Ladies and gentlemen, thank you for standing by and welcome to the Mednax 2018 third quarter earnings conference call. At this time, all participants are in a listen only mode. Later we'll conduct a question and answer session. Instructions will be given at that time. If you should require assistance during today's call, please press star then zero. As a reminder, today's call is being recorded. Now I turn the conference over to your host, Charles Lynch. Please go ahead.
Thanks, operator. Good morning, everyone. Welcome to our third quarter earnings conference call. I'm going to read our forward-looking statements, and then I'll turn the call over to Roger. Certain statements and information during this conference call may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by Mednax's management in light of their experience and assessment of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate. Any forward-looking statements made during this call are made as of today, and Mednax undertakes no duty to update or revise any such statements, whether as a result of new information, future events, or otherwise.
Important factors that could cause actual results, developments, and business decisions to differ materially from forward-looking statements are described in the company's most recent annual report on Form 10-K and its quarterly reports on Form 10-Q, including the sections entitled Risk Factors. In today's remarks by management, we will be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this morning's earnings press release, our quarterly report on Form 10-Q, or in the investors section of our website located at mednax.com. With that, I'd like to turn the call over to our CEO, Roger Medel.
Thank you, Charlie. Good morning and thanks for joining our call to discuss our results for the third quarter of 2018. Our EBITDA and EPS results were within the guidance ranges that we provided in August, despite the challenges related to soft patient volumes. The continued impact of our corporate and operating initiatives helped meaningfully to offset those volume trends during the quarter, and we remain on track to meet the targets that we established for these initiatives in 2018. Before I dive into the results, I wanted to take a moment to discuss an announcement that we made this morning about MedData, our unique management services organization focused on some of the most challenging areas within revenue cycle management, including eligibility services, patient engagement, and patient pay collections. We announced that we are initiating a sale process for this business.
This is an important and impressive business led by a highly capable team with over 2,000 people working every day to drive results for clients. Based on the dynamic environment in revenue cycle management, the organization has a tremendous opportunity to continue to grow. That said, from a strategic perspective, we have concluded MedData's current opportunities are more parallel to, rather than central to, our current plans to grow and develop at Mednax. We believe MedData needs a sort of focus to reach its future potential that will be best achieved under separate ownership. That is what we plan to do. We would expect to continue to engage MedData Services, which have been extremely valuable to us, following a potential sale. We also believe that the right partner would enable MedData to continue to accelerate and enhance its service offerings.
For Mednax, this potential transaction would allow us to focus our organization on physician services, which has been at the core of our company since its founding almost 40 years ago. Finally, we expect to use the proceeds of a potential sale to continue to pursue our balanced approach to share repurchases, debt repayment, and future acquisitions. Turning to our results for the quarter. Within Women and Children Services, our revenue growth across this broader organization was in the low single digits. We generated strong volume growth in newborn nursery care as well as in pediatric cardiology. Neonatology volumes were negatively affected by birth trends during the quarter. This was the primary factor driving our overall same unit growth below the range that we expected.
As we have seen any number of times in the past, birth trends at our hospitals and our resulting neonatology volumes can be volatile in the near term, with births being down one month within a region and up the next month in the same region. We cannot control that. The size and diversification of our organization provides us with multiple opportunities to grow in different ways, as was the case this quarter, despite an almost 2% decline in NICU days. After the end of the quarter, we also completed the acquisition of South Dade Neonatology, a large physician group based in Miami. We are very familiar with this group. I am happy that they have finally joined Mednax. Importantly, this acquisition expands the strong relationships we have with major health systems here in South Florida.
We acquired this group for a multiple in the mid-single digits, consistent with our historical neonatology multiples. Our radiology organization continued to generate strong volume growth in both practice-based studies and teleradiology. Through this year, we have also begun to target smaller tuck-in acquisitions to expand our existing practices. We continue to expand our footprint. Since the end of the third quarter, we have announced three strategic acquisitions. Two of these are of practices in Florida, which adds to our existing presence here. The third, Radiology Specialists, is based in Las Vegas. This is a strong geographic area with attractive growth opportunities. Also one where we have a significant presence already through our women's and children's services. Finally, in anesthesia, as we have previously discussed, our results were distorted by the non-renewal of a contract in Charlotte at the beginning of the quarter.
