Ladies and gentlemen, thank you for standing by. Welcome to the MEDNAX 2020 First Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to Charles Lynch. Please go ahead..

Thank you, operator, and good morning, everyone, and welcome to our first quarter earnings conference call. I'll read our forward-looking statements. And with us today are also Roger Medel and Stephen Farber.

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, its quarterly reports on Form 10-Q and its current reports on Form 8-K, including the sections entitled Risk Factors.

In today's remarks by management, we will be discussing non-GAAP financial metrics. A reconciliation of those non-GAAP financial measures to the most comparable GAAP measures can be found in this morning's earnings press release, our annual report on Form 10-K in the Investors section of our website at mednax.com.

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

Thank you, Charlie. Good morning, and thanks for joining our call. This has been an unprecedented period in the history of our company. Our affiliated practices across many of our service lines have been significantly impacted by the coronavirus pandemic. From whatever standpoint as businesses, as clinicians or as individuals, we have all been affected.

And in a very short period of time, we have taken significant actions to respond to the needs of both our patients and our business. Our challenge as a clinical organization has been twofold. First, to care for our patients and ensure that our clinicians are able to do so.

And second, to address the fact that the cancellations and deferrals of healthcare services across the country have severely impacted our patient volumes and revenues with additional uncertainties still ahead of us. We are, first and foremost, a national group of physicians and clinicians. And as such, our first commitment is always to our patients.

Since March, we have undertaken a number of efforts to respond to the pandemic on behalf of both patients and our healthcare partners. Anesthesiology clinicians have moved to the frontline and hotspots, providing intensive and critical care rather than covering surgical cases.

In fact, a significant number of them have volunteered to relocate from other parts of the country, less affected by the COVID-19 pandemic, to those areas that are heavily affected.

Our pediatric clinicians have worked to ensure that those events that can't be interrupted, labor and childbirth, can be provided in the safest way possible for both the baby and the parents. And they have done so in close coordination with our hospital partner.

Pediatric intensivists have taken all the necessary steps to make sure they're prepared to shift their focus to adult intensive care in the event of a surge in cases in their facilities.

Our office-based clinicians have rapidly shifted to telehealth, providing access to remote consultations for the pregnant mothers and the pediatric patients whose needs move on their own time line, not that of the pandemic.

And our radiology organization has mobilized efforts to utilize big data to enhance our ability to use the natural language processing capabilities within our own database to support faster treatment and to enable tracking of this virus' progression throughout the country, particularly in the events of any future resurgence.

In turn, MEDNAX has taken steps to support our affiliated clinicians, in particular, we moved aggressively to strengthen our supply chain and source-critical-protective equipment during a time of acute need in order to ensure that our clinicians could provide care as safely as possible without depending on our hospital partners for that equipment.

For some time prior to the onset of the COVID-19 pandemic, we also have invested to enable telehealth access across our physician population, which has proven to be truly valuable in the recent months.

In fact, our teams have gained experience enabling this access utilizing VC, an internationally recognized telehealth platform and have done so across dozens of specialties. This is no small task.

And today, we are exploring ways that we can provide this same service on a consultative nonclinical basis to enable non-MEDNAX physicians to onboard onto that platform. Lastly, we see true benefits of our scale as a national medical group. Physicians across our organization have been able to share their experiences and collaborate across geographies.

So for example, a pediatric surgeon who has experienced a COVID-19 surge in his or her market can help another pediatric surgeon who may be expecting a surge to prepare for what's to come and to benefit from that experience.

To improve this ability, we have created virtual doctors' lounges for our clinicians across multiple specialties to enable collaboration, and candidly, to help preserve a sense of normalcy in a time of social distancing and significant stress.

I couldn't be more proud of the efforts my colleagues have undertaken across our organization in order to fulfill our commitments to take great care of our patients.

This is also an unprecedented time for our company because yesterday, we announced that our American Anesthesiology organization has combined with North American Partners in anesthesia, NAPA, to form the most comprehensive anesthesiology, pain management and perioperative care organization in the country.

Anesthesiology physicians and clinicians are part of the backbone of our healthcare industry, and we have been proud to be part of this clinical service line since our first anesthesia group joined MEDNAX in 2007. From that beginning, we built an organization spanning more than 40 practices with total revenue in 2019 of $1.2 billion.

We have certainly faced challenges in this business related to payer mix, scarcity of clinicians in the face of growing demand and reimbursement headwinds. And the challenges posed by the current pandemic are significant as well.

To that end, we believe the best positioning for American Anesthesiology is to be part of a larger organization with a singular dedication to anesthesiology, with the scale, scope and financial support, not only to manage through today's environment but to invest in innovations, the advancement of patient care and growth in the future.

We share a common culture and philosophy with NAPA, where both clinician-led and clinician-centric organizations with long histories of placing patient care as our highest priority. I have known Dr.

John Di Capua, NAPA's Chief Executive Officer, for a long time, and the two of us also share a deep mutual respect for one another and for the organizations that we need. I have the utmost confidence that under his and his team's leadership, this combined organization will thrive in the future.

To that end, we are closely aligned with NAPA, and we'll be providing transitional services to ensure a smooth integration in the months to come. We also will be able to share, in the future, success of NAPA and its financial partners through the contingent consideration we agreed upon as part of the transaction that we announced.

As for MEDNAX, as of this week, we are wholly focused on our pediatrics and the obstetric medical group on our MEDNAX Radiology Solutions medical group and our surgical directions, our consulting organization. To be sure, we face common challenges in these groups related to the COVID-19 pandemic.

While patient volumes appear to have stabilized in recent weeks, they remain below normal levels across many of our specialties, particularly within radiology and our office-based women and children's practices.

In addition, uncertainties exist related to the economic impact of what the country is experiencing and how that will affect payer mix and people's behavior among other factors. But I am confident that the steps we've taken to address these challenges will ensure our own ability to care for our patients during this difficult period.

