is the business trending, I mean it's tricky blending that with vRad, is it trending like you thought generally?.

Yes just answer your question. It's up okay. So just to answer. Just to answer it's up..

Okay..

Yes, it's trending like. It's actually we're doing very well..

Got you. That's all. Thank you..

Thanks, John..

Do you want me to take another question?.

Sure..

Okay. We'll go to Pito Chickering with Deutsche Bank. Please go ahead..

Good morning, guys. And thanks for squeezing me in after these two callers. I appreciate that very much. Just to step back for a second on the guidance. To make it Apples-to-apples comparison what would EBITDA guidance has been in 2019 if you didn't adjust due to the new adjustments.

Is to just putting $15 million, $20 million of IT sort of pointing out to that number?.

Good morning. You know, I mean that's a tough question to answer because it's unclear if the spend on that projects where it's going to land between $15 million and $20 million and where it's going to land between four and six quarters. So I think I mean you are of course free to make your own assumptions.

But I would intend to focus people on the sort of the 565 [ph] midpoint of our guide is 550 to 580 range. And if you want to layer some of that on that you're more than welcome.

I do think my own personal view and the reason why we are tracking out going forward a line - separate P&L line to include those costs because I think of them are different really than I would think about integration cost or restructuring costs or I could be calling transformational cost.

But it's a - we view these as sort of step function type project oriented investments, that really to include them in our reported results would somewhat obfuscate the underlying true cash generation, cash-generating capacity of this enterprise..

It makes full sense. But then I understand you guys are focusing on EBITDA dollars versus margins. I acknowledge that there's structural headwinds or impacting some of your revenues. But I still want to get a better feeling forgive and takes on EBITDA margins.

So if we sort of back into 2018 revenues the 2%, acquisition 1% same-store, and uses that 5.50 like you can do a comparison 2018 versus 2019. It looks as though that would results in EBITDA margin of 14.5% or about 100 basis points lower than last year.

Is that the right margin compression to think about when same-store revenues are growing 1%, and it gives the feeling for how to think about same-store revenue versus what we have achieved to get margin stability, that'd be great. Thanks..

Wow. That is a mouthful for the last question..

Sorry, I apologize..

Two things. I mean first we're more than happy to talk to you later in a bit more detail in terms of making sure we really understand what it is that you're asking. But in general we're just not make commentary around margins for all the reasons that I've already said on this call and point people back to.

To our EBITDA, that said, look our goal is to be constructive and helpful and to try and make sure that everyone has a consistently full and complete understanding of our thoughts, about where we stand and where we think we're going.

So I would just suggest that you think about other than the individual distortions in 2018 that we sort of discussed ad nauseam over the past couple of quarters, I would suggest that maybe the best way to think about 2019 is with a focus on adjusted EBITDA.

And then in general context of essentially consistent stable-type performance that the overall goal relative to the prior year, acknowledging that there will be a decent amount of quarter-to-quarter noise on a reported basis given the event last year..

Fair enough. Thank you very much..

Okay. Operator, thank you for helping us this morning, and thanks everyone for being on the call. And we're going to go to work, and look forward to speaking with you next quarter..

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