Q3 2019 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Mednax 2019 third quarter earnings Conference call. At this point all the participants Arnaud listen only mode. There will be an opportunity for your questions and instructions will be given at that time. If you should require any assistance during the call. Please press star.

Our zero and out pretty well, let's just do you offline as a reminder, today's call is being recorded.

I'll now and Mr., Charles Lynch, Vice President strategy and IR. Please go ahead.

Hi, Good morning, everyone welcome to our third quarter earnings call I'll briefly read through our disclosure statements in turn call over to Roger Steven.

Certain statements made during this conference call maybe deemed to be forward looking statements within the meaning.

Private Securities Litigation Reform Act 1995.

These forward looking statements are based on assumptions.

Storable trends current conditions expected future developments and other factors they believe the appropriate.

Any forward looking statements made during this call are made as of today and then next undertakes no duty to update or revise any such statements whether as a result, new information future events or otherwise.

Important factors that could cause actual results developments in business decisions to differ materially forward looking statements are describing the company's most recent annual report on Form 10-K , and its quarterly reports on Form 10-Q , including sections entitled risk factors.

In todays 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 , and they need investors section on our website located at Mednax Dot com that I'll turn the call over to our CEO Dr., Robert I'll say, Charlie good morning, Thanks for joining our call to discuss.

Our results for the third quarter 2019, [laughter], our adjusted EBITDA.

Excuse me I'd, just say, yes were in line with our guidance ranges for the quarter.

We saw trials bodies growth across our hospital base neonatology, and other pediatric services anesthesia and in radiology labor cost trends remain a key focus for us and while the environment remains challenging cost stressful. The core we're also in line with our internal expectation.

The increase in non labor expenses offset some of the top line strikes we experienced but our overall operating results were in line.

Across our organization, we remain intensely focused on our transformational activities.

Related clinical and non clinical cost trend information technology or process improvements.

During the war or we continued to do it spans the school investments and activity and Stephen will provide more detail what we have done.

Our expectations.

I do you know you following the organizational changes I see held last quarter. The leadership. So each of our core service lines are moving forward aggressively.

They're operating class.

After you know our women and children's Medical group consists of pediatric send obstetrics our hospital and office space medical groups within pediatric patient volumes benefited from an angry birds eye crop that several hundred hospitals, where we provide services.

During the quarter deliveries increased by roughly one on a half or said on a same unit basis. This positively impacted most of our hospital based services.

I'd neonatology attempt that certainly agree newborn nursery services and hearing screening.

They are makes it was also monitor slightly favorable for the quarter continuing a trend that we have experienced since 2018.

We're also moving forward on our plans for strategic growth of pediatric Synopsys is our focus here is on capturing more of the total addressable market for leases services, which we believe remains a significant opportunity for both organic and acquisitive growth.

To that end during the quarter, we completed three practice acquisitions, including I need a college degree a pediatric P.S.T. group and a pediatric neurology group.

Earlier. This week, we also announced the addition of a pediatric plastic surgery group here in Florida.

Each of these gross adds to our existing footprint.

Services in Indiana, Florida, and Nevada, and I think that diversity of specialties that are interested in joining pediatrics obstetrics, he's a strong indication or the unique position, which we hope in our industry.

It radiology, saying you did revenues increased by mid single digits. During the quarter. We believe this growth exceeds market growth into five core areas, where we have built our on the ground practices in Florida, Texas, Tennessee, New England and Nevada.

We also believe it reflects the strength of our hospital partnerships as well as the innovative value proposition, our physician spring to those partners and to our patients.

We believe there is significant room for strategic growth the bar Radiology group and we're focused on the geography is where we have now established a strong presence. We will continue to look for smart tuck in acquisitions in these markets to complement our organic growth and we anticipate that we.

Well complete some acquisitions in radiology over the coming quarters that reflect that strategy.

Finally, NFC, yes, we saw the strongest volume growth Oh var service lines. During this quarter, how do well pair mix was slightly on favorable. This was in line with our longer term expectations based on the demographic trends across the markets for our practice.

Well they are anesthesia organization, we remain intently focused on our initiatives for both individual groups and for the organization as a whole they have a common goal of aligning our revenue and cost trend it gets a difficult external environment of supply and pricing constraints.

And they cover a broad spectrum, including hospital relationships portfolio management clinical resource utilization and compensation structure. They also include the engagement the war consulting group surgical directions, which plays an important role in our ongoing efforts.

Lastly, following the end of the third quarter, we achieved an important milestone in our transformation, we used to say I'm amazed that the Fraser healthcare partners, we've closed yesterday.

We're excited for the night data team, we asked them yesterday is now own by a deeply experienced health care partner committed for some 40 my data growth. This it was important for US. In addition to cash proceeds. We also remain aligned with met data as a key customer.

Format and I ask this milestone enables us to focus entirely on our core physician services basis and provides us with additional capital on top of the strong cash flow that we have generated so far this year.

Thus far in 2019, including the proceeds from the Mega data transaction, we have been able to generate almost $500 million in capital or roughly one entire term of our annual adjusted EBITDA that we have data.

<unk> debt repayment share repurchases, our transformation, all the investments and acquisitions and following the close of the met data transaction yesterday, we now have no borrowings on our revolving line of credits.

It all we have taken a meaningful steps this year the focus our business structure on our core physician services to flatten our organizational structure and enhance the operational leadership of each of our core medical groups and to align our capital structure for long term flexibility.