I am also confident that our focused efforts will provide us with significant opportunities to innovate, succeed and grow in the future.

Before turning the call over to Stephen, I'll make one additional comment related to a matter we discussed last quarter, which is the notices of termination that a number of our practices had received from United Health.

Given the transaction that we closed yesterday, I am going to confine my comments to only refer to those practices within our pediatrics and obstetrics medical groups. The total revenue associated with the United contracts at these practices on an annual basis is approximately $20 million to $25 million.

Related to these contracts, I am encouraged by the dialogue that we have had with United, which I would characterize as constructive. We have mutually agreed that it is in no one's best interest for these physicians to be out of network.

To that end, I am announcing that United has agreed to delay the effective dates of those terminations for several months in order to give us time to talk about the right solution. And we have been engaged in meaningful conversations about appropriate rates for the critical services our affiliated physicians provide to their patients.

I am very pleased with the progress that we have made and I look forward to a mutually beneficial long-term resolution so that we can focus on our highest priority, taking great care of our patients. With that said, I'll close with a note of thanks.

I am deeply grateful to each of the thousands of clinicians and the nonclinical associates who support them across our organization and to those who are now a part of NAPA. Challenging times yield through heroes, and there are more heroes across our family of caregivers that I could possibly name in the time I have with you today.

With that, I'll turn the call over to Steve..

Thanks, Roger. Good morning, everyone. Thank you for joining our call. I'll keep my comments brief today so we may talk in Q&A. I'll start with a few comments regarding our first quarter that are relevant to the environment that we're in.

Our operating results, as you've heard from many companies, for the first two months of the March quarter, were in line with our expectations and tracking to the expected range of $90 million to $100 million in adjusted EBITDA that we previously guided.

During the last two weeks of March, patient volumes across many of our medical specialties were significantly disrupted in the early days of the COVID-19 pandemic. As a whole, this disruption in volumes reduced our revenues by roughly $40 million during those two weeks compared to our internal forecast.

This impact occurred across our anesthesiology practices, across MEDNAX radiology, including our on-the-ground practices and at vRad, and within our office-based women's and children's practices, particularly pediatric cardiology and maternal-fetal medicine.

Given the rapidity with which the decline of patient volumes occurred at the tail end of the quarter, we had limited ability to make adjustments in that short time frame to our expense structure, such that the impact to our adjusted EBITDA for the first quarter was more than $30 million.

So most of that revenue shortfall fell straight through, and we reported adjusted EBITDA of $63 million versus our previously guided range of $90 million to $100 million. As we detailed in our press release this morning, the impact of our business persisted through April and continues today.

While we have not finalized our financial results for April on a preliminary basis, our consolidated revenue declined by approximately one third. In response to this impact, we enacted a number of steps, primarily related to labor.

Across our nonclinical employees, we put in place a combination of temporary salary reductions for just about everybody, ranging up to 50% reductions for our executive officers and furloughs of approximately 175 people or roughly 25% of our administrative nonclinical workforce.

Within our clinical population, we worked collaboratively and in partnership with our affiliated practices to identify expense actions, including similar salary reductions, and in instances, where patient volumes had been heavily impacted, reduced hours and furloughs.

It's important to note that while our revenues have been significantly impacted by COVID-related volume reductions, there simply is not a commensurate flexibility to our aggregate operating expenses, which consist predominantly of labor.

As a result, we estimate that the actions we've taken would only represent a partial offset to the revenue impact we have experienced to date. To that end, we took additional steps to enhance our financial flexibility through this period. In late March, we announced an amendment to our credit facility and a concurrent drawdown of $300 million.

We have also significantly reduced our third-party expenditures as part of the transformational and restructuring efforts that we've been undertaking since late 2018. Lastly, we have both received and submitted applications for monies available to us under the CARES Act.

To date, the total amount that we've either received or applied for is roughly $50 million. To date, we've received $12 million of this, and we've submitted applications in recent weeks for the remaining $40 million or so that I just mentioned.

This does not include a remaining tranche of money still to be distributed from the CARES Act since the mechanism to calculate those amounts is not available yet. And it also does not include the additional $75 billion being termed stimulus 3.5 for CARES 2, which is also still undefined.

We also noted in our press release that we did not seek or receive accelerated Medicare payments available through the CARES Act, since it was not a material benefit for us. We also did not apply for small business loans under the Paycheck Protection Program, some of our structural elements were prohibitive to participate in that.

We have, however, been able to defer the employer portion of social security payroll taxes beginning in April 2020, from which we expect to continue throughout this year as allowed under the act, another benefit to current liquidity that was available under that legislation. With that said, I'll touch on our announced sale of American Anesthesiology.

Effective yesterday, this transaction was both signed and closed. We view the transaction as having four elements of value to MEDNAX. Under the terms of the transaction, we received roughly $160 million in cash and retention of net working capital, primarily accounts receivable.

We also received contingent consideration in the combined NAPA organization worth up to $250 million based upon the ultimate financial return of NAPA's financial partners.

Additionally, as we indicated in our 8-K filing, following this transaction, we will not incur future financial losses beginning today related to the impact of COVID-19 on American Anesthesiology's operations.

It's difficult to predict what that impact would have been, but based upon multiple scenarios that we evaluated, we estimate that those losses would likely be at least in the range of $150 million to $250 million.

Lastly, while I wouldn't classify this as an economic consideration, we also looked at this transaction through the scope of our remaining operating and risk profile. As Roger noted, following the transaction, we are wholly focused on our pediatrics and obstetrics and MEDNAX Radiology Solutions medical groups.

In our view, this focus improves our risk profile, enables us to dedicate resources to these medical groups and pursue future growth opportunities that we believe are significant. I'd also like to provide a few thoughts that can provide some baseline views on how you can think about our company post this transaction.

First, looking at our 2019 financial results. Last year, we reported total revenue of roughly $3.5 billion and adjusted EBITDA of $500 million. At the top line and as it is disclosed in our 10-K, anesthesia contributed 36% of our total revenue last year or approximately $1.2 billion.

