Ladies and gentlemen, thank you for standing by and welcome to the MEDNAX Third Quarter 2020 Earnings Conference Call. At this point, all participant lines are in a listen-only mode. However, there will be an opportunity for your questions. [Operator Instructions] As a reminder, today's call is being recorded. I'll turn the conference now to Mr.

Charles Lynch, Vice President of Strategy and Investor Relations. Please go ahead, sir..

Thanks and good morning, everyone. I quickly read our forward-looking statements and then turn the call over to Mark. 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 these 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 located at mednax.com.

With that, I'll turn the call over to our CEO, Mark Ordan.

Thanks, Charlie and good morning, everyone. I'll start my remarks by telling you what an honor it is to work with my colleagues at MEDNAX.

There is a real passion throughout the organization, including my fellow members of our support team in our offices, for providing the best care for our patients, for leading and research and clinical support, for being careful financial stewards, and for being the best possible partner to hospitals, practices, physicians and all clinicians.

I've already met the leaders of hospitals who attest to our commitments of quality care, and who hope to expand our relationships.

And I've had the privilege of meeting many of our doctors and nurse practitioners, visiting our natives and receiving a resounding welcome to show support for a continuing commitment to reinforce our mission to take great care of the patient. Joining me on today's call are Marc Richards, our new CFO by Dr.

Mack Hinson, who leads our Pediatrix and Obstetrix Medical Groups, which of course will be all of our operations after the sale of our radiology medical group closed. Mack and I work hand in hand to lead the day-to-day operations of the company, along with a dedicated and our smaller senior team.

Marc, as you may know, has worked with me for over 10 years and there is an operation and capital allocation focused CFO, Marc and I will detail the results of the third quarter. Marc will detail the results of the third quarter and then I along with Dr. Hinson will provide a more granular understanding of how we are operating.

Before I turn the call to Mark, let me make a comment about the radiology sales. I thought before I joined MEDNAX that the company should focus on its core and decide accordingly. In my first days and weeks that opinion was reinforced to our Board members share that conviction.

So we restarted the sale process, made certainly with competitive and concluded in just over one month. We were in our guarantees when we agreed upon price and when the sale closes, we will be able to make our strong balance sheet much stronger, allowing us to operate our core practice areas more efficiently and to grow more certainly.

I have no update today on closing timings since we are in the customer regulatory approval process. When we do close the transaction, we expect to pay down debt and fund accretive growth more easily.

Be assured that we are very shareholder friendly, and if tools like buybacks or distributions ever we see lies in the future we'll work with our Board to do what's best. Mark will now speak about the third quarter. .

Thanks, Mark. I certainly appreciate the warm welcome. I'd like to thank Mark, our Board and the MEDNAX team for an exciting opportunity to work here. My focus over the past two months and going forward is on operations with the goal of driving core profitability.

I'm overseeing accounting, finance, tax, technology, and RCM and we'll continue to refine our organizational structure for optimal efficiency, while also ensuring that adequate resources are available to execute on our business plan and growth initiatives.

Before going into our third quarter results, I know that the modeling our company has been challenging, given the divestiture early this year of American Anesthesiology and the announced sale of MEDNAX Radiology Solution.

So concurrent with this morning's press release, we provided on our website full quarterly financials for 2019 and year-to-date 2020 for our continuing operations. And I'll make references to those financials were both sequential and year-over-year trends.

Turning to the quarter, I'll give some details on our P&L drivers to add some context to the information provided in our release. As we announced, our same unit volumes declined 4.3% which marks a partial recovery from a roughly 9% year-over-year decline in the second quarter of this year.

This recovery was greater at our office space practice areas based on the more severe impact those services experienced during the second quarter.

And on a preliminary basis, our overall volume trend in October appears to be similar to what we saw in the third quarter, with patient volumes across the organization down by mid-single digits on average compared to last year.

Within our hospital-based practices, which include neonatology and related services, pediatric ICU, ped hospitalists and ped CR our NICU days were down 3.9% while volumes and other related services were down somewhat more. Others at the hospitals were in the NICU were down 3.2%. And rate of admission was down slightly year-over-year.

I'll note that the third quarter of last year was a fairly strong comp period with births up 1.7% and NICU days up 3.4%. So it's important to keep that comparison in mind. Looking at a two year stacked basis for example, births declined by just under 1%, which is in line with our experience of the past several years.

In our office-based practices, which primarily include Maternal Fetal Medicine and pediatric cardiology, volumes also declined by approximately 5%, a significant recovery from Q2, where volumes fell by roughly 17%. Pediatric cardiology remained among the most impacted service lines in the third quarter.

But MFM volumes rebounded sharply and were down only slightly compared to last year. On the pricing side, we received just over $14 million in CARES funding during the quarter, which was a contributor to our 3.9% same unit pricing growth, along with normal managed care price increases.

Offsetting this, payer mix was modestly negative during the quarter. At this point, our overall mix remains in line with the range it's been in for the past several years. And for the quarter the negative comparison appears to be a year-over-year fluctuation within that range, with last year's quarter being modestly on a favorable side of that range.

I also want to flag items on the expense side. Our practice level salary, wage and benefit expense was up about $8.6 million in the quarter. Most of this increase was just over $6 million reflects the flow through of CARES response and the practice bonus expense. Our G&A expense was up about $3 million year-over-year.

As we detailed in our press release, G&A includes about $10 million in expenses we incurred as part of a transition services agreement we haven’t map up, following the sale of American Anesthesiology.

The reimbursement for those expenses is reflected in our investment and other income line item, so there is a minimal impact to our adjusted EBITDA, but they do inflate our G&A expense. As one last word for G&A, there were just under $3 million in TSA expenses within our second quarter G&A.