While this was in line with what we expected, it nonetheless impacted our consolidated operating results, which otherwise reflect continuing year-over-year growth in EBITDA. In terms of operating trends in our ongoing anesthesia organization, we did see a payer mix shift toward government. Our operational initiatives are heavily focused on anesthesia services, however, and the progress that we have made in those initiatives helped to offset these revenue trends during the third quarter. Related to that, I want to turn to our corporate and operational initiatives. Last quarter, we announced an expansion of these plans to a target of $120 million in annual improvements, with the goal of achieving this target through the end of 2019. This represents a full realization of our targeted $40 million in G&A improvements, as well as $80 million in annualized improvements through our operational plans.
These goals build on the progress we achieved in the earlier, more tactical stages of our initiatives and become more transformative, focusing on our own service delivery model to our practices and on the practices' own clinical delivery models. We're devoting resources across our practices with a heavy focus on our anesthesia organization to support enhancements to the service delivery model. This includes engagement of our consulting organization, Surgical Directions, to work in tandem with our clinical services leadership to identify opportunities for more efficient coverage and scheduling. It also entails the rollout of additional IT capabilities to improve a practice's clinical staffing efficiency, as well as to measure, benchmark, and reduce premium and agency labor costs. We have also identified areas where we may look to invest further in order to either accelerate our plans or to expand them.
The initiatives we are pursuing are not meant to be one-time in nature, but rather to transform the ways in which we provide services to our patients and the ways in which Mednax provides services to our practices. From a financial standpoint, beyond the dollar targets we have established through 2019, our ultimate goal is to continually optimize our earnings power, regardless of the external trends that we can't control. Any additional investments we make towards that end will be targeted and finite, and we will be reviewing them based on the returns that we would expect to generate in terms of accelerated timing or expanded operational improvements. As I've discussed in the past, our initiatives also include a focus on growth opportunities.
Within women and children's services, our focus is to build on the breadth and diversity of our organization, which includes more than 50 subspecialties, and our ability to expand the services provided by our existing practices and to win new business and start with opportunities. We believe that areas like newborn nursery care and OB hospitalist services represent attractive, addressable markets that we haven't yet fully tapped. These are focus service lines for us as we look at our organic growth opportunities. The same is true for radiology, where we've been successful this year in helping our on-site practices expand into new facilities on both an organic basis and through tuck-in acquisitions.
Lastly, we continue to pursue targeted M&A with a focus on radiology and women and children's care, as demonstrated by the transactions we closed following the end of the third quarter. We will continue our deliberate, strategic approach to acquisitions. The acquisitions we do pursue will be in service lines and geographic areas that we believe will be strategic to our markets and value additive to our organization. In terms of a high-level view of external trends, we are operating with the expectation that the headwinds we have experienced this year will persist. However, we continue to believe that the corporate and operational initiatives we're undertaking can be sufficient to offset these headwinds in 2019 and position us well for improving margins and organic EBITDA growth should market trends turn more favorable than what we're currently seeing.
As we move forward, we will continue to refine and update our views of the headwinds we face and the tailwinds we may see, as well as the operating and financial performance enhancements that we are creating through our corporate and operational initiatives. One last point I want to make on headwinds and tailwinds is the specific headwind related to the Charlotte anesthesiology contract. As we discussed last quarter, our results for the second half of this year will include our commitment to the physicians impacted by this non-renewal to pay their salaries through the remainder of the year. As we move into 2019, we will also move away from the distortions that this event has created this year. Before our review of our financial results, I want to make a few comments about our board of directors and our company leadership.
First, we have retained Spencer Stuart to assist us in identifying and reviewing candidates for addition to our board of directors. I look forward to this process and the opportunities we have to complement the experience and thoughtful input that we receive from our directors. Second, following the completion of our third quarter filings, Stephen Farber will assume the role of chief financial officer. Our healthcare world continues to evolve rapidly, and Mednax is transforming as well. Stephen brings to us a wealth of experience in helping to lead large, complex healthcare organizations through significant change. He joins us from Kindred Healthcare, one of our country's largest providers of post-acute care, where he was chief financial officer since 2014. Prior to that, Stephen was CFO of Tenet Healthcare, one of our largest hospital partners.
Throughout his career, Stephen has also helped to ensure that the organizations he worked for stay true to their missions of providing high-quality care to their patients during times of change. That will certainly continue to be the case at Mednax, where taking great care of our patients is at the core of everything we do. Over the short time Stephen has been with the company, he has been deeply involved in all aspects of our business. We look forward to his contributions as we move forward. To that end, this will be Vivian Lopez-Blanco's final earning call before she moves on to retirement. I want to thank her again for all of her contributions throughout the years. Vivian joined Mednax in 2008 and became CFO in 2009. For the past decade, Vivian provided leadership over the company's financial organization during a period of significant growth.