And as you might recall from my commentary over the past couple of quarters, the Anesthesia Medical group contributed roughly one fifth of our adjusted EBITDA or roughly $100 million.

Obviously, given the disruption to many parts of our business, my observations do not represent a forecast of contributions from our remaining pediatrics, obstetrics and MEDNAX Radiology Solutions medical groups. In addition, as we announced in late March, we are not providing financial guidance for 2020.

But I will observe that for 2019, our remaining organization that we have today contributed roughly $2.3 billion of revenue and approximately 80% of our historical adjusted EBITDA.

I will also note that for the brief period when we did offer guidance for 2020, we guided toward an EBITDA number of $470 million as it compares to last year's $500 million.

Second, in terms of the impact to our non-anesthesia medical groups from the COVID-19 pandemic, as we disclosed this morning, that impact was greatest within our radiology organization and in our office-based women's and children's practices.

During the March quarter, the impact of these medical groups made up approximately one quarter of the total $40 million decline in revenues we experienced on a consolidated basis.

Looking at our preliminary volume and revenue observations for the month, and again, let me please reemphasize this is preliminary and we are still in the process of closing our books, I will point out that the total impact to our ongoing revenues for the month was in the range of roughly 20% to 25%.

Third, in the coming days, we will be filing pro forma historical financial information for the years 2017 to 2019 in order to present our past results, excluding American Anesthesiology.

I will note, importantly, though, that these financials will not be a perfect representation in any respect of the past performance of our remaining medical groups since we are required that they reflect all of the overhead expenses of the company during that period, not adjusted for the sale of American Anesthesiology and the overhead and support resources that transferred with it.

Looking forward as well, those overhead results will remain in our results from continuing operations. And further, we will likely retain certain operating expenses that will be necessary for the intermediate future and not associated with the transitional services agreement we have signed as part of the transaction.

And finally, in terms of our balance sheet and leverage profile, given the number of moving parts, both structural and related to the uncertainty of the COVID-19 pandemic, I'm going to speak in rough terms.

Prior to the onset of the pandemic and prior to our sale of American Anesthesiology, our leverage profile was essentially in the high 3s in terms of net debt to EBITDA, which was a level that we have spoken about over time as a comfortable level for this company, but with some bias to bring that down to a certain extent.

As we look at the impact to our organization and our leverage profile from all of the moving parts surrounding this transaction and COVID and all of the other elements in play, again, in rough terms, I quantify that the combined impact has moved our leverage up by roughly one turn, reflecting movements to both the numerator and the denominator.

That being said, we remain confident that the steps we have taken so far in response to this unprecedented time for MEDNAX, provide us with the financial flexibility we need to ensure our ability to support our clinicians and for providing them or providing them to care for their patients throughout this challenging period and beyond.

With that, now I'll turn it back to Roger..

Thank you, Stephen. Operator, we can go ahead and open up this call for questions..

[Operator Instructions] And we will begin with the line of Ralph Giacobbe with Citi. Please go ahead..

I was hoping you could talk a little bit more on sort of the decision, the process and also just the timing of the anesthesia sale and why not wait for some normalization and maybe how you approach valuation sort of for the asset? And if you can just opine on how much the payer disputes sort of drove the decision?.

I'm happy to try and give a directional response to some of the items that you mentioned. But to a great extent, on some of the specifics, the transaction is complete. The business is now owned by somebody else. And we feel generally in these situations that it's not it's kind of no longer our role to speak to some of what you asked.

In general, and as I think we've said in the 8-K that we issued yesterday, we have had some discussions over time with others as we've evaluated our options prior to the pandemic. And I would say that the transaction that was completed yesterday was done relatively it was relatively recently.

And there was an element of it, a meaningful element, that was related to the pandemic. I mean, we do believe we mentioned in the 8-K, we mentioned it today, that, that business demonstrated a cost structure that was difficult to adjust and particularly difficult to adjust quickly in the face of the pandemic.

I would say anesthesia, if you think about how it operates, Ralph, we have contractual commitments in those practices to provide staffing to hospitals. And if a hospital let's one of the practices know, they're going to open 10 operating rooms next week, they've got to be in a position to staff it.

So unlike some businesses where you can meaningfully and rapidly adjust your labor force, we needed our clinicians to be available to be ready if the demand arose. And so that really is a key element of the challenge, with how do you retain that workforce so that they are available, but how do you also manage down your cost.

So I think it's fair to say that the world changed somewhat for that business under our ownership in the face of the pandemic.

And those operating-loss projections of $150 million to $200 million, look, I emphasize, I did use the word at least in both the 8-K and in my prepared remarks today, the course of the pandemic will have if it's short, if it's long, if it's volatile, will have under our ownership, it would have had been very tough to manage that business without the sorts of cash impacts that we've been discussing.

And that was a key factor in both the decisions, but it's also a very significant what we view as a very significant element of the value that we received from the deal was to no longer have to shoulder both that financial burden and the uncertainty and volatility for us that it would bring with it..

Next, we'll go to the line of A.J. Rice with Credit Suisse. Please go ahead..

Good to hear everyone's still safe amid of all this. Steve, maybe just try to clarify a couple of points there. It's all under the umbrella, just understanding what's going on with the elimination of the anesthesia business. You talked about $150 million to $250 million of future cash losses.

I guess I was trying to figure out what time frame does that relate to? You rattled off the CARES Act funding.

Does any of that get impacted with the sale? Or do you get to keep legacy MEDNAX, all of that? And is there any way to quantify the residual expense that you're going to incur? And over what time frame is that enough to move the needle? And I guess maybe finally on this, the gross AR number of $110 million or the AR number of $110 million, is that a gross number? Or is that an expected net that you fully expect to collect the entire amount?.

Sure, A.J. I'm happy to answer those. And forgive me if I forget a piece of it, just as to follow up. I'm going to go backwards, let me first knockoff the AR piece. The actual AR was higher, and then we had some payable stuff that we offset against it. So it's a net number. We expect to collect something around there.