Finally, on our G&A expenses, is the wind-down of the TSA with NAPA. This activity will wind down as we move through 2021, but in terms of financial impact of MEDNAX, there will likely be a lag time for us to bleed off these expenses currently being reimbursed for.

So, we think of G&A expense excluding those TSA cost as a future state of work towards and not an immediate step down in G&A.

Our transformational and restructuring expenses were $34 million for the quarter, which included about $27 million of costs related to our executive and board restructuring, roughly $5 million in consultant cost and the rest related to contract termination fees and the like.

We will continue to reduce our transformation activity for Q4 of 2020 and expect any ongoing consulting expenses to be minimal by early 2021. Overall, adjusted EBITDA was just under $73 million for the quarter, up from $69 million last year.

We know that many analyst models for the quarter still included our radiology organization, so to help bridge results of people's models we detailed in our press release that MEDNAX Radiology Solutions generated Q3 revenue and adjusted EBITDA of a $126 million and $21 million respectively.

Again, on a sequential basis our adjusted EBITDA showed a sharp recovery, $73 million from $56 million. For one last piece of detail, the CARES funds we received in Q3 contributed $8 million of EBITDA compared with $3 million contribution in the second quarter of this year.

I’ll make one final note on adjusted EBITDA for those of you keeping models, while we aren’t providing financial guidance for the fourth quarter, I’ll point out that while we have applied for additional CARES funds based on HHS guidance, it's uncertain how much we will receive during the fourth quarter.

So the more appropriate comparison to use for your models would be our third quarter adjusted EBITDA excluding the CARES contribution to that EBITDA. As we have done for the past two quarters, we’ll provide specific details of any CARES funding we received during the fourth quarter, when we report early next year.

Turning to our balance sheet and cash flow. There are a number of moving parts on what's flowing through continued operations and discontinued operations, particularly given the collection retained our from the anesthesia transaction flows through discontinued operations.

The better way to look at cash flows then, is our total increase in cash for the quarter to $295 million from a $132 million at the end of June. Roughly $40 million of this increase reflects anesthesia AR collections.

Another $28 million reflects the receipt of income tax related refunds and the remainder reflects operating cash flow from our core operations with engineering ops, and from radiology within discontinued ops. With that, I will turn the call back over to Mark. .

Thanks Marc. I'll now pick up and provide you with a look at what we're up to and what it means. While we look at our share price and read analyst comments about our company I see a misunderstanding. We are not an organization that is sitting around waiting to see what share we will get our country's birth rate.

And at this point, we don't see any signs of a major drop in birth rates, like we've heard about anecdotally. Instead, we are very actively managing every aspect of what we do to maximize efficiency without ever putting our patients anywhere, but as our number one priority.

We have been reducing our overhead and in particular slashing outside consultants spending, which for the year-to-date was almost $50 million in total and almost $30 million related to our continuing operations.

While we're not just providing earnings guidance, I will reaffirm our view that we can achieve a steady state deepest our run rate of $270 million in 2021. This assumes no major continuing effect from COVID.

Our confidence in this is bolstered by the combination of our control of our business and spending, along with the direct and constant push for sustainable, organic and new growth. If you're having trouble getting from our current quarterly EBITDA levels to where we think we can go, I would point to a few things that I love.

First, the $14 million in CARES dollars we received in the third quarter and the EBITDA associated with only dollars did not fully make up for the lost revenue we experienced due to the pandemic. This is clear when you see that even including these dollars, our same store revenue remains down slightly this quarter.

Second, we'd continue to make overhead spending reductions, which likely won't be fully evident until after the end of this year. We've also made significant changes to our leadership team and reporting structure, which also are not reflected in our third quarter results.

Third, the changes in sales and gross which are reporting directly to me and our veteran Chief Development Officer Dr. Jim Swift and operations reporting to me, Mack and Marc are new and will materially affect the way we run the company. I want to expand on this way of planning.

Mack and I are visiting our practices and hospitals and our key markets and we now for the first time have practiced data analytics to allow much more effective monitoring and financial control of our operations.

This sole focus on increasing efficiency and first hand understanding of our practices and partner hospitals has begun last fall by Mack and our team. This now has a full support and attention of our entire organization. To underscore the importance of this focus sales, business development and strategy now report directly to me and to Dr. Swift.

We see many ways to grow organically and with a combination of new practices and new and expanded hospital relationships. And we are very confident that we can grow without straying from women's and children's health.

I can attest to the strong relationships we have firsthand with hospital systems, who are eager to find ways to expand our partnerships. And we will be all over this.

In fact, just this week, we were very pleased that subject to customary Board approval, the Memorial Healthcare System here in South Florida, announced their decision to choose MEDNAX to lead their neonatology services across three hospitals, including Joe DiMaggio Children's Hospital.

This achievement was only possible because of our reputation, our dedicated and rededicated focus on women's and children's care and relationships that were built and nurtured long before I got here. Our founder Dr. Roger Medel, and our senior leadership with Mack made this a reality.

I can promise you that our passion for excellence and smart growth is alive and well at MEDNAX. Dr. Mack Hinson will now share how our team is combining this passion for both clinical excellence and operations excellence.

Mack?.

Thank you, Mark and good morning everyone. As Mark said, starting the course with Roger Medel, we have insisted on building our relationships, and our reputation as a leader in women's and children's health. When we met with the leaders of Memorial Healthcare, this was the focus and the commitment we brought out to them.

So, we're very excited to begin providing services during 2021 and to bring our decades of dedication, investments in data and clinical research and our mission to take great care of the patient to several additional outstanding hospitals here in South Florida.

Across the three Memorial Healthcare hospitals where we'll be providing the neonatal care, there are roughly 13,000 annual deliveries and a 120 new beds. This is about 1.5% addition to the 2019 annual volume across the pediatrics organization. This is now a very flat organization with a complete absence of silos.