Okay and sustainability.

So we are confident we have the right plan in place that deliver value, so our shareholders and all our stakeholders patient clinicians and employees as well.

With that I'll turn the call over to see.

Thanks, Roger and good morning. Thank you joining our call as Roger mentioned this quarter was in line with our expectation. So my focus on a few items within our results or updated views for the remainder of year or transformational and restructuring activities at our thoughts about how those will progress as we move and just want to 20.

Finally, I'll give some more detailed on balance sheet and our sources and uses of cash.

First as part of our third quarter results.

We recorded a 1.4 billion dollar adjustment to goodwill as we discussed in our earnings release. This morning. This was a noncash accounting adjustments and I'll highlight just a couple of points here that you'll also find in our 10-Q number one its discharge related almost completely as far as seizure, where operational and financial performance has been.

Challenges for sometime in the topic of discussion on a number of earnings calls and to this adjustment reflects the changes in our organizational structure that we detailed at August where three core medical groups are now their own individual units within our overall physician services sector.

Under the rules are required to be test and separately to be clear. This charge was purely an ordinary course accounting treatment of goodwill and the entire amount to the charge was non cash.

In terms of our operating results. This quarter, we reported adjusted EBITDA of 133 million, an adjusted EPS of 91 stat inline with our guidance ranges and right on top of street expectations on a year over year basis, adjusted EBIT dollars off about a 3 million compared to Q3 2018.

For those of you manage any models on the company and keep in mind that are EBITDA for the third quarter last year was burdened by roughly 10 million in salary expense related to positions that are North Carolina.

And it seems urology practice that remain employees through 2018 after our contracts expire.

Adjusting for this year ago expands our adjusted EBITDA declined somewhat at about 7 million or 5% on a year over year basis, or we continue to narrow that gap during the quarter compared to the first and second quarters out this year.

As Roger mentioned, our topline performance exceeded our expectations driven by stronger end market demand.

In total our same unit revenue growth of 4.2% wasn't bahar guided range of 1% to 3% with most of the upside driven by Asian volumes, and anesthesia and their technology and other pediatric services and radiology.

So the hospitals, where we manage the next you increased by just over 1.5% ending the quarter. There's the remainder our reported growth in Nicky days relating to a modest year over year increased average length of stay.

We did benefit from an additional we day during the third quarter, which impacted our overall same unit revenue growth favorably by about 60 basis points, but even that is that the results were ahead of our expectations.

On the cost side or labor expenses were largely inline with our expectations for the quarter. Both in the practice level and with NGL <unk> based solely on those cost trends, we would have anticipated a better pull through of EBITDA based on the revenue strength, we saw in a corridor as we noted in our release. This morning, we did see higher.

Unexpected costs related related to your med Mal legal and other insurance during the quarter I'm not going to go into specific details on these costs, but I do want to give a couple comments here.

Overall, we see an agenda believe tougher legal environment throughout this year in terms of litigation activity bad at all settlement amounts in hardening insurance market at all add that a lot of this isn't you need to us that said.

These costs items offset some of the favorable topline trends, we saw in Q3 to the tune of roughly five or 6 million more in the quarters than we had included in our guide and respect that they will persist at these higher levels in Q4 unlikely carried into the next year.

He had all perspective, we report our expenses these items into areas, where we can crack the salaries and benefits and NGL right. So both of those line items are affected by changes in the cost structure.

Moving onto our transformational and restructuring expenses. These totaled roughly 20 million in the third quarter and were predominantly related as far consulting spend and severance related costs.

As you also see in our guidance for the fourth quarter, we expect our investment pace to continue with that in mind I'd like to give you a fuller SASSA power scoping these investments.

As I've discussed for sometime in the past few quarters real quickly ramped up our transformational activity in partnership with best in Class Third Party resources.

So identify and pursue operational improvements.

Enable process change and efficiencies across the organization.

I was broadly flat and probably the work streams, we stood up in four major categories right. Its operations revenue cycle management information technology and human resources within each of these buckets, we have multiple workstreams most of which involve some degree to a high degree of IC enablement.

We also have a large number entered dependencies such that a lot of our work today is on those enabling IP investments, which will set the stage for process improvement greater effect effectiveness of our infrastructure and ultimately cost take outs.

This activity is all within the scope of the transformational initiatives. We've discussed in the past and we continue to expect better timeline will run through 2020 and taper off over the course of 2021.

Oh Wow. This on the timing standpoint, we're still in the early heading into this activity with much of our efforts over the past quarter focused on supporting our existing activities to enable to ensure that we minimize implementation risk.

On top of this work, we're now standing up incremental investments focused on core integration activities. All the finally, the consolidating multiple systems for greater consistency, especially in data management. This core integration activity includes replacing the multiple I T systems, we utilized today.

Wall to wall and implementation of Oracle in the cloud moving to consolidate and standardize RCM platforms and systems.

Hanting, our eye to support for our HR systems and talent management.

Based on this activity our outlook for the third for third party related transformational investments for the fourth quarter of this year is roughly $25 million and isn't appropriate way to think of our run rate investments for the next few quarters as we move into 2020.

Core new system implemented there should be tapering off of that spec.

Last comment I'll make on our transformational investments is that we are intensely focused on time to value.

For many companies you would normally contemplate a meaningfully longer timeline for this level of activity, but for embed that we plan to compress that a timeline significantly and as a result, we expect to be intensely focused on our transformational activity over the coming 12 to 18 months.

With that said I think it's useful to discuss our cash flow, which was very strong both in Q3 and for the year to date.

On a reported basis operating cash flow from continuing operations in the third quarter was 156 million compared to 135 million a third quarter 2018.

Taking into account the cash component of our transformational again restructuring expenses in the quarter.

Better way to look at our true operating cash flow for the quarter is more of the range of roughly 170 billion.

In terms of our primary uses of that cash during the quarter, we repaid 142 million in borrowings under our revolver. That's bad for an additional 24 million for the acquisitions that Roger management.

Contingent payments on prior acquisition.

Finally, our Capex in Q3 for continuing operations was only about $8 million, which you should think of isn't appropriate quarterly run rate going forward.

Our prospective capex at something like 30 million a year down from about 50 million per year now that we've completed the sale of Mad data.

Well also reiterated summer Roger's comments on our sources and uses of cash this year.

Including the cash frozen doesn't matter data sale, we have now generated nearly a half billion dollars in capital.

Bar in 29 team for almost the entire churn of adjusted EBITDA.

With that capital, we funded our transformational investment acquisitions share repurchases and capital expenditures.

The same time repaying all of the borrowings on our line of credit that as of last night. We Additionally had nearly $100 million of free cash sitting on our balance sheet.

On a pro forma basis for the med data sell our toll that consists solely of our to note issuances and our leverage is roughly 3.4 times.

Turning to our guidance for the fourth quarter and this year.

Provided in our press release. This morning, we expect Q4 adjusted EBITDA out of 125 to 135 million. This outlook is consistent with our expectation was I just asked last quarter that adjusted EBITDA in the second half of the year should be fairly ratable between the third and fourth quarters.

Based on our results for the first three quarters of 29, Jane and this outlook, we expect full year adjusted EBITDA to be in the range of $500 million and in terms of margins. We expect our adjusted EBITDA margin for the whole the or to be in the range of roughly 14 to 14 and a half per se.

I'd like to conclude with a couple thoughts about the overall completion of our EBITDA in our margin trends.

First is based on our roughly half a billion dollar a year outlook for adjusted EBITDA I want to give a sense of how the spreads across our three core medical groups.

Our pediatrics sectors groups generate a little more than half our revenue.

Somewhat higher for some of our EBITDA or anesthesia groups generates roughly a third of our revenue roughly 20% of our EBITDA and while radiology represents only about 15% of our revenue.

EBITDA is catching up quickly with anesthesia.

Second related margins.

Modeling perspective, our expected adjusted EBITDA margin for this year reflects something in the range of a one to one and a high percentage point headwind compared to 28.

Hey team, we get a lot of questions about how to think of our margin trends beyond 29, Jane So I'll make a couple broader comments about our transformational activities and some high level expectations for hobbies activity should impact results over the 2020 and 2021 here first common focus of all our efforts is a dry.

I think this margin gap over the course of our transformation and today, we are fully resourced to move forward across the whole scope of our initiatives second as I noted earlier, we anticipate a 2020 will be a year of significant transformation focus for us as I described before.

As a result, we do anticipate narrowing the quantum of margin pressure, we face as we progressed through the coming 18 month, but I also want to emphasize that while the yield we expect to generate from our transformational investments will likely build overtime through 2020, and 2021, the timing and magnitude.

<unk> progress.

On a multitude of factors and remains default forecasts as we move through the coming quarters. We will continue to refine our views love the same time being transparent as possible about what activity. We're undertaking how it's impacting our core business tracks with that let me turn it back to Roger. Thank you Susan Thank you offer.

Operator lets open up the call for questions. Please certainly ladies and gentlemen, if he would like to ask your question. Please press star one [laughter], you'll hear a tone in the gain even been placed any Q. If your question gets answer you wish to remove yourself from the Q. Please press the pound key once again star one the other question.

And first wouldn't line of a AJ rice with credit Suisse. Please go ahead.

Hi, everybody. Thanks for the question I wondered a first of all in a.

I appreciate those comments about the segment participant there between the different physician groups.

If you look at the other end up all the transformational work you're doing do you have in mind that you know you're at a certain level margin today, what the opportunity might look like a look in two years out and does that concentrate itself I'm, assuming that's mainly in Anastasia, but I wondered.

That's right or can you tell us how that might break out across most segments.

Good morning, AJ. Thank you for the simple and straightforward and easy to answer your question.

[laughter] you know a why I say this I I think it is hard at this point do you sort of endpoints goals.

Business line, but I think it's fair to say that we see opportunities in all of our businesses and I think the more that we feel this I'm going back to more opportunities. We fund. So this is an evolving story.

Turning to the directional nature of the evolution as a positive one I think I'd also say see meaningful opportunities in GSK I'm at all if you think of it is sort of a virtuous cycle, where we're working on all the businesses at the same time will work out our DNA at the same time, we are meaningfully meaningfully off.

Operating our internal systems and capabilities at the same time and the more we up radar systems. The more opportunity we find everywhere else. So I think our hope is to make continued progress for for some time, a really across all fronts.

Okay, and maybe just one follow up.

On your you're doing an increase of these pediatric group acquisitions.

I guess I'd be interested to know what does the competitive landscape for those deals I'm I would think that might be less competitive given your.

Strength, then I Neonatologists, historically anyway, and then second or any comment about what the oh pricing on those transactions and valuations on those transactions tends to be.