In fact, we've that was as of the March 31 number. So the reality is we've probably collected a bit of that over the course of the past month. In terms of the CARES Act money, I mean, we've received in total so far, like I mentioned a minute ago, $12 million as MEDNAX. I think about half of that or touch more than half of that was anesthesia related.

We already received it. We have it. The we've made applications for about $40 million of money. We've found it hard to predict with precision what amount we ultimately receive from the government. We know that we had some that our understanding on the $12 million we've already received was a little different than what finally showed up.

So these are rough numbers to give you a sense. I think a bit less than half, $40 million that we applied for, is anesthesia related. And we have, as an element of our sale agreement because we had submitted those applications prior to the transaction date, we do receive those monies. So when they're received, they'll get swapped to us.

The for future reimbursement and if it's okay, I mean I'll answer this, but a lot of the hyper details of the transaction are probably not appropriate for public discussion.

The we do have an agreement where in most circumstances, any remaining monies from the CARES Act that we have not yet applied for and any money is received under a stimulus 3.5 or CARES two or, frankly, I always forget the actual name for it, it's like an 8-letter acronym, any money is received by anesthesia under those programs, we split it 50-50 with NAPA.

And I think you had a question at the beginning, A.J., that I'm neglecting to answer..

The cash losses, are they $150 million to $250 million, I guess, some perspective on what time frame does that relate to? And then any residual costs you have? You said you referred to providing ongoing help or assistance.

Is that a meaningful number that we should think of in terms of a drag and for what time period?.

Let me give you the best response I can on those.

The $150 million to $250 million A.J., we ran different time lines, right? And that actually was a key element, right? You sort of do you think COVID sticks around for a couple of quarters? Do you think it recurs? Do you think it recurs partially in different geographies? Is it kind of rolling? It really depends and we basically stress tested it, right? We sort of ran the model with a bunch of different levels.

And they tended to circle around that couple hundred million type number. You could get super punitive and assume that COVID is a meaningful thing through a good part of 2021 or different levels of recurrence and you could have impacts that were meaningfully worse than what we've discussed. So hopefully, that helps you out.

I was going to answer the piece on overhead. So, when we transitioned to the business yesterday, we moved several hundred nonclinical employees above the practice with the business. So three of our CBOs moved with it that were dedicated to anesthesia.

There are some different people from different departments, different overhead functions are shared service functions moved with the business. But there is going we did enter into a TSA, which gives support to the business for up to 18 months.

I do believe, A.J., and I'm going to limit my comments around this just because we are no longer the owners of the business. But we are going to have some drag from it. I can't quite tell you what it is yet. I think in the future, when we report quarters, we'll probably be able to give you a pretty good sense of what we think that drag may have been.

We do have an agreement as part of the TSA, then essentially, we will be able to pass through most elements of transition support at cost, so we will be reimbursed, but it won't be for everything, and there are some areas where it's impractical for it to be everything.

So I think to the extent we have drag, it should shrink over time, and we should be able to help you understand those impacts on a quarter-by-quarter basis..

Next we'll go to the line of Pito Chickering with Deutsche Bank. Please go ahead..

A few ones here.

There are obviously a lot of moving parts, sort of, with the remaining co, but I just as you think about the salaries and benefits line, what percent of the I guess it's going to be fixed versus variable at this point going forward with what you guys have left?.

Pito, can you repeat that? I'm just trying to get some clarity in there..

Looking at sort of what is left for your business as you think about S&B costs going forward, what is the variable versus fixed component within that?.

We've always been cautious to give that kind of breakdown in the past, and I don't know that's from a quantitative standpoint we'd be comfortable providing it now.

I think one thing, and Stephen, you can weigh in as well, that we could provide is a little more descriptive of the comp structure within the medical groups that are still part of MEDNAX, and this should be familiar to you, to some respect, starting with our MEDNAX Radiology Solutions medical group, as I think you know, all of the on-sites and on-the-ground radiology groups as part of that organization have been under a form of revenue share comp structure since joining MEDMAX beginning in 2017 or so.

And that means that the aggregate clinical compensation expense within a practice moves a month step with its revenue, more or less. So there is starting there. And within vRad, our teleradiology organization for the clinical the physician network affiliated with vRad, the compensation is on a productivity base to the paperclip.

So there is a meaningful amount of either volume or revenue-driven comp dynamic within radiology. Across women and children services, we generally have a legacy some form of salary and bonus structure.

And the only thing I would add on that is, number one, related to neonatology services within the woman and children's organization, that's an area where we've seen very limited, if any, measurable impact from the COVID-19 pandemic.

And number two, across the organization, the bonus component that's within our clinical SWB has historically been fairly heavily weighted toward the longer-standing practices within women and children's services, particularly in neonatology. So there's a flex component in there as well..

I guess thanks, Charlie. I would just add one thing is that I think when we think about the fixed versus variable about the individual businesses, I'd also think about the fixed versus variable for the revenue in each of those businesses.

I mean you could look at the neo business, as Charlie just described, with the there is very little in the way of fixed versus variable when you think about the demand side for that business. So women who were pregnant pre-COVID-19 are still pregnant today or they've given birth to the babies.

So that business is particularly well suited to a largely fixed cost structure because the demand side is pretty much like clockwork that a certain percentage of babies that are born, fairly consistently for debt for years and years haven't required going to the NICU. So pretty predictable demand, up and down a little bit, but pretty predictable.

And it well it essentially matches the cost structure different, obviously, for the office-based businesses or radiology. Hopefully, that gives you some color..

The only thing I would add, Pito, just to keep in mind, we're not alone in this environment and saying that the world has changed to a good way over the past six to eight weeks. And we can talk a lot about the general concept of fixed versus variable expense structure and the like.

But I would emphasize again that like many other companies affected by this pandemic, we have taken fairly unusual measures related to our expense structure. And Stephen laid them out and did caution that they're not it's extremely difficult for them to be commensurate with this magnitude of revenue impact.