During Vivian's tenure, Mednax has quadrupled in size from $1 billion in revenue to almost $4 billion today. Vivian played a pivotal role in financing this growth, which involved significant investments for the acquisition of physician groups and other companies. Under her leadership, we successfully expanded our access to financial markets, increasing the company's borrowing capacity, as well as completing our first bond offering in 2015. Beyond Vivian's significant leadership and many contributions at Mednax, I consider her a close colleague and friend. Please join me in congratulating her and wishing her well. We have the benefit today of being in a transition period from Vivian to Stephen. I've asked both of them to make some comments on today's call.
Vivian will review our financial results for the quarter, and Stephen will provide some thoughts based on his time so far with the company. For the last time, I'll turn the call over to Vivian.
Thanks, Roger. Good morning, and thanks for joining our call. I'll provide a brief overview of our third quarter and some additional details in a couple of areas. Our consolidated revenue growth of 3.2% reflected same unit growth of 1.2% and acquisition-related growth of 2%. Same unit growth was evenly divided between volumes and pricing. On the volume side, we saw growth across all of our service lines except neonatology, where NICU days decreased by 1.9%. Radiology was the greatest contributor to volume growth, along with our other pediatric services, primarily newborn nursery care as well as pediatric cardiology. Pricing growth was driven primarily by modest improvements in managed care contracting. Payor mix trends reduced pricing by only a slight amount, with unfavorable mix in anesthesiology partially offset by a favorable mix in neonatology and other pediatric services.
On the cost side, practice salary and benefits expense was $626 million, or 69.8% of revenue, as compared to $586 million, or 67.5% of revenue last year, reflecting growth in clinical compensation, premium pay, and agency labor, as well as acquisition-related growth and staffing additions related to our organic growth initiatives. As we indicated when providing guidance for the third quarter, we are providing continued employment through the end of 2018 to certain physicians affiliated with Southeast Anesthesiology Consultants who were affected by the contract non-renewal. The expense related to this employment was accounted for as normal practice salary and benefits expense in our income statement for the quarter. The amount of this expense was roughly $10 million, which is in line with our expectations. Turning to our corporate and operational initiatives, the financial improvements we generated during the third quarter were in line with our expectations.
These included operational improvements of $10 million and $6 million in improvements in G&A expense. In the third quarter, G&A expense was 11.5% of revenue, compared to 11.7% in the third quarter of 2017. EBITDA for the quarter was $141 million, compared to $152 million in the third quarter of 2017. To put this comparison in context, we estimate that the non-renewal of the Southeast contract impacted EBITDA for the third quarter by roughly $16 million, or roughly $0.12 per share in EPS, reflecting both this contract's historical quarterly EBITDA contribution of roughly $6 million and the salary and benefits expense we incurred during the quarter for the affected physicians. Below the EBITDA line, our effective tax rate for the quarter was 27.5%, in line with our expectations.
Turning to cash flow, we generated $141 million in operating cash flow in the third quarter, compared to $200 million in the prior year period. As a reminder, cash flow from operations in the third quarter of 2017 was favorably impacted by the deferral of tax payments for companies impacted by the 2017 hurricanes. We used operating cash flow as well as borrowings on our revolver to fund the $250 million Accelerated Share Repurchase we announced in September. Finally, turning to our balance sheet, we ended the quarter with total borrowings of $2 billion, consisting of our revolver borrowings and senior notes. At quarter end, we had additional borrowing capacity under our revolving credit facility of roughly $735 million.
Lastly, turning on to our outlook for the fourth quarter, as we announced in our press release, we expect that our earnings per share for the quarter will be in a range of $0.65-$0.73, and that our adjusted EPS will be in a range of $0.87-$0.95. The range for our fourth quarter outlook assumes anticipated same unit revenue growth will be flat to 2% year-over-year. For the fourth quarter, we expect that our EBITDA will be in a range of $130 million-$140 million. Related to Southeast Anesthesiology Consultants, our expected results for the fourth quarter include approximately $9 million in expected practice salary and benefits expense related to the affected physicians impacted by this matter, or $0.08 per share in EPS.
Our expected results for the fourth quarter also reflect no ongoing EBITDA contribution from this contract, which during the first half of this year was roughly $5 million-$6 million per quarter or roughly $0.04 per share in EPS. As a result of these items, our guidance for the fourth quarter reflects a total impact to our expected results related to Southeast of $14 million-$15 million, or roughly $0.12 per share. Also related to our forecast of EBITDA included within expected general and administrative expense for the fourth quarter is approximately $6 million of improvements in G&A expense. Our forecast of EBITDA also includes $11 million in positive impact from our operational plans. This reflects a combination of incremental revenue and improvements in operating expenses.
Below the EBITDA line, our outlook assumes an effective tax rate of approximately 27%, compared to 39% in the fourth quarter of 2017. Finally, based on the impact of our Accelerated Share Repurchase, our outlook assumes average diluted shares outstanding for the fourth quarter of 89 million. With that, I'll turn the call over to Stephen.
Thanks, Vivian. Thank you, Roger, good morning, everyone. I've worked in prior roles with many of you on this call, and I'm glad to be working with you again. I've been with Pediatrix Medical Group now for about two months, and I've had the pleasure over this time to get a better sense of the people, the business, and the mission that drives everything that we do here. This is a time of significant change for Pediatrix Medical Group, and I'm honored to have the opportunity to be part of it. There are two areas where I'd like to focus my comments this morning. First, a few comments on our cost and margin opportunities with a sense of our intermediate and longer-term perspective, and second, some perspective on capital deployment and capital structure. I'll start with cost and margin opportunities.
As Roger and Vivian have discussed, there are significant cost initiatives underway with meaningful results already delivered and high expectations for 2019. Roger also commented earlier that there are areas where we may make additional investments in tools and resources to supplement these initiatives. I've been spending a good portion of my time working to understand opportunities with cost. While my views are preliminary, I believe there are significant additional opportunities to reduce costs and improve operating efficiencies that are incremental to what has already been discussed. To be clear, these opportunities are perhaps a bit less tactical and a bit more strategic. They will require meaningful technology and operational investments and will have longer lead times than many of the change efforts already discussed.
These include areas like technology-enabled process change, shared service expansion and improvements, and also meaningful deployment of administrative tools and technology directly into our practices. In short, we believe there are significant opportunities to harness data and analytics and technology to drive performance across the enterprise. You should expect that over the next few quarters, we will begin to attach more specifics and begin to take action to go after these opportunities. Turning now to capital deployment and capital structure, just a few thoughts to wrap up my comments today. Last quarter, Roger made the comment that he expected a moderate level of transaction activity over the balance of 2018. This activity, combined with the $250 million Accelerated Share Repurchase we announced in September, represents the use of roughly a year's worth of free cash flow.
As we finalize our capital structure plans for 2019, I would make the following comments. First, we are thinking of 2019 as a year of significant internal focus. We believe there are meaningful internal opportunities to reduce cost, increase efficiencies, and in general, work to get higher levels of performance out of our existing enterprise. We are working diligently to streamline, simplify, and organize what we have and strengthen our basis for future growth. We do expect a modest level of transaction activity in 2019. It's hard to quantify exactly what that means in dollar terms, and it is possible that a tremendous opportunity may present itself, and if it does, we intend to act on it.
We expect our general posture for 2019 to be one of integration and optimization of our existing practices with perhaps a handful of modest acquisitions along the way in our women and children's and radiology areas and very selective strategic transactions. As for capital structure, we continue to work through the $250 million ASR that is underway. Following its completion, there will be $250 million of additional remaining share repurchase authorization. We currently expect to use a portion of the proceeds from the potential sale of MedData to utilize that authorization and repurchase additional shares. Of course, subject to market conditions and all the usual caveats. From a philosophical perspective, we believe that a balanced approach of persistent methodical share repurchases, strategic acquisitions, and a relentless focus on optimizing and operating our core is the right approach to advancing MEDNAX as an enterprise.
That dynamically shifting our balance between these three areas, depending on priorities and market conditions, is the right approach to maximizing our value for shareholders over time. With that, let me turn it back to Roger.
Thank you, Stephen. With that operator, let's open up the call for questions.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press *1 on your touch-tone phone. You will hear a tone indicating you've been placed in queue. You may remove yourself from queue at any time by pressing the # key. Once again, ladies and gentlemen, if you do wish to ask a question at this time, please press *1 on your touch-tone phone. Our first question is going to come from the line of Kevin Fischbeck from Bank of America. Please go ahead.
All right, great, thank you. Best wishes, Vivian, and welcome, Stephen. I guess a question on MedData. How has that business been performing over the past few years? Obviously, the overall business has been under some pressure. Has that business been growing nicely or has that also been relatively flat earning trajectory?
Good morning, Kevin. Thank you for your comments. MedData has performed-- It had some growth, but honestly not met our expectations from when we had originally acquired it. I do think that that industry that they're in is changing. As Roger mentioned in his comments, I think they need focus to have someone that is going to be able to enable the technology and things that are happening in that industry. We feel that they are going to be better served by having someone that can focus on that. Because, obviously, given the initiatives that we have here with our physician services arm, that's really what the company needs to focus on at the moment. As we said, they have a great management team, they have a great product.
They will continue to be used by MEDNAX because they've done really well by us in the service line that they have on the patient pay side. We feel that they need some dedicated focus.
Okay.
I don't know if Roger you or Stephen have anything else to add to that.
No, I think that's it. It's a great company. We believe they need some investments. We, at this point in time, just are prepared to make investments in our sector as opposed to.
Okay. They're investing in what really changed your growth profile at all as far as how we think about that? Then, I guess, I don't know, I guess it's early, is the thought process that business, given the opportunities that you see, would probably be at a higher valuation than the company overall is trading at right now?
Well, we just started this process. We have heard from bankers, et cetera, that market right now is really looking to expand. We think that there are good opportunities. I'm hesitant to talk about valuation at this point because it's just too preliminary to tell. We know that there's a lot of interest in that sector.
Okay. Then, I guess, trying to dig into the anesthesia payer mix. Is that just purely the demographic story, if you will, of just the senior population growing faster than the commercial population and high deductibles pushing down commercial volumes? Is there something else going on underneath that? I guess there seems to be a lot of focus on out-of-network and things like that. Is there any issue contractually on the commercial side that's causing that shift?
Yeah. No, not for us. We're consistent with what we've said in the past related to what you just said on demographics changing and the out-of-pocket. We don't see, as we've said before, this issue with out-of-network. And again, the anesthesia mix, yes, it's negative, but it's been consistent in that range. It's not like what we saw at the beginning of 2017. Nonetheless, nothing else to say there, Kevin. It's the usual that we've said in the past.
Okay. Then I guess, just last question then. Nothing else changing as far as your view about what kind of organic revenue growth you need to show margin expansion? It sounds like the company has a renewed emphasis on cost control. I wasn't sure if you guys were thinking that, if you're able to execute on some of these efficiencies that you're looking at, you might be able to maintain margins at a lower organic revenue growth rate.
Well, yeah. That's the goal. As Stephen said in his commentary, I think we're looking to continue to evolve that and expand it. So I think we're going to have more than what we had announced in the last quarter, and we're actually pretty satisfied with where we're at with it as it relates to the progress, because we have continued to deliver on the metrics that we set internally. Nonetheless, we're not satisfied that that's where we should end. So we're going to continue to look at this, and, as Stephen said, make investments where we need to on automation, because we still want to make sure that we can impact some of this premium pay and agency labor and all that, and that'll come with some of the automation there.
We think there is a lot more opportunity, but some of these things are more strategic in nature and are going to take a little bit longer.
I guess, just to clarify, I think it was Roger said something along the lines of that the pressures you're seeing right now are expected to persist. The cost cutting should hopefully allow you to kind of keep things more stable. If things improve off of the growth rates that you're seeing now, then you can grow EBITDA. When you say that, are you talking about the 0%-2% number or kind of that you expect in Q4? Or are you talking about the kind of year-to-date number, which is maybe more like two or three?
Yeah, no, it would be more, if it bounces back, right? Because right now we saw this quarter, obviously same unit and specifically births were not where we wanted them to be. Our fourth quarter guidance reflects that because we've seen this volatility in the past. Yes, we don't expect that to persist. If it doesn't persist, obviously we'll have a lot more opportunity for margin expansion as well as positive EBITDA growth.
Yeah. One thing I want to add here is that if we go back to 2010, over that eight-and-a-half year time period, there's only been two quarters in that time period when we have seen births decline to this kind of level, the 2% level. Just to put it into perspective, this was a pretty significant drop in births that we saw during the quarter. When we've seen this in the past, births have come back. That's what we were talking about.
Okay. Thank you.
Thank you. Our next question will come from the line of Brian Tanquilut from Jefferies. Please go ahead.
Hey, good morning, guys. Roger, as I think about margins, just to follow up on Kevin's question, do you think you can, with the cost cuts, is there an ability to at least hold margins or drive margin expansion if same store remains in the flat to 2% range, do you think?
Well, obviously, Kevin, more on the 2% range. Again, as we look at these cost initiatives, we continue to drive that. Not so much on the flat side, that would be a bigger hurdle, obviously, but certainly on the 2%. Remember, if I can refresh all of your memories, we used to say here that you needed kind of 3% to have margin stability here, then we kind of started to raise that because of some of the premium pay and some of the salary pressures we were seeing. Now, given some of our initiatives, that's coming back down. Yes, there is opportunity there, Brian.
Viv, just to follow up or one more question just on the rate side. Are you seeing any more increasing stipend payments? Is that a factor in the deceleration in the same store kind of rate growth?
Yes, thank you for that. We do see, as I've said to you guys before, some variability in the timing of not only for what you're suggesting on the contract revenue, Brian, which is also true, but also on the managed care piece. Again, that just has to do with the timing of when you negotiate the commercial contract. That was lighter this quarter than what we have seen for the first half of the year, but again, we're not expecting that to slow down permanently. It's just the timing of the managed care contracting, et cetera.
Viv, just to follow up on that, quick question. Do you still think that you can get managed care rate growth, at least on the NICU side, in sort of the historical 3%-5%, 4%-5% range?
Yeah. We're still sticking to that. Yes, absolutely. Again, it's timing related. Yep.
Got it. Thank you.
Thank you. Our next question will come from the line of Ana Gupte from Leerink Partners. Please go ahead.
Yeah, hey, thanks. Good morning. On the pediatric and child services, beyond the birth rate, are you pursuing share gains with the RFPs that are in the pipeline, cross-selling well-baby care or any other specialty services? Is that likely to help offset some of the volatility we're seeing just on the secular trends?
Yeah, for sure. We're pursuing those, and we have a special emphasis right now on well-baby care. We only do well newborn care at probably less than half the hospitals where we provide NICU services, and we think that's a big opportunity for us, and we've got a special program which is focused exactly on that. Also, OB hospitalist is another area that is growing very fast for us. Yes, we're specifically targeting those two areas for growth.
When will that materialize, you think, in a way that can drive more predictable volumes on that service line? On that business segment.
Well, it's materializing every day. It's slowly contributed to our growth in other services, as we said at the beginning of the call this quarter, we believe that it will accelerate over this quarter and beyond. Our hope is that we can have a significant opportunity for growth there. That growth is already happening and has contributed in this third quarter.
Okay. On the anesthesia side, on the contracting with the anesthesiologists, are you seeing any push from your workforce, from your anesthesia staff to change the incentive structure more to pay for performance or introducing equity or anything? Can you talk about what that looks like for you in the next one or two?
Yeah. We're renegotiating those contracts as they come due, we talk about having a different kind of a structure where we're sharing revenue with them, we've already been successful a couple of times in making those changes. We're hopeful that as we move and continue to negotiate these contracts, again, when they come due, that we will be able to move more of our existing groups into that revenue sharing model.
Will that drive volumes that offset any other wage pressure from changes in contracting?
I don't know whether it will drive volume or not. I wouldn't say that. What it will do is it will sort of share the responsibility rather than having guaranteed salaries for them to having a percentage of the revenue, and we have seen it already drive them to be just more efficient in how they staff their services et cetera. That's the force behind that.
Got it. Thanks, Roger.
Yeah.
Thank you. Our next question will come from the line of Gary Taylor from JP Morgan. Please go ahead.
Hi. Good morning. Just a few questions. The first one, Vivian, I was wondering if you're going to move up north and retire somewhere cold.
No, Gary. I'm planning to spend time in Spain.
Okay. All right.
Cold Spain.
Yep. Not as cold as the Northeast.
Okay.
Thank you, Gary.
Best wishes.
Thank you.
Couple questions. On the Q4, when you mentioned the $6 million on the G&A, was that a sequential G&A improvement you were talking about?
That's year-over-year.
Okay. Year-to-year.
Yes.
Just when we think about looking at the EBITDA this quarter, adding back $16 million on Atrium, EBITDA's up $5 million year-over-year. If we look at the Q4 guidance and we add back $15 million-$16 million, it's flat to down. Is that just purely a function of the fact you have really strong same unit revenue growth in the fourth quarter last year? You're guiding only 0-2% this time around. Just the negative operating leverage or anything more explicit than that?
Yeah. It's a little bit of all of that, but also given that obviously we kind of lowered the revenue given what we saw in the third quarter, right? That's a piece of it, right? The flat to 2. There's things that usually happen in the fourth quarter that are a little different from the third quarter, namely, as you would expect, there's some higher expenses. Typically we do see about a 50-60 basis point decline in margins there because of seasonality. A few of those things are, as you would expect, some of the year-end true-ups, like typically you have a little bit higher healthcare costs and you do have true-ups on bonuses as we're going through and looking at what the practice results are. Just some supplies and practice expenses are typically a little bit higher.
All of that does contribute to Q4 being slightly, on the margin side, being slightly less than in Q3. Everything else being the same.
Okay. Last question. Correct me if I'm mistaken, but I believe last quarter, Roger, you had said 2019 would be a year of modest EBITDA growth. I'm wondering if you're still seeing that and if that includes, excludes the EBITDA headwind you still have from the Atrium contract exit in the first half of the year.
Yeah. We are still, given, obviously we have a different baseline, right? Yes, we are expecting to continue with some growth there. Remember that we do have the lack of the year-over-year with this Charlotte matter, because even Q3, I think one of you guys put that in one of the notes. I can't remember who it was, but barring Charlotte, we did have some positive growth in Q3. Again, Q4 being slightly less given some of these things that I mentioned on the margin. Yes, we're expecting 2019 to have growth.
Great. Thank you very much.
Thank you. Ladies and gentlemen, if you could limit yourself to one question. Our next question now is going to come from the line of Chad Vanacore from Stifel. Please go ahead.
Thanks. On the anesthesia physician contracts that you're carrying to the end of the year, should we expect that full cost to evaporate after year-end? Or alternatively, what percentage of those contracts do you expect to retain into 2019? Have you moved a portion of those clinicians to other practices, and are they servicing other contracts?
Yeah, no, we have moved some physicians, it evaporates at the end of 2018.
All right, Roger. That's basically a $9 million EBITDA lift that you get in the first quarter?
Right.
Okay. Just on MedData, what percentage of that $46 million EBITDA generation is internal to Mednax? Presumably a large portion of this is intercompany income.
It's probably roughly in the 10%-12% range.
All right. That's it for me. Thanks.
Thank you.
Thanks. Yeah.
Our next question then will come from the line of Matt Borsch from BMO Capital Markets. Please go ahead.
Yes. Thank you. Could you just talk about your acquisition strategy going into 2019? How is the trends and if at all, the trends in the back half of this year affecting your view of what you want to do next year?
Well, at the end of the day, we're going to have to grow our way. There's only so much you can cut. Although we have a lot of room, I think, to still gain some efficiencies, we have to think about our growth as well. I'm very excited about this large neonatal practice that we acquired after the third quarter. It's a practice that we have been looking at and friends with for many, many years. It demonstrates that we are able to. If you remember historically, we bought neonatology practices in the 4 to 5 multiple ranges, and that's exactly where we were able to accomplish this very large acquisition.
We have a renewed effort to recontact the existing neonatology practices that are still out in the market, and we believe that we may be able to get maybe one or more of those deals done in 2019. We're excited about that. We're excited about radiology. We do have some growth in radiology. I think this fourth quarter, we will have two of the four radiology practices that we acquired last year will fall into the same unit calculation, and I think that will be helpful to us, both our large practice in South Florida as well as one up in Connecticut. We believe that will contribute to our same-unit growth calculations as well. All of that is looking good for us starting in the first quarter of next year.
We will continue to focus on women and children's services, acquisitions, particularly in the neonatal field, and some radiology, as I stated on the call, some smaller tuck-in kind of acquisitions. Hopefully we'll see opportunities to enter other markets that make sense for us from a geographic and a payer mix standpoint. I think we'll see, even before the end of this year, a small radiology acquisition to follow as well. That's, as we said, the combination of share repurchases and strategic acquisitions is where we see 2019.
Just one quick follow-up, which is, are you seeing the neonatology volume trends impacting valuation in a way that might benefit you in the near term?
Well, I think the valuation of our neonatal, like I said, I'm sorry, I'm not sure I understood your question.
Well, I'm sorry. I mean, in terms of potential acquisitions that maybe this becomes a little bit better environment to do acquisitions because the market's not as hot.
For neonatology, you mean?
Yeah.
I don't think, no. I think that being able to acquire these practices that are four to five-time multiples is pretty good.
Okay.
It's not been a valuation issue that has kept these practices from joining us. It's always a fear of losing their independence. That is always the number one reason why these larger practices that are still left elect not to come be part of what we're doing.
Got it. Thank you.
Yeah.
Thank you. We have a question on the line of Ralph Giacobbe from Citi. Please go ahead.
Thanks. Good morning. I just want to go back to expectations for growth in 2019 and maybe more specifically, try to get to the right baseline as you guys are thinking about the business and where we're at at this point. Do you think it's fair to use that fourth quarter EBITDA number as sort of a run rate, maybe after making the SAC adjustment? Is that sort of a reasonable way or jumping-off point to think about 2019 at this point?
Well, we're hoping that it'll get better because, again, fourth quarter, as I mentioned in the prior question, the margins do get impacted with some of the things that are usually year-end phenomenons as you true up the books for the year for healthcare and all that stuff. We would expect it to be slightly better.
Just if I could push on that a little bit, because I think typically your first and second quarter are your weakest EBITDA generating quarters. It's usually third and fourth that are a little bit more than a quarter of the EBITDA contribution. I just want to make sure I understand the seasonality of using that or not using that.
Thank you for that clarification. It's the first quarter that we do have significant seasonality, because one of the things that happens in the first quarter is that these physicians are meeting their FICA expense and all this, so it is much lower. The first quarter is the one that has the big seasonality. I was referring to between third and fourth quarter.
Yep. Okay. Yeah, I guess I'm just trying to get to the baseline of how to think about, when we think about growth in 2019, there's been a lot of moving parts, a lot of pressure in the business, and so it's just whether or not you see fourth quarter as kind of a good starting point or not, and it sounds like the answer is no, and because of these incremental considerations.
Well, yeah. You adjust it for some of the, like I said, it's roughly 50 to 60 basis points in margin. Then, of course, what we said, the Southeast impact. If you do that adjustment, then you're in the ballpark.
Okay.
Again, we're hoping that organic growth is not going to continue to be flat to two. We're hoping that we go back to more of the first half of the year trend. That hopefully will be impacted positively as well. Nonetheless, that would be an in range barometer there.
Okay. All right. Thank you.
Thank you. We have a question from the line of Matthew Gilmore from Robert Baird. Please go ahead.
Hey, thanks for the question. Picking up on the 2019 outlook, you talked about low mid-single digit growth as sort of an expectation. Can you give us some sense for what's assumed from a birth perspective? Does that sort of contemplate flat births or positive births?
I wish we could be so good, but we're not. I will admit to that we don't have that crystal ball, usually what we do is that we make an assumption on overall same unit. We can't be as precise as that. We just can't.
Got it. One quick follow-up to the MedData EBITDA number you disclosed. Is that the number we should think about coming out of Mednax's EBITDA, or are there any costs that won't go away or maybe some overhead that you can remove so you actually get a bigger benefit than the $46 million? Just wanted to sort of understand how that impacts Mednax when it's removed.
Yeah. Roughly, that's the number, because they've been operating pretty independently, so there's not overhead here that is justifiable to go away for that reason.
Got it. Thank you.
Thank you. Once again, ladies and gentlemen, if you wish to ask a question, please press star one on your touch-tone phone. We have a question on line of A.J. Rice from Credit Suisse. Please go ahead.
Hi, everybody. Best wishes, Vivian, and congratulations to Stephen. Just a couple of very specific things around the third and fourth quarter. I think you've mentioned a couple times increased clinical compensation contract and premium labor. Is that sort of just the ongoing dynamic that you've been experiencing for a while, or was there a step up somehow in the current quarter, and do you think that's going to continue? I guess I would also ask about the 0% to 2% in the fourth quarter. I just want to make sure I understand what's behind that. Is that simply assuming that what you saw in the NICU and births in the third quarter persist in the fourth quarter, or is there something else behind that that's building up to that revenue growth expectation?
My last piece on this is, thanks for the comments about contribution from the two cost reduction initiatives, but I think last quarter the comment was that you expected about $35 million in operational improvements in 2018 and about $25 million on the G&A cost initiative. Is that still the goal for this year? Are you on track for that, or has there been a change?
No, we're on track for that. If you add up what we said, we're pretty much in that ballpark. We think that, like I said before, A.J., the experience we've had so far has been positive, and we've been delivering on both the G&A side as well as the operational efficiency side.
Okay.
To get back to your other question, let me see if I remember all parts of it. I think the prior piece of it was related to what we have in the forecast for the fourth quarter as it relates to top line. Yeah, that does continue the trend, because we don't know, as Roger said, we typically don't see it so harshly, certainly on NICU births, but we think it's just conservative to continue with that, at least for the next quarter. That's what it does. There's nothing more to it than that. As it relates to the salary and benefits line, I think was the last piece of your question.
Yeah, actually, it did get slightly better, because we still saw some increases, as I said, but it really was slightly better than what we see in the first half of the year, and certainly on the nurse anesthetist side for sure.
If I could just maybe clarify one point on that fourth quarter NICU assumption. I know it's probably not fair to ask this, but is that just your assumption, or do you have something in the October results that you've seen already that suggests it sounds like it's fairly unusual to have two quarters like this in a row, but I just wondered, do you see something in sort of the early read on the quarter so far that suggests it'll continue to be that soft?
No. We haven't. Again, we want to deliver on the forecast that we have set out there. We thought it'd be prudent given that's something we can't control.
Okay. All right. Thanks a lot.
All right. Thank you. At this time, I have no further questions in queue.
Okay. If there are no further questions, I'll thank everyone for participating this morning, and I will look forward to speaking with you again at the end of the fourth quarter. Thank you, operator.
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.