Hey, good morning, it's Roger Oh, Yeah, you know we find that a you know we are having a lot of reception.

You know from these groups they are interested.

Joining us and it's more in building up does so women and children's.

You know, especially at the group that we're trying to build up so we're we're having a lot of success.

You know not not running into a lot of other groups, but you know the okay are you will find somebody else out there are all around multiples for this which is another huge a advantage for us we may end up in the four to five.

Times.

You know range. So that's another reason why you know where where we're very focused on this.

So it's been the historical multiples that we have paid for the majority of these out of these groups and they remain within that you know four to five range. Okay. Great. Thanks, a lot.

Our next question from Ralph Giacobbe with Citi. Please go ahead.

Thanks, Good morning.

Just wanted to try to clarify the 2020 commentary I believe you said you would narrow the margin crusher and and I can get you mentioned sort of what you're looking at 19 is about 100 450 basis point headwind so.

So some narrowing.

With that so you still expect margins to be down and I just want to be clear off the baseline of.

Roughly 14.2, that's implied for the full year this year, yet the way, we should be thinking about it.

Hi, Good morning welcome season.

Yeah, I mean, I think that I think that substantially correct. Yeah, we obviously get a lot of questions around around this and so we wanted to be an explosive transparent helpful. As as we could be understanding that we really haven't guided yet on 2020. So we just wanted to give a directional a directional view.

You know the but we made progress with sort of a negative drag on our margins will we have a long way to go and we've been talking about that for a bit and we just we just want people to be realistically calibrated. This is there's a lot of work to be done and we're right in the middle of doing it.

Okay, [laughter] and then I guess I guess I do want to ask on sort of the consulting and transformational cost because it sounds like that's obviously going up in the fourth quarter and I think you said.

It's going to run rate I'm trying to just 25 million last year.

Each quarter so.

Correct me, if I'm wrong nearby he I think you've spent somewhere around 50 million this year.

He has spent another 100 100 million or so next year. All these transformational costs I know you strip not have either job and I mean, that's [laughter] tend a 20% of your EBITDA base.

And obviously drags on cash flow.

And the margins are really getting sort of squeeze began next year. So I guess I'm just struggling a little bit with sort of the timeline from pooling and then how all of these sort of costs are going to drive how much it's going to drive incremental EBITDA improvement I didn't think even about 21 and beyond thanks.

Sure sure.

No I think the.

Maybe easier way to think about it is is to frac it out a little bit into a couple different buckets is part of what's happening now is look we are doing a wall to wall or on the cloud implementation, which as you all know where you've seen it other companies is it just caused a bunch of money.

And we're also doing revenue cycle, and we have a very large revenue cycle operation at involved as well over 1000 people and there are numerous numerous systems that we have for the different businesses for different pieces of that process, we're working to consolidate those as well and frankly doing simultaneous.

With the Oracle implementation, which is it do they.

Fairway to say that it is a very substantial effort and so trying to do both of those simultaneously. It carries a lot of costs those are very different than well than some of the other transformational activities that we're doing and which are much more you know normal consulting type activities. So.

I consider I, even though we're going to the cloud I kind of still call. It maybe I'm just getting all that I call. It heavy iron transformation. So we really have I wouldn't cleve are our spend into two different buckets I think it's a little premature for us to specifically break it apart that way, but there is a big chunk, particularly going into it started.

Oracle stuff started a couple of months ago, and it's really ramping up into Q4 and into next year. It has a natural curve to it where are you getting pretty heavy and then you get close to Don over the course of kind of four or five quarters. So I think that as a meaningful hard or the explanation of the scaling up.

Those dollars I think there are other things that we're doing that are frankly, getting done where I I truly believe I mean look I've been through a number of these and we probably have yeah. We have dozens of work streams that are told it up and I believe every work stream hasnt beginning a metal on an FX and and that's our goal is to drive each one.

Of these.

Work streams through that through that process. So we're still seeing new ones start we're seeing ones. We started a few quarters ago come to an end and there is a then kind of a constant home in the background now of the larger systems transformation that is simply just need to play out.

Okay all right. Thank you.

Our next question from Chad Vanacore with Stifel. Please go ahead.

Thanks, Good morning <unk>.

Okay, Hey, there.

Let's talk about or organic growth a little bit better this quarter you solved birthrate.

Which is unusual do you have any visibility into being a continuing trend or not.

Hey, guys Charlie.

It wasn't good number this quarter.

Leaving aside and raise more length of stay the underlying for as far as Roger mentioned about point to have I think it's useful to look back on that a little more statistically because if you revert back to Q3 out of 18 and was relatively weak quarter. So if you look at it more on a two year stack.

There is a modest improvement in trend, but we're still looking at.

A multiyear trend line that is closer to static and that's kind of how we're taking a look at it.

Instead of taking quarter to quarter I'm trying to change our outlook.

This quarter goes by.

Okay any idea why when you had last quarter.

What are your I'll, let you had it seemed like one of 3% same store revenue through a you were added that okay.

Yes.

Hi, guys are losing yet.

Uh huh.

Operator can we come back to Chad.

We've lost some here about next question, yes, certainly we're going to penal Chickering with Deutsche Bank. Please go ahead.

Good morning, guys. Thanks for taking my questions to dig a little more on the that's five just one or the cost in the quarter. That's about 60 basis points of margin pressure next 12 months.

If you questions, what's the split between medical malpractice insurance and legal Ah why did step up this quarter. It sounds like it was incorporated in your guidance from last quarter and kind of what do you have covered the this is a one time issue and lots of people increasing.

Sure.

Morning as Steven.

Yeah, I haven't even a little more color on that you know I think I think that real estate romances. This quarter. There is there has been some pressure in that area over the course of of the year, but it didn't become more acute this quarter I mean, we do focus a lot of our actuarial efforts in Q3, we kind of new.

Throughout the year Bye bye, but we do redo it every quarter and you know I think without gang of is it not an area that really any company talk too much about because it does involve pending litigation and other things like that but I would say that a significant portion of.

The Delta did relate to two med Mal accrual you know there is a and part of it related to some specific you know case development for US nothing that I was specifically call out but some of it also related to general market. So things to think about it this way if anyone in provider land.

As as it adverse jury verdicts that is outside the us as a couple Saturday variations beyond what you might normally expect.

Do you much every actuary around the country will then bump off what they want companies accruals to be on every case, regardless of whether you know there was anything specific related to that companies on on own accruals. So.

So I think we've kind of if we find out both the that both of those items with and particularly in Q3.

And once you raise your approval level to a certain level you can become keep it there for a while until you see what happened. So the activity in Q3 will drive we will have fairly consistent.

Accruals in Q4 absent some you know some other activity and will likely carry them forward until they annualize into our baseline so that just tends to be how how functionally and works.

In terms of reinsurance market and all that I mean, we we have seen a hardening in various sectors of the insurance market I think others have as well interest rates doesn't do low interest rates don't do anything to health insurance company and it tends to manifest itself and you have increased premiums and tougher terms. So.

I think is a mix of of all of that but with with with the balance leaning more towards that now.

Okay Fair enough and then as a follow up seems surprising was pretty good. This quarter can ask what percentage are managed care contracts are lucky and at this point like we assume the 2018 Medicare pricing trends continue in 2020 or what have been changes to it.

You know I think we don't really.

As discussed our managed care contracts spoke quite that way the same as as the hospital companies tend tend to do so a lot of things that we have or evergreen. We have other ones that you know that would you go through renewal cycles, but theres really nothing that I would call out any differently than what we've historically to Scott.

Great. Thanks, so much.

We'll go back to let Chad Vanacore you reconnected. Yes go ahead. Please go ahead.

Sorry about that got our loss knocked out the felons, we were talking about organic growth expectations, you a little bit above the range.

Anyway that that we can kind of characterize it going forward next quarter, you're still expecting that that wanted to 3% range is that a good way to think about 2020 as well.

You know Chad I think is good morning, I I mean does the Dodge in any way, but I think it's a little premature for us to talk about 2020, I think arlo, we were very happy to see the volume in Q3, we would love to see the volume in Q4, we tend to look at this stuff you know kind of R&D quarter kind of rolling.

Rolling average and every now and then we do get a quarter that Pops and we're always happy to see it but I I do think it's too early to say that the warm as turns and were initiatives in place.

What we would rather maintain a conservative outlook.

Okay, how about I'm thinking about the Steve write downs in the quarter. You know you wrote off a bunch of anesthesia. This quarter was anything related to men data or we expect that in the fourth quarter.

You know there will be something modest in in Q4 gives you always have to book the transactions here wherever you were carrying it we were in June we marked viasat, two or 300 million and you know we ended up selling it there's a whole bunch of pieces that go into the sale.

And and we actually are just in the middle of undergoing devaluation work some of those pieces I can't tell you right now when it comes out I expect we will take a modest marks to whatever the transaction was a I will take this opportunity, though just to make it clear as we've had some questions. This morning around this and I wanted to hold off the answer until we got a public.

For on there are other elements of the transaction that are beneficial for the company. For example, we we expect a cash tax benefit over the next couple of tax payments on something roughly around $30 million. So we did receive last night yesterday afternoon, we did get our $250 million, we got a quarter billion dollars.

Today, we do expect another roughly 30 million Bucks over the next couple of tax grids.

There were some transaction cost to go the other way, we do have $50 million of content of contingent interest.

Where we may have additional proceeds down the road based upon the performance of the asset and I really do think it I want to emphasize that for every one of the followed the company, but this was a business they handcrafted deal and it took a while as for very specific reason, we need and want med data to be.

Well owned and we wanted to find a partner and and a team that was it has a high likelihood of being very successful and running and growing that business, why because where their largest customer.

And while we don't representative that big of a piece of pie for them, we rely upon them to deliver results rather than we want them to continue to deliver into continues to improve. So we are we are at the end of the day I'm very pleased with the outcome out a lot of confidence and appraiser team's ability to add to drive this thing to another level of.

Pesticides.

Steve You mentioned that cash tax benefit is 30 million over next couple period, how come in the fourth quarter, you're assuming a 26, perhaps attach rate which seems high.

Yeah, well you know if our tax rate tends to move around a little bit there's always something over Q4 true up side and the year or whatever we both and remember also that both taxes noncash stock. So our cash tax often diverges quite meaningfully from whatever our own tax provision might be.

All right I'll stop there and I go back in queue. Thanks.

Our next question from Jason Plagman with Jefferies. Please go ahead.

Hey, just wanted to go back to the Q4 I look at it for a second on the same store volume.

Outlet is is that.

Pretty equally weighted between volume and price or they'll you know as it is it heavily more heavily you know thought of on on volume side, given the performance Utah in great.

Hi, Jason as Charlie I always say normally when we have a range like that I wanted to three.

We typically try not to be too precise within that so I just for your purposes. I was I would think about some equal weighting between volume and price within a range like that.

Okay Fair enough and then Oh I wanted ask about the practice level transformation activities.

Shouldn't you should we assume that some of those start to pay benefits a little bit sooner than you know the Oracle transition and you know can contribute some in in 2020 or though is more heavily loaded Ted Ted I'm. After 2020 as well as you know the practice level initiative.

Sure sure. Good morning, it's Steven the answer is as all the above.

We have some practices, where we have very significantly move the needle already over the past couple of orders by bringing in third party resources and really I don't have a lot of different of formats for engagement.

And in some cases were taking a resources that we deploy to a practice they improve that practice over a couple of quarters.

And get it reset and then they move onto a different practice. So I think we really expect a sort of continuous stream at the practice level on to a two to drive these improvements and frankly, everyone that we do we're learning more about how to better do it the next time.

So I think I think we have we have a lot of activity and we're feeling a high degree of conference or our ability to continue to drive.

Drive this transformation.

Okay and last one from me.

Given they like the cash you know you now have in the balance sheet with proceeds from my data and your typical strong Q4 cash flow any thoughts on capital deployment for 2020.

How mix between M&A and buybacks and and so on.

Uh Huh [laughter], Yeah, I think we will continue to do all those things we have.

Now that you know this year obviously.

You know with our opportunities in women and children's too.

Put the money to work and generate more cash flow in earnings et cetera. That's a a serious consideration we have a read on as well you know our growth came together new had no growth, which is the folks looking at organic growth in acquisitions, and you know a new head of sales a new marketing team.

Okay.

And so we're expecting.

That.

2020, we'll see you know a good growth here for us.

So I think it I think will you know well do a combination as we have done in the past.

Okay. Thanks.

Next we'll go to Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.

Great. Thanks.

Yeah actually talked about kind of I think 3%, taking the kinda rather number that you expect.

Do you need to be able to be the kind of marketing a stable and better than that can lead to improve margin. That's good that's still the right number in your view I guess long term it sounds like maybe the next.

Few quarters like anniversaries and I'd now this year it might not be the right number but long term is 3% still the right number or do you feel differently about that.

Hey, good morning, and Steven Yeah, We I mean, hi. This is I think the fourth quarter that I've reported and Ivan and this has come up on a couple of previous quarters, you know that a day legacy number that free days My my my being here.

And so we that's not something that we've really.

Talk about or or or relied upon for sometime.

I I do think that is it end up being you know more complicated into that there are a bunch pieces that feed into it as we said sort of indicated throughout our commentary Charlie I'm not sure. If you have anything you'd want to add yeah, I would say and Kevin to Stevens point, a lot of what we've talked about particularly over the course of this year.

It is.

You know somewhat more significant.

Comp cost trend just based on all of our clinical services, our specialties and geography, and I think thats pretty apparent in our results through the course of this year.

And that's all working again for working around the edges of reducing premium pay and we're looking at enhanced clinical resource utilization all of which is geared toward toward moving that needle and reducing the hurdle above which we need to get too.

To generate margin.

The only other thing I would add is that within each of our specialties as I think you're aware there's different make up of operating leverage as you know where volumes come through in one service line or specialty might have a more powerful pull through that that another that has more variable cost. So it does get a little bit more complicated.

Due to pick a single number.

Above or below which our margin moves.

So we're just trying to be a little bit more.

You know holistic about our our thinking about margin trend.

Okay, I guess, maybe just a follow up then on that could you just hopefully get the segment a topic leased directional commentary.

It sounds like based upon the mirror commentary to call that you feel a lot better about market share growth and deals I guess in your higher margin Nixon radiology business is that fair to say that you would expect there to continue to grow as percentage of the overall company and I guess, maybe that could be another mitigating dynamic toric margin.

Yeah, I would say in general I mean, one.

Purpose of giving that kind of color also can help you I hope you give.

Some thought around business mix.

Now as we continue to invest in and enjoy the growth.

Radiology group.

You know, that's becoming a bigger and bigger part of our overall EBITDA make up and that business mix hopefully continues to us to be important going forward.

But on the on the overall gross I I'll reiterate something that Roger brought out where we're looking at.

Somewhat more tailored growth strategies across our different service lines and within women and children's is a broad nationwide and look at the total addressable market and that's not just neonatology, it doesn't or or or more other specialties that we had a presence in.

In many cases as Ed and effective operating partner alongside the systems that we.

We work with and that meaningfully expand top of funnel versus just looking in the unique Holly.

Let me ask one last one on.

As to whether you've seen some bigger contract losses, the last couple of years.

Most recently, one of Minnesota, and it sounds like a big deal earnings wise.

Maybe give an update on and what you're seeing there any any trends on contract renewals and retention rates. Thanks.

Yeah, Yeah, I don't know that I wouldn't consider that loss I think as we've stated in the past we have reached an understanding.

Yeah that we were not.

A a really fulfilling.

The you know the the original plan for that practice in you know, we we have an active portfolio, we manage our portfolio depending upon what we think is into best interests of Oh our practices.

We don't I don't plan to your question I don't know Theres anything else going on of any significance in any other practice, we again, our managing our portfolio and has been a you know we always try to save the practices and talk with the hospitals and you know do whatever we can to to to make the practices.

Form.

So my sense is it's just not possible to do that.

And so we agreed to just part ways.

But.

I would again just.

Frame that all under as a portfolio management.

Banner.

Great. Thanks.

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

Hi, Good morning, just couple of questions. One I know, we ask that question periodically over the last few years, but I guess I just wanted to thank.

Think about it again when you look at you know clinical costs.

Well growing faster than revenue growth, even though you do have positive revenue growth.

We just look at this quarter what is the single largest factor is it still.

Legacy compensation escalators on contracts is that Sierra name shortage and much higher costs for we know traditions like how would you.

Characterize what what's still driving that.

Oh sure differential.

Gary Good morning, it's Steven.

You know I I think.

At the risk of.

I'm, saying the same thing twice its or all the above a week, we do have.

Increasingly good insight into what the drivers are across each of the businesses and each of the different sort of finishing categories and the other drivers of costs, we tend to not publicly frac those out too much.

And I guess I would say when we look at that this past quarter in really over the course of the year. There are a number of different buckets and it's geographically driven is it is quite there's some category driven.

And then there's other more Josef just about the labor market and sort of back office type.

But is that we have an anti employment base. So looking at I would tell you you know in some ways. It is it is comforting to see that there is not just one days single driver that is somehow you know incredibly difficult to overcome we have a number of a different areas each of which.

Yes, we have a different plan to address and are working on evolving and so we do hope to make to make meaningful progress over time.

Okay.

I want to go back to transformational expenses again, I know Ralph was asking about that's a little bit, but I just want to make sure I understand sort of the magnitude business I thought when you are.

Originally.

Announces it was 75 to 100 million over 19, and 20 looks like really hit 76 million this year.

And sounds like 2020 is gonna be at least at high not higher given you know the guidance sort of run rate at 25 million for a little bit so I guess the two questions.

Our our we if we really are doubling that bucket is it because you found more stuff to transform words, because the cost to do the transformation is more than expected and then finally would you anticipate still having those expenses.

Any material degree in 2020.

Yeah sure Gary poorly for for this year, the a and B 75 to 100 I think we've learned is it's an evolving process and we continue to find more opportunity. So we're we're going to spend more than 75 to 105, we have not refrain what that looks like I think we'll have a better view.

Now do we have made the decision to do Oracle wall to wall and now do we have made we are we are we have made the decision to do a number of things in our core revenue cycle systems. Those systems selections are still in the process of being finalized so we can't fully cost them yet those those are.

I will address.

And today and they would they were not something we're contemplating yeah. Two three to three quarters ago. I think we are you know the two to clarify when we said 75 to 100 and were very cautious to be specific that was around consulting spend that I'm not I'm not trying to cute here it just it.

Salt and spend in very purposefully excluded things like severance expense or you know if we have if we have a contract but it doesn't make sense, you know, where we have an opportunity to save money by doing it and doing some other way we're going to blow up the contract ended the contract has a cancellation fee, we're going to negotiate something we're going to do and those.

The things that we figure out a long along the way and we're not part of that original 75, New honor again, I'm not I'm not spending 75 to 100 or just what are you whether the timing. We're we're working hard to be completely transparent as our thinking evolves as our as our process. Oh, you know when I think I do think of.

Morning, 20 kind of as the balls year, right 2019 were sort of ramping into this the actual consulting type expense, including these sort of how the iron projects as you add it up and that's roughly 60 million boss for 2018. It is gonna be but we didn't really have much in the first quarter a little more in Q2, and then it kind of wrapped into.

We are I think Q2, I think 2020 is going to be the heaviest here and I think you're going to see having a meaningful tapering off over the course of 2021, but we have a we have a laundry list Gary of stuff that we're doing you know data center consolidations I've I've got I was I know I've got a.

Long list of things that will add value to this enterprise going forward that need to be dime, and we're not going to renovate half the house and but the second half till later, we're gonna right away. The whole house were going doing what we're living in it.

And and so we're that that's essentially.

Where is that.

Fair enough one more if I could just on my data is there any.

Negative operating leverage from that sale in other words, you you've had to enter into an agreement with them for continuing revenue cycle services to the is the cost of that contract sort of roughly equivalent to the.

I guess you know the employee costs are they net EBITDA that you've already guided coming out for that transaction or is it or is there any.

Until but that's still something that that we have to contemplate incrementally for 2020.

Sure, Yes, it is actually nothing to be to be concerned about with that we had historically.

We had essentially zero change and we have zero change in our pricing with mandated by virtue of the transaction. They were they were still I would say 99.

And 44, 100% you know free and clear from a from Mednax in the way that they operated.

Anyway, I think we we essentially you know did did some tax work for them.

I think our and their their payroll and insurance and a couple of mop very minor thing, but they were they almost completely free standing enterprise, we already had service agreements with them NFL a is in pricing and.

All of that yeah, we sort of beef that all up in the context of the of the sale as always happens, but we did not change our our pricing.

So that that is already baked into everything we started discussed over the course of time.

Great. Thanks very much.

Next we'll.

Ryan Daniels with William Blair. Please go ahead.

Hey, guys. This is Nick speak out in for Ryan I'm Real quick I thought last call you had kind of mentioned that you were.

Shying, a little bit away from acquisition growth. It seems like you're kind of ramping backed up with that given the eye catching the mandate I Wonder if you just discuss a little bit.

Wow.

Yes, I think what we manage it was.

You know on the on the radiology practices, we saw that you know multiples or.

Got you know getting an expensive than we would shy away from that.

We have.

Dot any ana.

Yes practices in whatever has been 18 24 months.

So, but I don't think we've talked about.

You know women and children's in that same line and so we intend.

To continue.

To expand our women and children service.

As we do think we have some small deals in radiology that we will be able to complete a you know over before in the forthcoming whatever a few quarters.

So I think I think we we still feel that way.

Yes, I guess I would add just one comment to that.

We have we have said in the past that if there is a larger transaction and I'm not sending any signal here, but I just want to be consistent with what we said last few quarters. If there is a larger deal database strategic and financial sense for the company. We will contemplated so no one should we be surprised if there is one but I'm not trying.

Turning to send a signal by saying that for the most part as Roger said, we're focused on end market adjacent market, you know tuck ins that enhance ours, our strategic strength.

And our financial upside in the in the Big communities we serve.

Got you think that's helpful and that ER.

Real quick modeling question with the revolver being paid dollars just wondering where you expect to end the year cars.

Doug.

That should be a component of the.

The guidance reconciliation for Q4 ceiling find that on our website cibers period of that.

Okay got you okay.

Oh no question for Whit Mayo with CBS . Please go ahead.

Hi, Thanks. Good morning, just a couple of quick ones here at bombs subsidies and for your contract admin fees in the queue look like they're up.

10 million or 12% year over year in the quarter, which I guess.

Lease on a growth rate is higher than we've seen the last few quarters, just maybe refresh us the conversations you're having with your your hospital partners and is that something that we should expect it bumps become a larger source of revenue or or is there anything unusual there.

Hey, wait so that's part of our anesthesia.

Yeah, a renegotiation process. It's when we go we've talked about this in the past where a holiday a group is.

Just now performing financially for us and you know one of the tools that we have at our disposal is to go the hospital and say Hey, you know, we need health and so that's part of the ongoing process of.

You know restructuring of our anesthesia business and Stephen do you want in essence, yeah sure.

Good morning way, yes. They're also there also is a growth element of that you know, we we have very close partnerships, where a lot for very long lives of health systems right. We have 400 odd Nick you said that we run across the country.

And and quite often and really increasingly so of our our women's and children's franchise is I mean, theres nothing like it anywhere and we have access to two sub specialize and subset of specialized physicians that a lot of others do not and so we often will.

I'll have just just on an ordinary basis I health system that we do business with no will come to us and say, hey, we really need half of a pediatric cardiologist or we really need some named name your favorite sort of specialty I mean look of the we just did a little deal a couple of days ago.

That that Roger mentioned four for pediatric plastics in South, Florida, where they really are a very highly specialized service and so we and often times those are the format for those arrangements with the hospitals include a contract based payment so.

I think there's a lot of factors that drive that number I think I think you kind of gotten Scott the gist of at between Roger myself.

Got it maybe.

I'll stick with maybe one last question, that's where the top the our I think last year you sized youre kind of two programs you had a G and H cost reduction program.

The thing that was around like 40 million over a couple of years, an operational improvement program around maybe 80 million. So combined to 120 million a savings between maybe 2018 to 2020 can you just maybe refresh us what you realize from that program, maybe any update on those two programs and what the expectation is going forward.

And I think these are fairly distinct from your your transformational initiatives as well.

Sure sure what I'm happy to answer that you are right. Those programs were very specific and there you know distinct and those programs are largely complete and have been successful we delivered the number last year and we are in.

The process, where the final stages of delivering that number this year. So that 120 is effectively baked into the pie. The transformational stuff is is separate and and.

By the but in terms of those of those announced programs there they're essentially Don.

The only thing I would add when it's Charlie.

On that because I want to be kind of clear that this was not some kind of finite program and on one 120 20 nothing happens.

The entire management system that was set up around.

Identifying those action items tracking and executing them and validating.

Was incredibly valuable to us and it's ongoing. So this is really from the practice level or a specific action plans for this group or that group as.

Well roll into 2020 and beyond it is effectively baked into the managerial process.

Across each of our service line. So I just want to be clear that it wasn't clearly defined goal and we will need.

But it will persist as we go forward.

Kind of these slide one last one I'm sorry, just anaesthesia the compensation strategy, just just any update progress you're making to realign the groups with your new.

Do you pay model I, just any color would give us a sense on the receptivity, whether or not is growing or not aftermarket and just you know any confidence on that initiative. Thanks.

Sure sure when I look I guess, the general comment, though make is you're seeing why anesthesia practice, you've seen one anesthesia practice and I think we're continuing to have a bunch of dialogue.

Yeah.

And there are and they are they're all the kind of evolving in their own way based upon the group itself on the nature of their hospital relationships I want me to give you a diffuse answer but I think we continue to evolve weight of each practice as we work through that we're we're sort of a little.

A little hesitant to set specific targets about where we're going to get to how many by one time, because we want to end up with a format and structure that makes the most sense for both parties and sometimes it happens quicker sometimes it happens for so I think that's of I think that but we are.

Definitely winning leaning into that across the enterprise.

Okay. Thanks.

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

Okay. Thank you operator, if there are no further questions and we will go ahead and trying to call. Thanks, very much and we'll look forward to speaking with you.

This quarter.

Thank you and ladies and gentlemen that does conclude your conference. Thank you for your participation you may now disconnect.

[noise].