But we have taken those actions and they're unusual for us, and they do not move in the same kind of lockset fashion as you might think related to your question about what is salary, what is bonus and what is flex. So it's not particularly in an environment like this, it's nowhere near as a model as in the cost structures as one might think..

Then one quick follow-up question.

Have you seen any changes to hospital subsidies in this environment that impacts you guys?.

I mean, not really. I mean the reality is, we provide critical services to hospitals and to their functioning. And I would say nothing that would approach the threshold of materiality because we are a key part of their delivery system..

Next, we'll go to the line of Gary Taylor with JP Morgan. Please go ahead..

Just a few questions.

One, on the contingent earn-out, can you share timing on that? And then would that just be typical profitability? Or would there be any other notable items you'd point to that would drive what ultimately the earn-out payment might be?.

I mean I think I can directionally answer some of that. We did say in our 8-K yesterday that it's basically MOIC driven by the sponsor when they exit and based upon their results, and it's on the overall results from NAPA. So they they currently own NAPA and they funded through NAPA, the acquisition of our anesthesia business.

And as with all sponsors, they will ultimately calculate for their LPs what their MOIC was. And whatever and whenever that happens, will drive what we get..

So that could be years away, basically, not just to confirm, I'm not being critical of it, but that could be duration of the fund or the investment, basically. Got it..

Yes, in a lot of ways, I would say, Gary, while I don't want to over comment on how we arrived at the deal. It was the most pragmatic approach given the uncertain timing around COVID-19, how long would it last, what will it look like? It's just it was the best answer we could come up with. And we're frankly pleased with it.

We think our interests are very well aligned..

Any tax implications to Remainco? I presume not material, otherwise you would have called those out..

No, there are no material tax implications..

And then to my last question. I mean obviously, we have to model Remainco going forward as soon as we can put models out. So, just kind of coming back to the overhead and the carrying costs.

Have you ever given us when you just think about total corporate overhead that's spread over SWB and G&A, is there an amount in total, can you talk about what might go with the transaction? And is there any impact on the your previous projections on transformational spend? Presumably, a fair amount of that was to help turn around the anesthesia business? And does that come down with the sale?.

Let me start and then Charlie will probably chip in. I'm going to I'll answer it backwards. And again, if I end up forgetting part of your question, please just circle back. On transformational expense, yes, we I mean it's we expect it to come down significantly.

So yes, I don't recall how much detail I put into my script, but essentially, we did have the 30, what was it, Charlie, $30 million, $31 million, $32 million in Q1? We very rapidly, with the onset of the pandemic, scale back, stop, freeze, the vast majority of the projects that we had under way.

I think that there will be some carryover into early Q2, simply because if you've got a whole bunch of people who have been working for six months or nine months on something and you decide to put the project on ice, we wanted to do appropriate wind-downs so they're tied up with a bow.

And if and when the time comes, we can restart those projects without losing the all the work that we've done over the past six or nine months with those. That said, I think a number of them there was a, I would say, an overweight portion of that effort did relate to anesthesia.

We put a lot of effort over the past year into working to stabilize that business and improve its performance. And now that it is no longer part of us, those projects will not recur.

I do think that we will continue to give thought to the projects that are on ice and just see what happens over the next couple of quarters, and we'll make whatever decisions are appropriate. At the same time, I will say there is still going to be some level of transformational expense.

I can't tell you exactly what it's going to be because we're kind of going through this live right now. Because there were some things that did make sense to continue in terms of like core IT replatforming, things that really do matter to the ongoing enterprise.

And where it's in the best interest of the company and our investors for those projects to get done. But the bulk of the expense, delayed, deferred, eliminated.

And I'm sorry, could you re-ask the first part of your question?.

Just the overhead across whether that's a total corporate overhead number, how much that might come down? Or anything just to help us as we try to model Remainco?.

Yes, sure. I mean Gary, I guess I'd say it's just too early for me to I understand what you want, and I can tell you that it's too early for me to really make commentary around that. I would say the anesthesia business had higher overhead associated with it than some of our other businesses.

And so it is probably a little bit disproportionate, but it really but it's too early and we've got a lot of work to do over the next couple of quarters to figure out how all of that aligns..

And next, we will go to the line of Matthew Borsch with BMO Capital Markets. Please go ahead..

Congratulations on getting done what you got done in midst all of this chaos. That is truly impressive. I think from our standpoint as analysts, just but given the circumstances, it's frustrating for us, of course, because we've got the turmoil of COVID-19 impacting volumes.

Obviously, a lot of impact of different ranges across your business and now maybe starting to stabilize somewhat. You've done this major restructuring, at the same time, you've withdrawn guidance. And I mean maybe it just is what it is. You're giving us 30 pieces of information and saying, "We're not ready to put this together.

We know you guys don't have the luxury of withdrawing your projections, good luck with this. Hopefully, this information is helpful." But I mean if you were coming out as a new company, Remainco doing an IPO, not that you are, but you wouldn't be able to do that.

And yet here we are in this situation, investors are supposed to look at this and figure out what is this company going to earn and what is its worth? That happens every day in the market. I'm sorry, it's a little bit of a statement, but it's also a question.

Put yourselves in our shoes, in the investor shoes in the situation, trying to come out of this with a projection of free cash flow, and you have those projections, but you're not ready to share them..

All right. I mean I guess I hear your statement, Matt, but is it I'm not quite sure how to reconvey what I think I've heard you say I think I heard you say, "Congratulations on a deal that radically reshapes the risk profile of your company.

I appreciate you completed it 24 hours ago, and yet I'm frustrated that you can't give us direct guidance in the midst of the COVID-19 crisis, notwithstanding having withdrawn guidance six weeks ago.

I'm frustrated that all that you can do is tell me the number of things that you actually do know at the moment." Is that a fair recharacterization of the...?.