We'll work together in teams to make sound decisions for all of our operations teams and our medical groups. I agree with Mark that we are misunderstood as a company.

We're not just a group of neonatology practices but a diversified National Medical Group across more than a dozen pediatric medical and surgical subspecialties, plus maternal fetal medicine and the only hospitalist services providing the most vulnerable patient population in the country to care to these patients, to the expecting mothers, their newborns and children.

It's incumbent on us to ensure that physicians across our organization are fully supported, so that they can care for their patients as best as possible. Physicians been years of their lives learning and training in the science of medicine, in order to bring their knowledge and skill to the best side of the patient.

It's an art, own through repeated patient interactions that allow every clinician to translate science into compassionate care of our patients. But healthcare is also a business, it’s our business.

It requires us to work every day to put tools in the hands of our clinicians so they can deliver high quality care to our patients in the most cost efficient and effective way possible, and to do so in a way that positions us for growth as an organization. In order to do that, last fall, we focused our efforts around a market based approach.

In each geographic area, we considered how we can strengthen and support our practices, and how we can be better partners with our hospitals. So we can expand existing relationships and form new ones.

What sort of tools are we supplying? We're introducing several tech enabled solutions that will improve the efficiency of the work our clinicians do each day.

These include a significantly more streamlined charge capture system, a cloud based image access and storage solution, the continued development of our cloud based neonatology specific notes and data system, and upgrades to our ambulatory EHR that are better for clinicians, and improve the patient facing portal of our patients and their families.

Since August, we're supplying real time data to practices so they can see and more importantly manage patient volumes. Our operations team and clinical leaders are highly focused on improving access to patients to more actively managing our market relationships.

These data enable comparison of our productivity data across the practices, and will allow more direct dissemination of best practices. This also enables a more active management of staffing and expense allocation.

One of the greatest predictors of success in our partnerships at the hospital and health system level is a high degree of strategic alignment between our clinical leadership and our partners. This requires of our clinicians the skill set beyond just the practice of medicine.

And to this end, we're re-launching our pandemic delayed clinical leadership development program. Physicians and nurse practitioners from across the organization will be starting this new program at the first of the year so, we can actively develop and support future clinician leaders in MEDNAX.

The steps we're now taking will help us better allocate resources, will improve the efficiency of our clinical staff, and will enable improved patient access and market relationship management, and will foster stronger health system relationships.

These actions will maintain our current with the business, improve our presence in our markets, and retain and attract talent inclinations, and new practices to grow MEDNAX. With that, I'll turn the call back to Mark. .

Thanks, Mack. Operator, now let's open up the call for questions. And Mack and Marc and our SVP, Charlie Lynch, are available to answer questions. .

Certainly. [Operator Instructions] And first from the line of A.J. Rice with Credit Suisse. Please go ahead..

Thanks everybody. Congratulations to the team, as they go forward from here. First of all, I know I appreciate the comments about not being too focused on short term volatility of birth rates. But I know there was a comment in the press release about what you're seeing in terms of maternal fetal patient volume being moving slightly down.

Does that give you any indication of what the next couple quarters might look like in terms of volumes, is that suggest similar to your long-term trend volume likelihood?.

Yeah, this is a Mack. It certainly suggests that we're seeing a similar type volume that we've seen in the past the fact that we're returning to a baseline and beyond that, I think it's hard to predict for beyond that information..

Okay and maybe a little housekeeping question. Obviously, when you finished the sale of the radiology business, we're calculating, you'll be just north of two times debt-to-EBITDA. So, presumably you have a lot of decent amount of flexibility on your capital deployment.

Can you talk a little bit about how you're thinking about capital deployment in terms of share repurchases, tuck-in deals, larger deals, other uses of your cash flow going forward as you complete the radiology sale?.

Sure, I touched on that briefly in my comment. This is Mark. First, we think there are a lot of growth opportunities in our core area and around our core area. And we're working very hard on that. So we want to make sure that we have the capital to deploy to make that happen and so we have a very strong balance sheet process.

I think we have a very sophisticated board, and we're very careful about capital allocation, and as I said, we're very shareholder friendly. In the future, it makes sense to consider a buyback or some kind of distribution, well of course, we'll do that.

The great thing is for this company to have a great core business, and to also have the financial flexibility to make the right tools. So, we have no plans to announce today, but our eyes are wide open..

Okay. And maybe just a final question then.

I know over the course of the summer there been discussion about as you refocus on the women health business and pediatrics legacy business, there was the potential to reaccelerate a bit the growth rate, I know putting a deferred volatility quarter to quarter aside and maybe get back to certainly low to mid-single digit type of top line growth.

I wonder if you have any views on that.

I know that wasn't really your assessment that you offered, it was the previous group, but I wanted to hear how you feel about that?.

Well, I won't put a number to it yet because the processes that I described in my comments have really just recently started. I do think that we have a lot of avenues for growth starting now and going forward. So, I am confident that we can achieve a solid level of both organic and new growth.

But again, in our areas, we're not looking to do anything outside of our core areas. And we're very fortunate that our core areas have a lot of opportunity.

And I would go back to the comments that Mack made that by looking at our company, and the stand of our company, and you look at it market-by-market, think about how we can be better and bigger partners with hospitals and have more practices join us in and around our core, I think it gives us a very incredible way to grow without stretch.

And I'd say as we talk about the new award that we got from Memorial Hospital here in South Florida, I think there opportunities like that throughout the country and we have a great team of operators, who are really working on how to take advantage of those opportunities. And this may seem unimportant to me, it's all important this all we do.

This is we talk about day and night. We are working together as a team. We have no other distractions. This is what we're doing. So that gives me a lot of confidence in our ability to grow..

Okay. Thanks a lot. .

Thank you..

Our next question from Brian Tanquilut with Jefferies. Please go ahead. .

Hey, good morning, guys. Mark, just a question on the comment that you made during the prepared remarks about just not seeing growth rate compression obviously, you put up a 5% NICU volume growth same sort of 4.3% same-store a number for the quarter decline.

How should we put those two comments together? I mean, what's the link between those two?.

Well, the reason for my comment is obviously we hear plenty of anecdotes, we heard articles and we're pretty passionate about this to look, to see, if there's some cliffs that we're approaching or something, because we hear these dire predictions. We're not in the basis.

We're not in the business of making long-term forecasts on birth rates, we'll leave that to others. But we don't see anything within our four walls that would indicate a precipitous decline.

So what I was saying is that I see those growing and we expect that they'll be plus or minus of some changes in the birth rate, but we just don't see anything that would tell us that we're walking into a clear sustained declined. And we should soon, what I'll tell you, we have looked to see if we can find a trend like that.

And we had, and when we tour our NICUs and our team have done out quite a bit, we haven't found that. So, obviously, if something precipitous were to happen, it would change things as to this, we’ve got today pandemic, becomes a worse for the country than it has been, that would affect us. But we just had that.

We have tried this very passionately to find a trend and we have. So we're certainly not expecting a big jump into gross readout. .

No, I appreciate that, very helpful. So, and I appreciate you addressing the sell side concern. So I guess just along those same lines, if you don't mind just describing to us what the comp structure is now that were down to the legacy core business without anesthesiology and RAD.

Just think about the flow through of payer mix changes and volume changes over time, what's the variability in the comp? And how should we be modeling that again with the risk in the horizon of whether it’s payer shifts or volumes compressing?.

Well, I'd say that, that kind of detail is to come. And I'm not dodging the question, but we're making an awful lot of changes, we have operated this company, we still operate this company with a focus on both our core business and on radiology.

So we are in the process of restructuring the way we operate, which is going to affect our overhead and how we run the business. And as we grow in the areas that I think we will, I think it's going to enable us to -- we still have the financial leverage characteristics that we've had.

But I think that we can operate as a much more efficient company than we've been able to in the past. We’ll provide those details in the coming quarters as we as we make our changes here. .

Appreciate it. And then last question for me, Mark, you're known as a turnaround guy, coming into MEDNAX with a fresh set of eyes. Obviously, there are cost opportunities here. And I guess you guys alluded to in your prepared remarks.

But if you can just give us more detail on what are the areas you're seeing right off the bat where you could see non-compensation expense opportunities? Thanks. .

Well we highlighted the company for a variety of reasons, spent a lot of money on general consultants over the last few years. It's not my nature to do that. I'm not questioning what was done in the past, but I will tell you what we're not doing that in the future. And Marc Richards talked about that.

So I think that there's just as a -- when you focus on a company and I appreciate your comments as a turnaround person, but I just look -- we just look at every penny we spend and how do we do it differently. So we try to find and there are lots of ways when a company focuses to reduce expenses going forward.

But like every company, we're learning from the pandemic about what travel is necessary and what travel isn't necessary, and what we can do to make our offices more efficient. As we've streamlined our office expenses have come down, and they're going to come down further. So, I do think we'll go to screen. And we have nothing else to focus on.

Having said that, I'm also as excited or much more excited about the fact that the team that was already in place when I got here is really an amazing team. I don't think that they had the opportunity over the last couple of years to solely focus on this.

As you know, there were an awful lot of external distractions, and at a much bigger company so they had to spend more time on anesthesiology, radiology, and all sorts of other things. So I can't underscore certainly in my past, this is just what I've done.

I've come to companies and said, hey, you have an amazing core business, but obviously great people that I admire. Let's work together as a team and focus on everything. Even in the sales process for me and Dr. Smith and the team to be working so closely together means when there's an opportunity, we jump on in immediately.

And the whole organization is involved. There's no last time. You can imagine a sales process to be that responsive, has got to bear fruit.

So I would go on and on about saying we're finding efficiencies in many ways, and you can probably hear my voice, but I find it more than a little exciting when I speak to the heads of hospital systems and they talk about how much they rely on us now and how much they would like to expand our relationship.

But we haven't had the bandwidth and the focus to be able to really work day in day out on that, we can do that now. And we are doing that now..

I appreciate that. Thanks again. .

Our next question from Gary Taylor with JP Morgan. Please go ahead. .

Hi, good morning, I had a couple questions. First is we're just thinking about valuing the company and calculating enterprise value.

Are there any adjustments we need to make to the balance sheet outside of the $885 million of Radiology proceeds? Are there any unearned CARES Act received or any accelerated payments on the balance sheet, we need to reverse out?.

Hey, Gary, it's Charlie. No, those are what you would look at I think, as we mentioned, related to the RAD transaction, we don't anticipate any tax implications related to those proceeds. So, that's a good proxy minus fees and expenses for what you would expect us to receive.

On the CARES side, the only funds we have applied for or received or what we talked about, which is that roughly $14 million we got in this quarter, and something less than that in Q2, we didn't take any accelerated payments or anything like that. .

Thanks. And then my other question, Marc, I just want to make sure I understand what you're saying about the $270 million run rate. I think you're saying you won't necessarily guide for that in '21, but you're expecting as you exit the year to be at that run rate, excluding transformational expenses, adjusting for seasonality, etcetera.

Is that is that correct?.

Well, if you say, at the end of the year, I think my only hedge is like every other company on the planet, I don't know, but it's unlikely that on January 1st, the pandemic switch will be switched off.

So, I'm saying that if pandemic wasn't affecting our business, and we described how it has, then I think we should be able to achieve that $270 million run rate. I have seen our forecasts that are a good amount lower, and I scratch my head, and I don't see any sign of that.

And I think that combined with, if you look at what we were able to do in the third quarter, and project that out along with the changes that we're making. And we're making the changes now, like seven months from now, we see no reason to have we won't be able to hit that number unless we get clobbered from the outside.

And as I said, obviously, we don't forecast a steep decline in birth rates. If that were to happen, that would definitely make a difference.

As I said, in the last call, I will tell you that we are in the business of also growing at a time when things are choppy, and people are concerned about birth rates, and they're not sure where they are, I do think that provides a buying opportunity for an organization that has a smart and careful long-term approach to our business.

So, I think that we don't hope for a lower birth rate. But there are opportunities that come in a choppier time, and we're here to take advantage of that. .

Appreciate that. Just a quick follow-up on the restructuring and transformational expenses, which have been pretty material the last couple years, certainly were this quarter as well.

Are you yet in a place to sort of talk about how and when those ramps down, so we can start thinking about true EBITDA performance without the noise of excluding a material amount of expenses?.

Hey Gary, it’s Marc Richards. Yeah, I would -- we are in the process of arranging that down. And I would expect very early on in 2020 -- 2021, excuse me, that that effort and the related costs will be moving to zero.

Is that January or February, probably in that range, maybe some residual that'll flow through in the early part of 2021, but not to carry on certainly, nothing to level that you saw here in the third quarter. .

Okay. Thank you very much. .

Sure..

And next, we'll go to Whit Mayo with UBS. Please go ahead..

Hey, thanks for the question. If I look at the EBITDA reported in the quarter and take out the $8 million for CARES Act, it gets me to 65 historically MEDNAX has earned call it 27% of the full year EBITDA in this quarter, which would imply kind of a $240 million bay.

So I'm just trying to come up with a starting point to think about how we build up to the 270.

And if there's any, headwinds or tailwinds that we should consider in terms of a normalized environment where you would be versus the pandemic, where your budget was and where you are now, costs anything that may help us sort of bridge the gap would be helpful? Thanks..

Yeah. Hey Whit, this is Charlie. I can give you a couple things and Mark alluded to this in his prepared remarks. When you look at that 65, that doesn't include the CARES, that effectively gives you a fairly broad depiction of our operations right now, as impacted in about a volume trends we've seen this year related to the pandemic.

And over and above that, when you look at the contribution from the CARES dollars we’ve received this quarter, you can see to that, even including those at the top line and I think the flow through EBITDA is comparable to what you would have seen if we had sufficient volume to get there.

Our same unit revenue is still down slightly year-over-year, which is somewhat less than our trend and thing in revenue for the past several years. So that's the most important thing that while we're pleased with how much we've seen volumes come back and force the return to normal, they are not back to normal.

And that has an impact in flow through into EBITDA as Mark mentioned. Now, the 270 is predicated on a view of normalized performance.

The last thing I would bring up is just a different reference point is, when you look through the pro forma financials we provided for 2019, it’s on our website, you'll see that for the full year 2019 for continuing operations with adjusted EBITDA about $260 million $261 million.

So that too is a relatively appropriate baseline to think about for last year, which was not impacted by the pandemic. .

And Whit, this is Mark. The other thing I would say, over the last several months with the reorganization of the company and everything that went on, the sales process that I described as are now on going forward, so the process was somewhat interrupted.

So in the third quarter, we still have significant expenses as Marc Richard said, will be mostly gone by the beginning of ’21. And as the overhead changes that I described, will be in place in ’21.

So there was a lot of spending in the third quarter that we don't expect to see in ’21, coupled with effective sales which you didn't see in the third quarter of this year. Because again, I would say the mass preceding in the third quarter, that pace was not as robust as we expect it to be. .

And I think, Mark, maybe more specifically meaning our normal sales and marketing and business growth process. .

Yes. .

Not the radiology cell process. .

Yes, thank you there..

Okay, that's all. Just to be clear, Charlie, I think you were suggesting that if we look at the CARES contribution, that's a decent representation of how performance may have been in the absence of the pandemic.

Is that a fair characterization?.

I think structurally, that's what I meant with. But my other point is relevant to this, I don't think we would have anticipated a negative same unit revenue growth in a normalized environment. And by that, I mean, the funding we received through the CARES Act did not fully replace what we experienced in lost revenue related to volumes..

Okay, now that’s helpful. Maybe one other question, I'm just scanning the queue, it does look like you've got all disclosures around payer mix and subsidies and subsidies looked like they were up $10 million year-over-year. And I know, that's the normal course of business.

But I guess maybe just remind us how this works with your hospital partners, how much visibility you have into sustaining those type of increases and maybe what the trigger points are for you?.

Yeah, I saw you mentioned in your note Whit and just as a quick clarification there, that contract and administrative fee revenue was up about $10 million year-over-year. The majority of that increase is related to new business and contracts signed and a like that includes some level of admin fees.

Only about $3 million represents the same unit comparison year-over-year. So that's really where you saw that the increase in that and those are all negotiated contractual structures. So, that's just part of the new businesses that we signed. We see that as just part and parcel of how we're providing services to all those contracts. .

And Whit, it’s Mark Ordan. I also go back to what I refer to and Mack described in more detail. This company for its existence did not have in my opinion anything like a good data for to be able to look at the factors that contributed to the results in its ambulatory practices and other places in the organization.

Several months ago, and long before I got here, there was a strong effort to create that data analytics, so that we could really look at all the financial movements in our practices, to think about the comparison with what best practices are versus was employed elsewhere. I don't know how you can move results without those analytics.

Those analytics didn't exist before. They were first rolled out, starting about a month ago. So, I'm just trying to give you and everybody and understanding that, that we are running the company, we could lead it. It's very hard to drive your car with no dashboard and no windshield.

And, I actually -- I would say, I admire what people were able to do without that. But with that, we can look at scheduling and we can look at a host of things and be able to move the needle where in the past, all you can do is go in and wish people well. So it's just -- I can't put numbers to it now.

I look forward in the coming quarters to putting numbers to it. But from my experience elsewhere, that's what gives me confidence that it’s going to be different here..

That's, that's helpful. Sounds like there’s a number of a cumulative positive forces there so I appreciate it. Thanks, guys. .

Sure, thank you..

Our next question is from Kevin Fischbeck with Bank of America. Please go ahead..

Great thanks. I was wondering if you could provide a little bit of color on the payer mix in the quarter. It sounds like you're saying that there really wasn't a major change in there.

But any difference in payer mix between the core NICU business and the other services that you provide in the hospital, any changes there potentially impacting payer mix [Indiscernible]?.

Hey Kevin, this is Charlie. No, we haven't seen anything like that. Marc Richards mentioned that, looking at the next quarter it looks like fluctuations are at a pretty steady mean over the last several years. And that's indeed what it looked like. So, we didn't see anything in there that looks like a change in trends.

And that trends for the past, probably four or so years, as in our payer mix and keep in mind, for pediatrics and obstetrics, we're really looking at a largely binary mix between Medicaid and non-government. It's been a slightly favorable trends, generally flat but slightly favorable.

For this quarter, over last quarter it just looks a little bit unstable. But there are fluctuations around that norm. So we're not in a place here, where we can see a change in trend. We'll see how things develop, but it really looks like a normal fluctuation..

Okay, I guess any update exactly on the payer rating, sounds like, that was normally for updates and anything to think about as far as Medicaid rate updates in the current environment?.

No, nothing to call up..

Okay. And then I guess maybe finally, when you think about the cost cuts that you guys are talking about kind of ramping in the future quarters.

How much more is kind of that to be realized versus where the Q3 amount realized this?.

Well, good amount. I mean, I guess the good news for the organization is a decent amount of it was in non-payroll expense. So we're able to eliminate a lot of things without chipping away at the organization. And obviously, many cuts were made before. So I think that, that there are host of opportunities in non-payroll areas well beyond consulting.

In terms of the size of the organization, we've made changes -- largely the changes we've made are done and I would expect it get done, so you'll start to see those in the fourth quarter and beyond..

Okay, great. Thanks. .

Our next question is from Ryan Daniels with William Blair. Please go ahead..

Hey guys Nick Spiekhout on for Ryan. Thanks for taking the question. I guess so you kind of touched upon this to start the call, but historically point to kind of like historically 3% growth maybe a goal getting that kind of 6% area.

I know, you said that's from prior management, but I was assuming like, what would be like kind of moving parts to kind of get to that mid-single-digit level that mostly targeting organic? Is that going to be a little bit more through acquisition? And then I guess, what kind of birth rate assumptions would be in that general area to get to that area?.

I can't give you a precise answer, but let me try to help. It’s Mark. We expect a choppy birth rate, we don't expect it to be up or materially down. So with that as a background, and not being able to get any better you can, what the effect of COVID might be.

So putting those two things aside, I think, is all the above, meaning that we are very focused, we are very -- we have a series of regional leaders and regional presidents that report up to two terrific operating executives who report directly to Mack and to me. As Mack said, we have a very flat organization.

So to be able to work with our practices and our hospitals to look for new opportunities, which I would call organic growth within the system, we're all of that. And I think we have a terrific team to do that.

But I mean, the heads of our mid-Atlantic group or our group down in Texas, they not only have a great understanding of operations, they have a terrific relationship with our hospital leaders. And again, I'm not only bragging about them, not about me, I brag on [Indiscernible]. So I’d say that, that gives us a huge opportunity in organic growth.

In terms of tuck-ins, same thing, we have a terrific sales and business development team that's out there, they've established long relationships with practices. It's not completely under our control, because somebody has to decide if they want to sell.

But I think that the more that they see that we are totally focused on is business and it's all of us. So we know recently, the team has been working on an opportunity and major opportunity in MFM.

And, it was all hands on deck to make sure that the practice was comfortable, that we think about the future of the practice, figure out what we can do to make the doctors and other clinicians as happy as possible. And that involves, just about everybody working together to make it happen.

I got to get involved, when it was already 99% done, so I could look like here. But we all work on. So I'd say, it's going to be a combination of organic growth and tuck-in acquisitions. And with our eyes open to other areas in women's and children's health that we think can be added creatively..

Thanks. That's definitely very helpful color. And then kind of you discuss how internally you've been making a lot of investments in new improving analytics and things like that.

I was wondering, if we get -- will we get to an area where as you improve that you'll provide the street with a little bit more, I guess specific data on volumes, NICU patient days, things like that?.

Well, I think it's always been Marc’s and my practice in our past lives to be able to disclose as much as we possibly can. So of course, as we -- if we tell you that we're doing these things, and they should bear fruit, then I think we owe it to you to tell you to what extent they are bearing fruit.

So we'll -- Yeah, as we were very confident of the progress we'll make in closing this. Now some of the spending that Mack described, I still think leads to financial improvements. But very importantly, a lot of these things are just things that we must do as leading clinicians to make sure that we're always at the cutting edge.

Practices, practices don't only want to join the first rate company and hospitals only want to partner with a first rate company. We would not have gotten this Memorial Health system contract if it weren't for our reputation and working on quality.

So I will tell you that when I talked about areas that were going to cut spending, I notably didn't include things like research where I think it's vital for us to be a leader in that area. And we have a physician who is head of our clinical services for the company, but Dr. Kirk Picard. And he's an astute business person also.

But when he says, hey, we need this to support our doctors and other clinicians, I listen -- I listen really carefully, by the way, he reports directly to me. And but I think that that is a sincere selling tool to hospitals and our practices because they know that we're doing the right thing.

And they're only going to want to be part of a company that's doing the right thing is focused on it. So, I'm not -- I don't want anyone to think that we're cutting in areas that are going to affect quality because we're not -- we'll find other ways to cut it. We'll turn off every light bulb before we do that..

Awesome, thanks for taking the question. .

Sure. Good question. Thank you..

And next, we'll go to Pito Chickering with Deutsche Bank. Please go ahead..

Good morning.

Thanks for taking my questions, [Indiscernible] following up on the $250 million EBITDA for 2021, just understand exclude the COVID impact is that to possible model, maybe I missed it can you breakout what is the split between organic revenue versus the M&A if this is the number?.

Hey Pito, I apologize Mark, but you like maybe move a little bit back to the phone, it's coming to a garbled. I'm not getting the question. .

Can you hear me better now?.

100%. There you go..

So, just a follow up on a $250 million EBITDA in 2021 which I understand excludes the COVID impact in your hospital model, maybe I missed this, but can you breakout account, what is the split between organic revenue growth assumptions versus M&A to get to that number?.

Yeah, I think Mark made a comment earlier that when we think about the ways to get there, and it's all the above. So now look, where there's a reason why we don't have specific financial guidance, just like every other company, we're going into the fourth quarter and doing our budgeting process. And we'll be a lot more granular as we move into 2021.

But I think, going all the way back to a bit earlier this year, when we when we started to discuss that financial profile, it was based off of a multiple factors between the opportunities for organic growth, the opportunities for acquisitions, the opportunities for cost improvements, without any specific line or contribution from each of them.

So, I think we're still thinking about it the same way in a holistic fashion without a specific contribution from X, Y, or Z. .

And let me add, one of the reasons I said that, and I was so declarative about it is I was reacting to things that that I read, and I understand the reason for the things I've read, but I think that there is a thesis out there, which I totally understand.

If the birth rate is going down, and you're not really growing, and you just want to sit there, how are you going to get to 270? I totally get that. So, my point was, Hey, I don't think we're not growing. I know that wasn't around a business that wasn't we have, because of the focus that we're in that that's been enabled.

So, that the reasons that people think that 270 might have been believable in the past, but they don't believe that now. I'm saying, hey, the things that you're focusing on, do not have the whole picture. So, 270 wasn't a new number.

It was a number that had been out there, that I think people pre-pandemic before everything else said, yeah, that's an achievable number, obviously, excluding radiology. And I'm just reaffirming that that is the things that we have in place now when we're looking at going forward, absents of birth rate calamity or pandemic calamity.

I think we can get there and by the way, it's November, we have many months ahead of us to make the changes that we're talking about..

Okay, so, one question on birth trends.

Have you seen any differences with the ages of pregnant mothers or senior practices? We've seen that teenage pregnancies are down quite a bit to the COVID was curious to what you've seen particularly within new pregnancies?.

So, if I understood the question correctly, are we seeing different types of mothers in the practice? And I would say no, I think we're seeing the same sort of mix of maternal patients that we historically seen.

We've been a very [Indiscernible] company that looks at quality and looks at trends in businesses and led by somebody who's a very, very data driven and passionate about this. So, we've tried to see if there's something that we're missing. So we haven't [Indiscernible] I ask her all the time, if it's something that we see.

So we're not at the business of playing hide the ball. But so we do look at it carefully. And then look the anecdotes that are out there, we’ll see. .

Okay, and then last one, looking on free cash flows what’s on [Indiscernible]. Just having these sort of what are these free cash flow generation for the core business at this point, you're looking at cash flow from ops that has definitely been pressured for charges.

If you think about sort of the cash flow, whether it's coming from ops or CapEx, going forward how should we think about the conversion from EBITDA to cash flow? Thanks so much..

Yeah Pito, it's -- I think we're just talking about what percent of EBITDA we can pull through into GAAP operating cash flow and free cash flow.

We've generally looked at that in a broad sense in the past, and I think the parameters we think we've thought about the past still apply, for pediatrics, which is that a fair rule of thumb is to think about us pulling through somewhere in the range of 60 to two-thirds of our EBITDA into GAAP operating cash flow.

And beyond that our CapEx requirements are fairly minimal for continuing operations, so it should be I'd say comfortably under $20 million a year. So those are the parameters you should think about. And, I don't think they changed dramatically post the sales of anesthesia or radiology..

Great. Thanks so much, guys..

And our next question is from Ralph Giacobbe with Citi. Please go ahead. Ralph Giacobbe, your line is open if you're on mute, possibly. .

Yeah, sorry about that.

Can you hear me?.

Yes. .

Okay. Sorry about that. So can you talk about maybe discussions with physicians and staff at this point, any turnover, if you can give us a sense of churn or if that stable if you're looking to add? And then previously, there was a push more into service lines connected to NICU and women services.

Is that still a focus or is it more focused on sort of the core entity at this point?.

Let me start taking the first one because, and then Mack can add to it. I had the opportunity Mack much more than I have to meet with a lot of our physicians and nurse practitioners around our system. And there is sort of, there’s two things that I pointed out a great level of enthusiasm and also a real interest in helping.

I call in a name, John Lloyd is one of our anthologists in Texas, who has been enormously helpful to me as I think through what we should be doing to better support our practices.

This is kind of unique, and it's fantastic, that people who are part of our organization want us to succeed, and they want to be as helpful as they can be to enable our success. And obviously, if we're listening, it's going to help us and it's going to help them.

So, we've seen a lot of that I'm very grateful to Mack, for opening these doors for me so that when we go together, he can explain what the acronyms mean. And I can listen and try to understand it better. And as Mack talks about the other specialties the announcement better than I do. So go ahead. .

Yeah, I would agree, Mark. I think the people are enthusiastic about the focus on women's and children's services. I think that's a very uniform response that we're getting as we're talking to multiple practices across the country.

With regard to service lines within pediatrics, we do a couple things, one is we certainly want to pay attention, because there is specialty specific focus, it's important.

The specialists want to talk to other specialists, neonatologist want to know what their partners are doing across the country as do pediatric surgeons that we had a discussion with some pediatric surgery leaders yesterday about exactly this thing. But it's also important to think about the whole.

So we're not thinking that we want specific pieces of pediatric or maternal care, but we did want to continue to help facilitate discussions within our specialists. But thinking about the specialties cross talking as a whole is really important to our success going forward, and we're devoting time and energy to make sure those things happen..

Okay, that's helpful. And then I was hoping, in your prepared I think you talked about normal managed care pricing. Maybe just remind us what that typical rate is. And, is there any opportunity there or are you seeing maybe incremental pressure there? Thanks..

I couldn’t point, it's Mark. I wouldn't point to any change along with focus, we focus on relationships with our payers. And there's no -- again, there's no trend that I could point to. We have a great team that's focused on our managed care relationships. The leader of that team comes from the payer world.

So it's great to have somebody who speaks their language and appreciates what they do and the care they use. So there's no change that we point to that there's always going to be, with any relationship like that there will be two sides to it. But I obviously do that coming into it.

But again, it goes with focus that we could not focus on those relationships and work as partners with our payers..

Okay, fair enough. Thank you. .

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

Thanks for the follow up. I just wanted to go back to the 4Q just for a second. I know you're not giving guidance, but I think Charlie had said sort of think about at least sort of the starting point coming out of 3Q as a $73 million minus the CARES Act funding.

When we look at the restated financials for 2019, there was pretty sharp step up in EBITDA from 3Qto 4Q, and it's just been obviously a number of years since we've been able to see this business on a standalone basis. So is that level of seasonal pickup is that normal or was there something C&A was down a lot? I see.

But there's something else in the fourth quarter of 2019 that just made that a steeper ramp.

Should we be thinking about that sort of ramp obviously, subject to how the pandemic might impact 4Q?.

Yeah, hey, Gary, it's Charlie. That is a specific unknown as we go into the fourth quarter from the third, any kind of sequential changes related to pandemic. And obviously, that's why we don't have financial guidance for the quarter.

What I would say is that, historically in a normal seasonal pattern based on the nature of our business, the fourth quarter from a top-line perspective, and therefore into EBITDA would generally have a slight downtrend from the third quarter.

And that's over multiple years, as we look at it and for us internally we can see when there are different distortions that might move that separately.

The second point is that because you're looking at this call last year, there are also different items, either on the cost or revenue side that kind of represents through ups and alike as you go into the end of the year. And they tend to sort that trend off and on as deal flow.

So it's one reason why we wanted to make that point related to your development of a model coming from Q3. Number one, we don't have perfect knowledge of the magnitude of CARES funds we might receive this quarter. And we'll call those out.

And number two, in a historically normal environment, we would generally anticipate that our fourth quarter top line and EBITDA would be comparable or slightly less than the third quarter..

That's helpful. And if I could just one follow up for Mark to just try to get back to some of the disconnect between your outlook and the Street models. Maybe you could speak to this, so if we look at 2019 the EBITDA and continuing ops is the $264.5 million.

But the presumption is I think, for most is that just looking at continuing ops that would have been down from 2018. We don't know that number, and that would have been down including acquisitions. And I know, obviously, you guys goal is to turn the company around, but I think the disconnect is trying to bridge.

What that organic decline looked like or what we're guessing that look like without perfect transparency and trying to measure that gap to where your go forward is? So I don't know if there's anything else you could provide on kind of thinking about how the organic growth or decline in this core business has played out? That would help us. .

I mean Charles talk about the past more.

And so, might be Charlie you want to talk about that a little bit, and then I could -- I make some comments about, what you're going to be similar to what I've said, but I get to put a finer point, but why don't I go ahead? Look the nature of a turnaround as it doesn't go on a tight schedule, but the nature of the turnaround the CEO is your open trust.

So I'd say that I see a hope of things here that give me the ability or give us the ability to toggle what we do. And I think that we don't have a long lead time to do that. These are immediate things that I see in front of us.

So again, it's less than pointing to a specific number versus it was, I would give you guidance, it's saying that I think that we have the ability to achieve that. And I think that we're doing the things to achieve that. So I don't link it with what happened in 2018 or 2019 as much as I look at 2020 and I look at what affected us in 2020.

And where we are right now and who we have on our team right now? Like I don't know the people who we hear in 2018 and 2019 and what they were doing day to day. I know what was going on in 2020 very well. And that would give me a lot of confidence in what we can do in 2021.

So again, it's a big guidance, if I set a steady state, I'll connect the dots and we’ll give you guidance. All I'm trying to say is that I have a high degree of conviction that we can get there. And I just want to be careful and I'd say what I said before, the reason I have high degree of confidence is because the team that Dr.

Medel and others put together, this is not where we're [Indiscernible]. I'm trying to take a team that’s great and dedicated to what they're doing, and enable them to focus more and make quicker results in a flatter organization without violence. And I again think from my past, that really bears fruit.

In my past, in the turnaround person you come into uplift, I like that, because I like to buy low and sell high. I see this playing out here. And I think again absent a trapdoor some place, because of the birth rate or COVID, we will get there.

So, I did not look at 2018 and say, how can we get to 2021?.

Understood. I appreciate that. Thanks..

And with no further questions, I'll turn it back to the company for any closing comments..

We appreciate all the questions. We appreciate all the interest. I hope that we're not frustrating you by not being able to be more precise. I hope that we are the opposite of frustrating you, by like showing you how we think, how we're running a business and where we think we're heading and we look forward to posting you on our progress going forward.

Have a great weekend..

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