No, I mean it is. And I think I mean that's a good push back on my pushback. And I look, I appreciate that. I mean and I did mean sincerely at the onset. I mean what you've accomplished amid all this chaos is truly impressive. And I think you guys are moving in the right direction and credit for all that.

I'm just I'm sharing with you the difficult place that we're in right now to try to piece together what Newco earns, given that we have to put projections out tomorrow morning, essentially, without sort of without having access to all of the information that you do about the overhead and so forth.

Recognizing that those estimates, I'm sure, and for very good reason, still in flux on your end. It's just that it it's it is involves a situation where for a while, this is going to be really a guessing game. Hopefully, an informed guessing game, but a guessing game..

Matt, it's Charlie. I'll give you a couple of comments on that. Starting at a high level, I think it's important to acknowledge the same factors that led us to withdraw our guidance several weeks ago related to the COVID-19 pandemic, still exists today in our current structure post-transaction.

And that makes it, in a non-transaction environment this morning, we would have the same challenge providing that information for you. The operating environment for virtually every business in this country is highly uncertain and unstable.

And I think that's just an umbrella comment that weighs on all of our efforts to predict what will happen in the future.

And for that reason, what we did attempt to do and we'll continue to attempt to do, is give some historical baselining views of what we would generally have looked like in the past as pediatric, obstetrics and MEDNAX Radiology Solutions.

And at a high level, those would reflect a company that prior to the pandemic environment, had an annualized revenue base of roughly $2.3 billion and would have retained roughly 80% of our historically reported adjusted EBITDA. So that's the first baseline.

And it comes along with the same caveat that Stephen mentioned before about the dynamics of the current environment.

One other thing I will provide, Matt, and I'll let others comment as well, is that it's important, I think, for everyone to try to get their heads around the, the complexion of our remaining business, and I mean it both structurally and from an operational and historical standpoint.

Of that $2.3 billion of historical revenue for our remaining business, based on our 2019 disclosures, roughly $500 million of that revenue was generated by our radiology organization. And the remainder was generated by pediatrics and obstetrics across neonatology, our other women and children services within hospitals and our office-based practices.

And I know that's quite qualitative, but what we're looking at today is our focus on those two businesses, one of which we have been extremely excited about since entering just a few years ago, and the other of which we have not only been involved in but leading for 40 years..

And yes, I mean we'll do our best with it. Let me ask a very, if I could, a very mechanical question on the UnitedHealth contracting. You've mentioned that you've gotten a few extra months on the termination date. Going back, my understanding was those went through the end of the year.

Is that does that mean that we now have a few months into 2021 to work with those?.

I'll just touch on it briefly, Matt. The notices of termination went across a number of practices and a handful of specialties within the women and children's organization here. The effective dates of those notices range anywhere within April to later in the year.

And related to any of those that would have been effective fairly soon, we've happily come to an agreement with United to push that off for several months, along the lines of what Roger mentioned. So if something was going to be effective, I don't know, in October, it wouldn't have been subject to that delay.

But it was under the umbrella of a contextual agreement that it doesn't make sense to have these physicians out-of-network while we are having discussions about a resolution..

Next we will go to the line of Ryan Daniels with William Blair. Please go ahead..

Yes. Roger, one for you. We haven't heard much from you during the Q&A.

I'm curious, if you look at the organization and move past the sale of anesthesia, move past COVID-19, assume normalization in the market, what's your vision for the strategy of MEDNAX going forward? If we look at this company, kind of what are the key goals that you want to see? Or how do you want to envision this, if we look down the road kind of 2, 3, four years from now?.

I'm glad you asked that, because independently of the part of the tone for this phone call, there's a very heavy mood and a very upscale and excited mood in the company today. We believe that we're headed back to our roots.

And I can tell you that if you think that a company like ours has suffered dramatically through the last three months about what's going on in the country, you can imagine what the smaller practices, who are not affiliated with any universities or hospitals or larger groups, are going through.

It's my way of telling you that we're having a lot of inbound calls from a lot of practices, asking if there are opportunities or looking for more a sense of security for them, particularly because a lot of these practices are also feeling like this isn't over yet. There's a round two that could perhaps come, come September, October, November.

And they're basically saying they may not be able to survive another round of something like this. So, my vision is to create to continue to work on creating the best group of women and children's healthcare givers in the country. We think we have an opportunity here to penetrate a number of women and children's specialties.

Our we have the largest group of maternal field medicine specialists in the country, the largest group of pediatric intensivists, the largest group of pediatric cardiologists, a very large group of obstetrical in-house obstetricians.

And so we believe that there's an opportunity here to really build those practices and continue to grow those as well as we're starting to build a group of pediatric surgeons. We really like the pediatric surgery business and the services that they provide. And these are services that our hospitals are asking us for.

Just like they ask us for maternal-fetal medicine and pediatric cardiology, they're starting to ask for pediatric surgery. There's a big demand for pediatric plastic surgery, that are reconstructive surgery that some children with cleft lips and cleft palates and those kinds of things need.

So there's a whole world of additional services in the pediatric subspecialty arena that we believe we're going to be making some significant investments in over the coming couple of years.

We have a radiology business which we're very excited about, and we believe that our radiology business, because of the structure that we brought from the beginning, is correctly structured and is headed in the right direction as well.

This is a group that's interested in research, that has a number of outpatient facilities, that are looking to provide artificial intelligence. They have, as you know, contracts with or relationships, I should say, with some of the software companies. So we think that this is where we are.

We think that we're going to make a significant impact in the women and children's world and to continue to be the leader in that world, but to invest in radiology as well.

Stephen, did you want to add something?.

The only thing that I would add is just that along with everything Roger said, I think we've sort of addressed parts of this in some of the other comments, but the financial dynamics, like the overall hydraulics of the business going forward, I think, have changed in a not immaterial way with the transition of the anesthesia business.

So I think the financial hydraulics will be more dynamic and I think and have a meaningfully higher degree of flexibility that we had prior to the transition of anesthesia, as we think through and work through all of these opportunities to essentially help these smaller practices and use that as a basis to drive growth as we work through the coming quarters..

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

So it sounds like the pressure on the business is really more in the radiology and the office-based businesses.

Did you size how big that is as a percentage of kind of the Remainco MEDNAX business?.

Yes, I think Stephen might have mentioned, Kevin, and again, this is preliminary numbers for the month of April. I think Stephen mentioned that under our current structure, that the impact to patient volumes through the month of April was somewhere in the range of 20%, 25% the quarter.

So less than what we referenced in the release about the consolidated organization for the month of April..

But I guess but that's how much total volumes were down.

I guess, I was trying to figure out like is radiology and office-based 30% of total revenue? Or like how do we think about it as a percentage of total revenue?.

Well, yes. I mean again, I want to reference back to what those contributions were prior to the pandemic. And against an annual revenue for our organization, excluding anesthesia services in 2019 of about $2.3 billion, radiology was about $500 million of that. So maybe that's some helpful sizing.

Per our disclosures for 2019 as well, Kevin, the lion's share of our office-based women and children's practices are within maternal field medicine and pediatric cardiology.

And based on our disclosed breakdown of their revenue contribution in 2019, that was on a combined basis, give or take, about a $400 million revenue contributor through those practices..

And you mentioned that you gave a 2019 number, you mentioned that you were guiding down about $30 million this year.

I assume that a bigger part of that is going to be anesthesia, though, that the radiology and NICU businesses weren't going to be down quite as much percentage-wise? Or is that or should we think about that kind of pro rata?.

I wouldn't really over read into that. There certainly were a number of pressures on anesthesiology that were unique and continuing, and we mentioned that in our 8-K yesterday, but I don't really want to get more specific on anesthesia, if that's OK, but just because it's no longer our business.

But I would suggest that there wasn't anything super unusual toward anesthesia when you think about moving from last year's $500 million result to this year's $470 million guide. And if you recall, when we did guide to $470 million, that number excluded any impacts from the United matter, and we were pretty explicit about that.

So I think it's going to be it's not something worth that much focus. I just want to step back for one second and add something to Charlie's answer to your first question.

If you do think about it, we have previously disclosed, and we've talked about, how our rad business was down, call it our rad volumes are down, call it, 60%, plus or minus, from the pandemic.

And so when you're trying to frack out our revenue and figure out our impacts, the and given that we said our NICU business hasn't really changed, the you could think about the rad business, where it has been kind of this $500 million, $500-plus million revenue type business, you apply those sort of declines and you get to a good chunk of the revenue impact that we're now talking about.

I think the office-based practices, let me take a second and walk you through the math, just to save you the trouble. I think our office-based practices, in our 10-K, we had some disclosure, and I forget the details of each business line, but we do break out MFM, and I think we break out pediatric cardiologists.

And I think if you add up the different office-based businesses, it's kind of like a, call it, a $400 million business, $350 million, $400 million. And that business, we've discussed the that the decline in that or actually, Charlie, I don't know if we did disclose it this morning, but I'm happy making a comment about it..

Yes, I mean we gave a bit of a range, between 20% and 40%, if I recall, because there's been different dynamics geographically, by practice, by specialty, et cetera..

Sure. I would say and as you've probably seen from others, there was a bit of a whiplash effect to the early days of COVID, where anybody who needed to take their kid to a doctor appointment, unless that kid absolutely positively needed it at that moment, they basically weren't going to do it.

So, our volume was down pretty hard in those early weeks in those businesses. I think they've come back a bit.

And I think it's fair to say, just Charlie, correct me if I'm wrong, but I think our preliminary read on sort of late April volumes look, I don't really like talking about a single month in the first place, I especially don't want to be talking about it if I haven't closed it yet. And I'm now going to make some comments about maybe the end of April.

But I think we're probably somewhere in the zone of down kind of 25%-ish, plus or minus, in the volumes in what is kind of a $350 million, $400 million business for us. So hopefully, that gives you some color of how we get to what we're saying about April..

And then just last question.

When you mentioned that leverage pro forma the assets, everything and COVID is one turn higher, was that kind of like a still like an LTM pro forma on March 31? Or are you also kind of including whatever kind of cash burn you might have had in April in that number?.

Yes, sure. Look, it's kind of its I understand what you're trying to get to. Let me do the best I can, because there are a ton of numbers moving around. First, in terms of overall borrowing, our overall borrowings as of April 30th obviously, some things are moving around right now around the anesthesia transaction.

So why don't I just sort of say prior to the deal we closed yesterday, our overall leverage is not materially different from what it was at 3/31 our overall borrowings. So let's forget leverage for a second.

Just how much money have we borrowed, right, is on a net basis, is pretty similar to what we had maybe within a handful of percentage points, pretty similar to what we reported at 3/31. So we feel very fortunate.

Unlike a lot of other companies, we have not added $200 million, $300 million, $400 million to our net debt over the last six or eight weeks of the COVID period. So that on that side, we're in pretty good shape. What I'll tell you what one has to be very careful about, though, is over reading into that figure.

Because as our revenue has decreased, some of our AR dollars have been repatriated. I can't really tell you what they are, because we haven't closed April yet. But we I mean I know my borrowing balance, but I don't know exactly how many dollars of AR have been repatriated.

But you could imagine, we've only collected $12 million from the government under the CARES program, and we have had, as we said, pretty serious impact, particularly from anesthesia, during this period, I mean sizable dollars. At the same time, we've had a repatriation of AR with the amount of revenue stream.

And then there's just a lot of moving parts with tax timing and interest payment timing and coupons on bonds and all that sort of stuff, that it's pretty hard for us to model, Kevin, it's probably impossible for folks on this call to model. So overall borrowing level, not a dramatic difference with these important caveats about it.

When you think about leverage, I think, look, we did sell a meaningful chunk of EBITDA with the anesthesia business. So I think that has an impact, particularly when viewed on a trailing basis.

That said, we did indicate in the 8-K and we said today, and we've talked for a while, that business continued to have pretty significant pressures from a bunch of different directions, and we expect it to be very well owned by, by NAPA.

So I think my comment about kind of having added about one turn of leverage, it requires a lot of adjustments to kind of get to that, even to that rough math, but it's more of a denominator issue than it is a numerator issue. And it was actually intended to be a positive point. I mean look, we were in the high 3s.

So let's say you make all these adjustments and we're in the high 4s.

Given the changed risk dynamics of our business, that really is a meaningful shift ex anesthesia, we that is a very manageable quantum of leverage for us, particularly in the face of a largely of a particularly in the face of the capital structure that we put in place over the last 12 or 18 months.

The vast majority of our capital structure is two bonds that aren't due for a long time, don't have any covenants and that are relatively attractively priced given relative compared to the current interest rate environment. So I think the I think we view it as having come into the crisis relatively fortunate to many others.

We didn't have that much leverage coming into the crisis. We've managed to exit the business that was the single greatest stressor on our financial condition and our prospects. We were able we came into COVID with significant liquidity, and we were able to sort of add to the flexibility of that liquidity extremely quickly.

I think we were one of the first companies to get an amendment done under our credit facility. That really buys us a few quarters at least of flexibility to work through everything that's happening with COVID. So I feel very good about our capital structure. I feel very comfortable with the flexibility and the liquidity that we have.

And absent some type of corner case with COVID, I think we have room to manage our way through this for the next few quarters, and we'll see where we are..

Next we'll go to the line of Jason Plagman with Jefferies. Please go ahead..

Just a couple of quick ones. Your comments on med-mal insurance increasing, I think that's been a trend for a few quarters.

But can you is that concentrated in any specific specialty? And when will you start to kind of lap those year-over-year headwinds in that category? And then second one real quick was just can you size the benefit of the payroll tax deferral benefit to cash flows in 2020?.

I'll be quick because I know we're running out of time. In terms of med-mal, look, I think when you think about the business lines that we're in and that and that anesthesia is no longer part of us, I would say that there's no disproportionate impact really from anesthesia.

And in terms of lapping, it was Q3 last year where we had a significant I forget the exact number, $10 million type of step-up or something like that in med-mal in Q3. I think we will lap that stuff, right? After we report Q2, I think we'll largely lap that.

I would say you should expect some transaction-related noise in Q2 as we kind of true stuff up relative to the sale of anesthesia. But that should all be kind of buried down in discontinued operations, that's just settling out of med-mal. The in terms of the federal tax deferral, yes, we think it's roughly $40 million.

We the anesthesia part was kind of addressed in the closing of anesthesia. So the go forward, the balance of the year, April was the first month when we could take that. So it's not like we got $40 million in the door in April. We'll get a little bit each a month for the balance of the year.

And just to make sure everyone is on the same page with that program, we'll defer those roughly $40 million of tax this year, we pay back half of it at the end of 2021 and the other half at the end of 2022. So it is a meaningful and helpful deferral..

And the last question comes from the line of Whit Mayo. Please go ahead..

I just have two clarification questions. Just back on the leverage, I just want to make sure that I get this right. I'm still a little bit confused, so bear with me. Did you adjust out the denominator for the full trailing contribution of anesthesia, or not? I wasn't sure if that was a partial stub.

And the math just sort of implies a number around $350 million. So I just want to make sure I understand what that $350 million represents..

Whit, I'm trying to be as constructive as possible given that we pulled our guidance six weeks ago and we haven't closed April. But in general, I would say you're directionally kind of looking at it correctly.

And I think it remains to be seen, but there are always we've got a lot of work to do, as I said, over the next couple of quarters as we handle this TSA as it relates with, with NAPA.

And as we kind of work through our support structure and how that all and our overhead costs and our G&A, and how all of that relates and morphs to all the changes that have been made recently.

But the I guess the last piece of your question, I'm using a clean EBITDA, an EBITDA number that is that does not include contribution from anesthesia, although it may include some support services or overhead or G&A that relate in part to anesthesia. We'll give a lot more clarity over the next couple of quarters..

No, that's helpful to sort of conceptualize how you're looking at that number. And just the last question is, I know that there's a lot of work that you guys have in front of you and you've been preoccupied. But as you think about recasting the business, I don't know if you plan on putting out an 8-K to recast prior years to exclude anesthesia.

I might just throw that out there that it might be helpful.

Is there any way to think about what the growth rate of the business would have been in 2018 and 2019, if we exclude anesthesia? I'm just trying to sort of visualize in my head what the historical growth profile of the business would have been in the absence of the anesthesia platform?.

Yes, we will be providing, as Stephen mentioned, some pro forma financials in the coming days. They come with a heavy caveat about the allocation of overhead expenses and the like that won't be fully reflected. I think it's a little bit premature to undertake, in the very short future, that kind of a recast.

Clearly, that's a high priority for us simply as a business, much less as a public company. So everything will flow from that. But I think it's a little bit premature to do that right now, given the, given the moving parts and the dynamics of the environment we're in right now..

No, I appreciate it.

But maybe just like directionally sorry to harp on this but if the business was down 3% in 2018 and declined 12% in 2019, I mean directionally, can you provide maybe some guidance around would it have been flat? Would it have been down half of that? Just anything that to maybe help out to think through what the organic growth of the business has been..

I'm not sure that I can provide anything much more helpful than Charlie, other than I'll make a general comment.

The general comment is I think it is clear to those that have followed the company for some time that for the last several three or four years, anesthesia has been a really challenging business for us, where our reported EBITDA for that business was down by well more than half over that period of time.

And so it has had that sort of impact on our overall earnings. Now when you strip it out, how that translates to everything else, I agree with Charlie, it's premature for us to, to comment. There's just simply a lot of work to do. But hopefully, that gives you a sense that something that has been a meaningful drag is not part of the go forward..

There are no further questions..

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

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect..