Earnings Call Transcript - MD Q2 2020

Operator, Operator

Ladies and gentlemen, thank you for being here. Welcome to the MEDNAX Inc. Second Quarter 2020 Earnings Call. All participants are currently in listen-only mode. A question-and-answer session will follow later, and instructions will be provided at that time. This conference is being recorded. I will now hand it over to our host, Charles Lynch. Please proceed.

Charles Lynch, Host

Thank you, operator, and good morning, everyone. Joining me today for our call are our Chief Executive Officer, Mark Ordan; our Chief Financial Officer, Stephen Farber; and President of Pediatrics and Obstetrics Medical Group, Dr. Mack Hinson. I'll quickly read our forward-looking statements and then turn the call over to Mark. Certain statements and information during this conference call may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by MEDNAX's management in light of their experience and assessment of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Any forward-looking statements made during this call are made as of today, and MEDNAX undertakes no duty to update or revise any such statements, whether as a result of new information, future events or otherwise. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the company's most recent annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K, including the sections entitled Risk Factors. In today's remarks by management, we will be discussing non-GAAP financial metrics. A reconciliation of those non-GAAP financial measures to the most comparable GAAP measures can be found in this morning's earnings press release, our annual report on Form 10-K, in the Investors section of our website at mednax.com. With that, I'll turn the call over to Mark.

Mark Ordan, CEO

Thanks, Charlie. Good morning, everyone, and thank you for joining our call. I'm excited to join MEDNAX and to support this great national medical and healthcare group. Over the past several weeks, I've spent time meeting with people across the organization, including practice groups in both pediatrics and radiology, and I've been so impressed with the dedication it clearly has to this company's decade-long mission to take great care of the patient. As you know, MEDNAX has always been physician-led at the top of the organization. That will continue, and that's why Dr. Mack Hinson is here with us today. In particular, I want to thank Roger Medel for his gracious introduction to the MEDNAX team and for helping me get up to speed. Dr. Medel built this into a physician and patient-centric culture, and that has been key to MEDNAX's success and longevity. MEDNAX's strong mission and spirit spring from Dr. Medel's determination and care. I want to assure you that MEDNAX's mission will not change. Even as we continue to address an unprecedented pandemic across the country, the care the clinicians across our organization provide every day is as important as ever. And the focus that MEDNAX has always shown over the years to continually improve their care in clinical research, education, quality and safety will remain important as it has ever been. Today, I want to reaffirm our previously announced intent to divest MEDNAX's radiology solutions. We are actively engaged in a comprehensive process in order to realize the value that recognizes this group's strength, resilience and growth potential. While radiology saw a steep fallout in the spring due to COVID, it saw a very impressive bounce back in the early weeks of summer. Stephen will provide more color about this. So if this sale does happen, it's only for strategic and financial reasons. It is a very strong business that will be very additive in the right hands. This sale will help accelerate our focus on our core pediatrics and obstetrics medical group in terms of both continuing strength as well as growth. Should the sale be approved by shareholders, we will change our name to Pediatrics Medical to attest to our focused commitment going forward. Stephen will provide details regarding our second quarter results, but I'd like to comment briefly that the strength in our results during an incredibly challenging time in history demonstrates just how critical and necessary our national medical group services are to our patients. In my view, this is a hallmark of this organization, and I'm tremendously proud to begin working alongside the clinicians and non-clinician associates to support them to help ensure that our patients have access to that care every step of the way. I'm most excited about the opportunities within MEDNAX as we look forward. Our entire Board, including me, of course, believe that a concerted focus on our core will enable us to operate very efficiently and grow effectively. I look forward to updating you over the coming months on our progress. I'll be working closely with our Board, leadership of the company and our clinicians and operators to ensure that MEDNAX can succeed, grow and continue to invest in the foundations of great patient care. I firmly believe that collectively, these will prove to be the basis for strong value creation for all of our stakeholders. With that, I'll turn the call over to Stephen.

Stephen Farber, CFO

Thanks, Mark, and good morning. Thank you for joining our call. I'll start with some high-level observations of the quarter, and then I'll go into some detail. First and foremost, we have been positively surprised by our operating results for the quarter, which demonstrate both the resiliency of underlying demand for the services our clinicians provide and our ability to mobilize an effective, timely and comprehensive response against an unprecedented and highly unpredictable environment. This was, obviously, a tremendously challenging period for our organization, as it has been for all healthcare providers. In a very short time, beginning in late March, we mobilized multiple work streams through which we identified and executed on cost mitigation efforts across our corporate and support infrastructure, additional mitigation steps with many affiliated practices and actions to strengthen our supply chain for critical protective personal equipment, our telehealth capabilities and virtual support groups within all of our clinical specialties. We also took steps to ensure that we maintain significant financial liquidity and meaningfully curtailed our third-party spending as part of our transformational and restructuring activities. Lastly, as we announced in early May, we divested our anesthesiology service line, which was impacted by the pandemic to a far greater degree than our ongoing business and is well served in our view as being part of a much larger dedicated anesthesiology organization. As a result of these steps, we were able to ensure that our clinicians receive the support that they needed to fulfill all of their commitments to their patients and to our hospital and health system partners. Turning to our results for the quarter, our consolidated revenue from continuing operations of $509 million was down $52 million or just over 9% compared to last year. This comparison includes just under $12 million in revenue that we received through stimulus programs during the quarter, which was divided about evenly between pediatrics and radiology. Our cost mitigation efforts during the quarter provided a meaningful offset to the decline in revenue such that our adjusted EBITDA was down $29 million or only about half of our dollar decline in revenue. I'll also point out that the lion's share of the pandemic impact to our operating results occurred in April, and we've been very pleased with the rapid return towards normalization of patient volumes and revenue in May and June. As we noted in our press release, our overall volumes fell to roughly 75% to 80% of pre-COVID levels during April but have recovered to roughly 90% to 95% of normalized levels by the end of the quarter. On a preliminary basis, this recovery has persisted during the month of July, with some geographic variations. We believe this rapid snapback in volumes reflects the nature of services our clinicians provide, which are highly critical and acute in nature and oftentimes lifesaving, showing strong resiliency in demand as a result. We did provide additional color in our press release that covers volume trends in what we view as the three primary components of our continuing operations: hospital-based women and children's services, office-based women and children's services, and radiology. I won't repeat those here, but to give some color on the relative weighting of these segments: hospital-based services, which were the least affected component of our business, represent about 60% of our revenue from continuing operations and primarily reflect neonatology services. The impact of patient volumes in the NICU was only about 5% in the quarter and trended up towards the end of June. Elsewhere, within hospital-based services, pediatric ICU and general pediatric services were impacted more significantly, with patient volumes down roughly by half in April but these volumes recovered to about 85% or so of pre-COVID levels over the course of June. These are also relatively small components of our overall hospital-based revenue compared to the NICU. Our office-based women and children's services and radiology services were more significantly impacted and each make up about 20% of revenue from continuing operations. In both of these areas, we saw a strong recovery in volumes in May and June, ending the quarter in the 85% to 90% of pre-COVID range. As a couple of additional notes, our payer mix remained stable and was actually slightly positive in the second quarter with non-government volumes increasing by about 65 basis points as a percentage of total volumes compared to last year. Our accounts receivable days were also very stable. In fact, we actually improved one day, coming down by just over one day versus the end of March. As I mentioned, we undertook meaningful expense activities in response to the revenue disruption we experienced during the quarter. These are evident in the reductions in practice salaries and benefits as well as G&A expense in our reported results. Those reductions also reflected the clinical compensation structure within MEDNAX radiology, where each of our on-the-ground practices operates under a revenue share model, and vRad affiliated radiologists are compensated based on volume. These compensation structures functioned very effectively, and I'll note that all but one of our individual practices as well as vRad had positive EBITDA for the quarter. Within our G&A expense, I'll provide three observations for those of you keeping models on the company. First, for the second quarter, our G&A was roughly 15% of revenue. I'll point out that G&A for radiology is structurally higher as a percentage of revenue than G&A for pediatrics, with radiology being closer to 20%. This predominantly relates to vRad, which has a fairly different P&L inflection versus our practices based on the expenses incurred of its fairly extensive operations and IT infrastructure. Second, our P&L reflects the accounting treatment for transitional services, which we have in place with NAPA following the sale of American Anesthesiology. We are providing certain ongoing services as NAPA works to integrate American Anesthesiology, most of which are non-labor but that flow through our own G&A expense line. We are reimbursed for those expenses, and that reimbursement is recorded within investment and other income, further down on our P&L. For the second quarter, these expenses and our reimbursement for them totaled $2.8 million. These items are a wash in our calculation of adjusted EBITDA, so they don't impact that metric, but they will temporarily inflate our reported G&A for a time that we provide those services. Lastly, as I indicated in our update call in early June, in the weeks following the sale of American Anesthesiology, we identified and completed roughly $10 million in annualized expense reduction. We continue to press hard to reshape our G&A infrastructure to match the size and scale of our ongoing enterprise and anticipate that those efforts will benefit our overall G&A percentage as we make further progress. As the last comment on expenses, we meaningfully reduced our third-party and other outlays related to our transformational and restructuring activity. Total expense in the third quarter was $11.5 million, down about 40% from what we reported in the first quarter of this year. Turning to cash flow and liquidity, we are very pleased with how the quarter progressed. In total, we generated $193 million in cash flow from continuing operations, which is significantly higher than the prior year. There are a handful of moving parts in the quarter related to either the sale of American Anesthesiology, taxes or both, and there are significant additional cash inflows that we anticipate collecting. So I want to spend some time there. First, as a meaningful part of the consideration for American Anesthesiology, we retained all of the working capital from that business, which as we disclosed in May totaled about $110 million and consisted primarily of accounts receivable net of current liabilities. While the retained accounts receivable are recorded as part of our continuing ops on our balance sheet, our collection of those receivables is not part of our cash flow from continuing operations, but rather are reported separately as part of discontinued operations. So, our continuing cash flow for the quarter is not inflated by those collections. Second, we were not a cash taxpayer during the quarter, compared to cash taxes paid in last year's second quarter of $68 million. In fact, for the first half of last year, our cash taxes were $71 million. This year in the first half, our cash taxes were $1 million. Third, we were able to defer payroll taxes during the quarter as part of the CARES Stimulus Act. This was a smaller amount, totaling about $12 million during Q2, and we expect additional similar amounts over the balance of the year. Thanks to these sources of cash, we meaningfully improved our net debt profile during the quarter. We ended the quarter with cash on hand of $132 million, which is up about $40 million from what we reported for the end of May. We have no borrowings on our $1.2 billion revolver, our dollar amount debt consists solely of our senior notes, and our net debt as of June 30 was about $1.6 billion compared to about $1.8 billion at the end of March. I will tell you as well that our cash projection for July would add another $40 million to $50 million of cash to where we ended June. In addition, there are ongoing one-time cash benefits that we expect to realize in the back half of this year that total more than $100 million. First, in terms of our retained accounts receivable for the anesthesia sales, as of June, we still had $58 million remaining to collect, which we expect to receive mostly during the third quarter. Second, you'll see in our balance sheet details that we reported $64 million in income taxes receivable. About half of this is a refund for an overpayment of 2019 estimated tax and the remainder is the current tax benefit on our year-to-date operating loss that will be used to offset any future taxes payable for the rest of 2020. We anticipate that these additional nonrecurring sources of cash, when combined with our ongoing cash flow from continuing operations, will enable us to further reduce our net debt perhaps by $200 million or more over the balance of the year. If you do that math, that's well over $2 per share of incremental value. I'll wrap up with just one more high-level comment on our ongoing operations. Based on a review of the impact to our business from the COVID-19 pandemic, we anticipate a full recovery of demand across our women's and children's and radiology service lines pending the pandemic. Put more simply, at this time we do not believe that there has been any structural or permanent impact to that demand, and I'll reiterate that we believe strongly this reflects the nature of the services our affiliated clinicians provide, which are highly critical and necessary in nature. As it relates to our discussion in early June regarding the outlook for the financial profile of the Pediatrics Medical Group, at this point we are not changing that outlook. More specifically, we previously indicated that this business on a normalized basis should generate roughly $1.8 billion in annual revenue. From a margin standpoint, we view pediatrics and obstetrics as beginning with a mid-teens EBITDA margin profile, which based on a normalized annual revenue would put EBITDA in the $270 million area. From this initial margin profile, we believe there is a highly viable path to move pediatrics margins from mid-teens to high teens, driven by continued reshaping of our support infrastructure and by operating leverage as revenue increases. This could move dollar EBITDA into the $300 million range or higher from our preliminary range, which we believe is fully achievable over the next couple of years. With that, I will now turn the call back over to Mark.

Mark Ordan, CEO

Thanks, Stephen. Before we go to questions, I want to share some observations I made a few weeks ago at the company. First, everyone here is tremendously proud of how the entire team responded to the pandemic. It's clear that a giant test to mobilize a nationwide organization to care for patients safely, to protect our frontline caregivers, and to manage our costs. I want to recognize and thank everyone for their efforts and contributions. Second, I know from my past that it's all about people. I'm impressed by the dedication our team has to the mission to take great care of the patient. The results we reported this morning simply wouldn't be possible without that dedication, and I intend to do my job with the same commitment to this company's mission. I've already spoken with and heard from physicians and clinicians from throughout our organization. So I can speak to the spirit and determination first-hand. Third, I view this as an absolutely incredible franchise. And again, as COVID demonstrated, we are resilient even in the worst of times. We occupy a hugely important and unique space in the healthcare ecosystem. We care for babies and children when they are at their most vulnerable. The trust that our patients place in their physician and the trust that our hospital partners place in us has been earned over a decade, and that makes us truly unique. Lastly, the position we hold in the healthcare industry gives us terrific opportunities to grow. In each of our service lines and in any number of adjacent ones, there are exciting paths to take to build on where we are today and to make this company more and more efficient and more and more successful. I'm looking forward to working with the team to make that happen. I'm eager to tell you what we're doing as we go from here. With that, operator, we are ready for questions.

Operator, Operator

And our first question comes from A.J. Rice with Crédit Suisse. Please go ahead.

A.J. Rice, Analyst

Hi, good morning. Welcome on board, Mark. I appreciate the comments there. Just a couple of questions. A lot of discussion over the last year about the transformational initiatives and today you provide an update on what the spending level is. How much of that is still relevant given the focus on pediatrics going forward? And what is sort of the run rate of expected spending? And what are some of the opportunities that you think you might realize from that as you move forward?

Stephen Farber, CFO

Sure. Hey, A.J., good morning. Thanks for the question. I can give you a little bit of color on that. We are continuing to work through our plans. As you may recall, a significant portion of our transformation spend was in and around the anesthesia business, and now with that business...

A.J. Rice, Analyst

Right, right.

Stephen Farber, CFO

So that really has provided us with a good opportunity to reshape our investments and efforts there. The pediatrics business had a relatively modest portion of that spend. I'd say probably about a quarter of it or so. And then we had some general infrastructure for the company as a whole with the number of projects that were underway and some of which are still underway. So for example, I know we've spoken before that we were migrating our DRP to Oracle in the cloud. That project is continuing and should be largely done around the end of the year. We have some IT infrastructure and other sorts of things that are ongoing. We're continuing to refine those plans. We've kept a little bit going for things that were more mission-critical during this period. But to some extent, it's kind of like stopping and steering an aircraft carrier. So it does take a little time. I can't give you a precise sort of anticipated spend level going forward but I can say it should be very modest relative to what spend levels have been historically and should be extremely focused on things that are either necessary critical infrastructure upgrades or things that will enhance the physician experience and the patient experience of being part of and working with this company.

Mark Ordan, CEO

A.J., the only thing I'd add on to that is in my past, I usually only use third-party advisers for IT and related projects. So we certainly have a strong bias going forward to operate and make decisions within our four walls with our team and with our Board.

A.J. Rice, Analyst

Okay. No that's great. Maybe the follow-up question would be around the CARES Act funding. I think you reported about $11.7 million this quarter if I got the number right. I know at one point you had applied for significantly more than or thought you might be significantly more than that. What's sort of the current thinking of where you stand in Cares Act money and when you might report some of that in the back half of the year if there are indeed incremental dollars to be had?

Charles Lynch, Host

A.J., it's Charlie. Yes. When we made that comment in early May, as Steve would recall, it was reflective of all the services we had including anesthesia. So a meaningful amount of the monies were related to anesthesiology and not relevant to our continuing ops. So the just under $12 million we received during the quarter relates to pediatrics and radiology. We do have some additional amounts that we would anticipate in the third quarter. They're not meaningful probably somewhere in the single-digit millions. So that's still pending. But the amount that you see for the quarter is specific to our ongoing operations.

A.J. Rice, Analyst

Okay. All right. Thanks a lot.

Charles Lynch, Host

Thanks, A.J.

Operator, Operator

And our next question comes from Ralph Giacobbe with Citi. Please go ahead.

Ralph Giacobbe, Analyst

Thanks. Good morning. Hoping you could talk a little bit more about the NICU trends and the declines there. I guess a little bit surprising given the specialty and I think the commentary last quarter that you had a more stable results. But obviously, we've seen lower birth rate in the past to some degree. But the commentary I think in your release talked about lower admission rate. Can you just delve into that a bit and help us understand sort of the level of acuity and sensitivity to that trend going forward?

Mack Hinson, President of Pediatrics and Obstetrics Medical Group

Sure. Yeah. Hey, Rob, this is Mack Hinson. There's a little bit of decrease as we reported in terms of numbers. I think firstly related to COVID. I think it's difficult to clearly relate any of this to COVID, whether it's cyclical or not. We've seen some consolidation of NICUs. We've seen some diversion of NICU beds to allow for COVID patients, but that's really been a minority - very, very sporadic and not contributing significantly to the numbers. Clearly I think, everybody has seen over time and even recently, concern about birth rates. I think I would remind everybody that the markets we're in tend to have relatively less effect than the overarching national market. And so the year-over-year decrease that we've seen is well within simplicity that we've seen over time. So we're hearing anecdotal reports that some of our NICUs are busier over the last month in some of our major markets. So I would be very hard-pressed to say that this is a downward trend that's something that we're going to see as persistent. I think we'll wait and see how this plays out. But certainly, we have some indication in the markets that we’re busier than we saw in the first part of the year.

Mark Ordan, CEO

I would also add, Ralph - I would just add one quick comment on top of that. When we actually look sort of month-on-month and week-by-week because we have, obviously, internal indicators that we look at, we did see a trend that was pretty similar to the other businesses and to others out there that we know a lot of the hospital systems have reported where essentially April was a lot softer, and then it came back somewhat in May and it came back even more in June and then trended pretty strong week-to-week throughout June, which indicates along with what Mack just said. It really does indicate that this was almost more of an exogenous type item over the quarter as opposed to something that we expect to be persistent.

Mack Hinson, President of Pediatrics and Obstetrics Medical Group

I'd just add one other comment. We have looked at the mix of the type of patients that we are seeing in the NICU. And there have been reports about there being fewer premature babies, for example. We're not seeing any mix of the type of degree of prematurity or the acuity of the babies that we're admitting. So across our system, we're certainly not seeing any evidence today of that happening.

Ralph Giacobbe, Analyst

Okay. All right. That's helpful. The follow-up I had just on payer mix, it improved in the quarter, certainly encouraging and somewhat confusing, I guess, given the backdrop. Any thought on why that was the case? Or more importantly, sort of, how you see mix playing out into the back half of 2020 and into 2021? And then is it your expectation that the pandemic, including economic consequences, is going to impact birth rates one way or the other going forward? Or how do you think about those considerations looking ahead? Thanks.

Charles Lynch, Host

Hey, Ralph. It's Charlie. On your second question, I think we don't have any specific answer to that. I mean that's just purely an unknown related to any kind of behavioral response to what the country has been going through. So that's going to be something that we'll just watch as everything unfolds. Related to the payer mix, what I would say is our payer mix dynamics today, when you don't have the anesthesiology organization in the mix, are predominantly focused around pediatrics and obstetrics. And just to remind you, which I think you know, Ralph, it's kind of a binary payer mix between non-government and Medicaid. So what we've generally seen over the past number of years is a fairly good degree of stability in that mix with modest variations quarter-to-quarter like we saw this quarter. So when we see a quarter with pediatrics mix going up or down 50 basis points or something like that, we haven't seen that reflected in any trends. We'll obviously keep an eye on it because that's going to be something that needs to be closely watched as we go forward. But that said, our observation for the quarter was that that mix was relatively stable and didn't reflect anything outside of the trend lines we've seen the last few years.

Ralph Giacobbe, Analyst

Okay. Thank you.

Operator, Operator

And our next question comes from Kevin Fischbeck with Bank of America. Please go ahead.

Kevin Fischbeck, Analyst

Great. Thanks. Maybe I want to build on that last question. You guys have outlined an accelerating top-line growth profile over the next couple of years with improving margins. I mean what is your assumption about birth rates and payer mix in that? I guess there are a lot of forecasting that the birth rates may be down, and obviously, unemployment implies payer mix will be down. Are these targets that you can get to in that kind of scenario? Or are you assuming a more steady state when you think about that earnings power in the next few years?

Stephen Farber, CFO

Sure. Good morning. It's Stephen. We've thought about all those factors and we've played it out a bit. As Mack was just saying and Charlie, we haven't really seen it yet, right? I mean our payer mix improved a little bit during the quarter. We really didn't see anything dramatically different in terms of birth rates. In fact, in some of our practices over the past several weeks that take care of pregnant women, they're actually busier than normal. So I don't think anyone can really call it yet, but I do think there are folks out there who are writing articles that are extrapolating off of really small sample sets where I'm not sure we're comfortable that there is any statistical validity to it and it's really more of anecdotal. In terms of our modeling, look, I think that the two main drivers of our thoughts about the prospective future performance for pediatrics and obstetrics are reshaping our cost structure, which is near, if not completely within our control. It doesn't rely on any exogenous factors, and we see significant opportunities to continue to reshape our cost structure and change the fundamental margin of the business. The second one and the second most important factor is the ability to drive growth, whether it's organic growth through landing new contracts or providing adjacent services across the hospital beds that we serve or through some M&A-related opportunities. We do expect some level of birth rate volatility, but we think at best it will be on some sort of a regional basis. We think that there are some places that could be busier as well as some that could be slower. So it's probably too early to make a hard call precisely what that's going to look like, but it's not keeping us up at night. So I'm not sure do you guys have anything incremental to add? No?

Mark Ordan, CEO

As the new guy, the only thing I'd add is that this organization obviously went through a lot over the last several quarters and has transformed itself into a very different kind of company than it was. With that focus that Stephen was talking about just now, it's a very different scenario. We don't assume either a decline or an increase in birth rate as part of our modeling; we assume that things will be fairly steady. We do think that this is going to be a dramatically more focused and streamlined company than it has been in the past. We do believe that this will really bear fruit and that that's going to attract many more practices to adjacent services to want to be part of our organization. We're going to redouble our efforts to reach out to the organization to provide the kind of support that they need. We will improve our relationships and really work on our relationships with our payers so that we're working hand-in-hand with them. So I think a lot of this is a little bit hard to quantify, but I think surely an organization that has a very strong resilient core business that is focused 24/7 on just that tends to outperform.

Kevin Fischbeck, Analyst

All right. And then, Mark, maybe just to follow up on that point because I guess oftentimes you see a new CEO come in and then there's kind of a new strategic review of the business. And I guess the fact that you're kind of reiterating all of these dynamics means that you've done that work and come to the same conclusions as the prior management team. So just to make sure I have that correct, but then, b, would just love to hear your perspective from someone who's coming in with fresh eyes and being able to kind of look under the hood a little bit more than we get from the outside. Just what gives you the confidence in that growth opportunity and the cost-cutting?

Mark Ordan, CEO

Well, in no particular order, I would say that first, the Board was very careful in dealing with the issues that it had to navigate around. We then added a group of new Board members who are highly qualified and really terrific. In total, we have a group of 10 people plus me, and I think we're very attracted to continuing to move this company forward because they see the incredibly strong position we have in its viral niche in medical services. I think we were all attracted to the fact that the company was already moving in a direction to focus on its core operations. Again, I'll remind you that the radiology practice here is very strong and as Stephen detailed bounced back incredibly from the depth of COVID. So it's really a core and strategic initiative to say it could be better off in other hands, and we could use that money to enhance our core business. But it's certainly not selling from a position of weakness. When I go back to the core business and say yes, I think everybody is determined to go in that direction. We as the Board are obviously new; any changes that we make will be because of me working with my Board and our senior management team. But I would anticipate anything different than what was described in this call and what Dr. Medel and everybody had intended moving forward. Compared to things I've done in the past, I would say that the dedication level to succeeding in this core business here is higher than I could have imagined. The spirit in the organization is greater. I think people have gone through a turbulent time and are so eager to put that turbulence behind and to move and to really focus. I've spent a lot of time with Roger and understanding the importance of the support that we do and can provide, as well as the importance of research and other intangibles to make sure that we're doing what we say we're going to do and that we're always a leader and out in front. I've seen organizations before that kind of lack a central purpose and the central drive, and that's not the case here. So it gives me a great deal of confidence. I know from the people who were on the Board before and the people who have joined the Board; they have that enthusiasm that this is a great opportunity to follow on a lot of hard work that the team did before I arrived.

Kevin Fischbeck, Analyst

Okay. To address the last point, I understand the volume numbers worsened in April and improved as you finished the month and the quarter. However, it's somewhat unusual because we typically expect NICU volumes to be influenced six to nine months prior to the patient's arrival. This makes it seem unlikely that demand would have been affected by COVID. It appears you're suggesting this is merely normal fluctuation. I'm curious if there are other factors, such as an increase in home births, that might explain why the birth rate appeared lower than expected. Normally, you would anticipate that demand would remain strong, especially considering other sectors have shown resilience, yet it seems there has been some impact here.

Mack Hinson, President of Pediatrics and Obstetrics Medical Group

Yes, this is Mack again. Based on the evidence we have so far, you’re right about the timeline; babies born in April, May, and June were conceived earlier. Therefore, what we're observing is not a direct consequence of COVID. Over the years, we've tended to see some fluctuations in admissions. Generally, our busiest time of the year is from July onward. Our anecdotal evidence from some of our larger units suggests they have been busier in the past four weeks. In one of our key markets, one of the main OB groups informed us that they recorded a significant number of new pregnancy intakes last month. So, it's still unclear what this means for a long-term trend. Currently, I believe the evidence is just cyclical, and I think we shouldn't read too much into it at this stage.

Mark Ordan, CEO

I want to emphasize that none of us want to see a downturn in the birth rate. However, if one occurs, it presents an opportunity for businesses that are well-positioned to thrive during challenging times. It would be a chance for mergers and acquisitions, as it is typically a more advantageous time to grow through acquisition during periods of temporary or cyclical weakness. If we observe trends that suggest this might happen, we will be ready to capitalize on those opportunities. That said, we see no indication that this would signify a permanent change; we remain confident in our strength. As Stephen highlighted, our financial situation is strengthening and will further improve with the sale of radiology, allowing us to navigate any challenges effectively. Any short-term weakness could turn into an opportunity for us.

Stephen Farber, CFO

Kevin, I'm just going to add. I just got one last comment not to pile on as everyone around the table is providing part of the response. But just to build on what Mark was just saying, we end up getting a significant amount of essentially development pipeline referrals through our existing physicians and clinicians. They have someone they work with or someone at the hospital, someone else at the hospital down the street, who has had a hard time. There are a lot of physicians and clinicians in small groups who have had a really hard time financially during this COVID period. A number of them were sort of taken to the range of viability, and we have received a significant amount of reverse inquiry and direct referral from these folks who are more interested now than they have ever been in being part of a financially strong national medical group. I think the ultimate proof will be borne out over time, but we are really pleased with what we're seeing and believe that we're going to achieve some momentum with exactly what Mark was just talking about over the next several quarters.

Kevin Fischbeck, Analyst

Okay. Great. Thank you.

Operator, Operator

And our next question comes from Ryan Daniels with William Blair. Please go ahead.

Nick Spiekhout, Analyst

Hey, guys. It's Nick Spiekhout in for Ryan. Welcome, Mark. This one's kind of for you. I guess it seems like you're kind of continuing on towards the strategy that was basically in place before you came on. I guess I was just wondering how you are going to define or how you define your responsibilities going forward? And I guess what would be success on your end?

Mark Ordan, CEO

As the CEO, my primary responsibility is to work closely with the team and understand how we can collaborate effectively to achieve significant results. First and foremost, we must excel in providing care; our core strength must remain intact. I often think about the small but crucial elements that contribute to a successful company. Additionally, we need to be financially robust to seize opportunities, invest wisely, make necessary adjustments, and grow responsibly. Our share price will reflect our efforts over time if we carry out our commitment to quality care. I have navigated similar challenges before, always focusing on simplifying complex issues and ensuring everyone is aligned with our goals. It’s important to maintain transparency with all stakeholders and address any problems immediately. A simpler organizational structure makes this much easier and gives me confidence in moving forward. Though it's only been a few weeks, I believe our team shares a strong sense of confidence in our direction and is eager to contribute.

Nick Spiekhout, Analyst

Great. That's good to hear. And then I guess this one is for Stephen. I see that salary and benefits expenses kind of ticked down as a percentage of revenue this quarter, assuming kind of going on your cost reduction benefit. Just wondering how variable that is going to be to improvements kind of a normalization in volume. Should we expect that could tick up a bit as volumes continue to normalize going forward?

Charles Lynch, Host

Hey, Nick. This is Charlie. Yes, I think we referenced both in the release and as David mentioned before. One of the components of cost response to the revenue impact we saw in the quarter was built within a number of our different practice structures. So, for example, if you have a radiology group whose physicians are compensated based off of the revenue of the practice, there's going to be mechanical adjustments to the clinical compensation within that practice as revenues go down, and there would be an adjustment. Conversely, as revenues improve and grow. So, I wouldn't call that a lockstep, but that was a very useful mechanism as we went through the trough of demand earlier this quarter and we see some normalization in practice-level compensation should we see a continued recovery in volumes and revenue. So I would not call that variable and under our control, but it certainly flexes accordingly as we saw the impact we saw during this quarter. More things that are under our control are some of the other operating and support structure within the medical group and more importantly within our G&A, which is obviously more of a business expense and something over which we have greater control. On top of that, we are in the midst of reshaping that G&A infrastructure following the divestiture of American Anesthesiology. That I think will give us additional capabilities to flex our G&A as we go forward.

Nick Spiekhout, Analyst

Got it. Thanks. That's helpful. Appreciate that second question.

Operator, Operator

And our next question comes from Pito Chickering with Deutsche Bank. Please go ahead.

Pito Chickering, Analyst

Good morning, guys. Thanks for taking my questions, and welcome to the team, Mark. Going back to the targeted margin improvement for pediatrics as it moves to the mid-teens into the high teens, how much of that margin comes from operating leverage from revenues versus cost-cutting measures? And on the cost-cutting, can you walk us through the lowest hanging fruit? And how fast do you think that can occur?

Stephen Farber, CFO

Sure. Good morning, Pito. It's Stephen. I can provide a directional answer. As we've discussed for the past few months, we are making significant progress in reshaping our general and administrative costs. In early June, we mentioned that we had achieved a $10 million reduction. We are continuing with further meaningful reshaping, but much of it will take a couple of quarters to implement fully due to the technology-driven variability of costs that will lead to greater efficiency and reduced overall expenses. The G&A aspect is crucial, but we also have substantial operating leverage from our scale. While we haven't quantified this yet, we believe we can achieve significant topline growth, particularly by adding practices rather than relying solely on mergers and acquisitions. We see a good opportunity to secure new contracts, which involve relatively low costs. While there are some startup expenses, they are much lower than acquiring someone's established business. We also believe that the impact of COVID on the healthcare ecosystem will create more business opportunities for us, as our services are highly specialized and we operate in more locations than anyone else. Leveraging our strengths will provide us with various growth opportunities. It's challenging to specify the exact contribution of each element driving us from mid-teens to high teens, but we have multiple pathways to achieve this. My primary focus is on these various routes, which gives me confidence. We may not have a definitive plan for how everything will unfold, but we are very confident in reaching our goals.

Mark Ordan, CEO

The only thing I'd add to that, Pito, just real quickly is when we talk about the growth opportunities and talk about what we want to do, this is not all prospective. We have a lot of activity that's in play. We laid out a lot of details in June when we had a broader discussion of the Pediatrics Medical group and the growth activities that we've been investing in and undertaking. There is a pretty meaningful amount of new development activity that is in-flight today and gives us a fair degree of confidence in the position that we've got. So, I just wanted to be clear on that.

Pito Chickering, Analyst

Okay. So can I pry down on a 50/50? Is that is a ballpark? And then a follow-up question on accounts receivable it sounds like you had some collections since the quarter. Obviously, there are issues with NAPA. But can you just confirm that you aren't having any issues in collections with commercial payers on your core business?

Stephen Farber, CFO

Yes, sure. Look, on your 50/50 comment I'm going to stand by the comments that I just made, Pito. There is no one on this call who would like more to be able to give you a precision answer, but I think one is just not possible, but we're comfortable because we've got a lot of ways to get there. It's going to clearly be able to do both those elements.

Mark Ordan, CEO

As the new member, I will briefly use that as an excuse. I joined the Board three weeks ago, and I think we'll follow up on that. We are still learning, and while we may not have specific numbers to share right now, you can sense our determination and confidence. Many initiatives are in progress, but at this moment, we are not ready to provide an answer. However, we will be completely transparent when we are able to do so.

Stephen Farber, CFO

Thanks, Mark. On your AR comment or on your AR question, Pito, it's actually been kind of nice to see over the past few months that in some cases we've had collection acceleration as opposed to delay and we really have not seen much of anything in terms of categories that are causing concern. We've had some minor negatives in certain areas, certain geographies by certain payers, but we've also had meaningful positives from others and they've all kind of watched out. And we've surprisingly pulled the day out of DSOs over the course of this quarter, which if you had asked me that question in April, I would have said yes, well I would be nervous about that, we're likely to see some pressure. In fact, it's gone the other way.

Q - Pito Chickering, Analyst

Thank you very much.

Operator, Operator

And our next question comes from Brian Tanquilut with Jefferies. Please go ahead.

Brian Tanquilut, Analyst

Hi, good morning. Mark, welcome to the company. I've seen your work with other companies over the past few years. As you mentioned earlier, you're not keen on relying heavily on external consultants. Can you identify more specific actions beyond divesting the radiology practice? We've discussed various topics today, but should we concentrate on physician contracts and perhaps enhance business development as strategies to achieve the growth goals you've outlined?

Mark Ordan, CEO

I won't comment further. I hope you'll understand that there are myriad of things in the organization that we're looking at. A lot of this for me to give an intelligent answer to you and to myself and to our Board required to be really knowing the people in the organization better than I did. That has been my priority, and that's what I've been working hard on. So before I can talk about specifics, I want to learn more and also get together with my Board. So I apologize had I come a few weeks earlier then I can give you a better answer. But I think I'm getting my arms around all the facets of our operations, and I'd rather not comment further until...

Brian Tanquilut, Analyst

Yes. Understandable. I guess my follow-up to that. So given what you just said and also the comments from Mack earlier about how there's probably cyclicality in NICU or birth trends and as we look at NICU trends for you guys over the last few quarters, I mean we haven't really hit that 3% goal for same-store that you reiterated today embedded in the guidance. So what's the mindset? You're coming in with a clean slate. So why not take the guidance out and revisit or re-analyze before coming out today and maintaining that long-term guidance range that a lot of people are questioning anyway?

Mark Ordan, CEO

We have no reason to change our approach since there is nothing indicating we should. However, this doesn’t prevent us from updating our comments in the near future. Considering the direction the company has taken, we are not a start-up. Based on our history, there is no evidence that necessitates altering our current figures. Therefore, it makes sense to maintain them. As we proceed and reshape the organization, we will evaluate the best M&A and add-on opportunities, which will lead us to a more significant number. And if it changes, we'll update it. I think we also didn't want to make it seem like if we all sudden pull back the number that there was a reason behind it. We didn't want to send an unintended signal when there's no signal to send.

Brian Tanquilut, Analyst

I appreciate. Thank you and good luck.

Mark Ordan, CEO

Thank you.

Operator, Operator

And our next question comes from Rishi Parekh with Barclays. Please go ahead.

Rishi Parekh, Analyst

Thanks for taking my questions. First, I apologize if you already mentioned this but I was hoping that you could just provide me your radiology volumes in Q2? And also since you provided your NICU volumes for July, what your radiology volumes were in July? And can you update us on your negotiations with UNH? And I have a follow-up after that.

Charles Lynch, Host

Yes, Rishi. It's Charlie. I think you're asking just about the radiology volumes for the quarter. They were heavily impacted in April, down by about half. They recovered fairly strongly through May and June, getting much closer to normalized pre-COVID volumes of 85% to 90% by the end of the month, and they have persisted in that range at least on a preliminary basis as we've come through July. Related to United, as we mentioned a couple of months ago, we were very pleased with how constructive the conversations had been going such that we had extended any effective termination dates. We have more time to talk. As we stand today, we've progressed further with United. Related to the practices question within Pediatrics Medical Group, we have agreed to extend those contracts well into 2021 with no change to terms. So we're very pleased with that. It gives us plenty of time to work constructively with United, and it's something that we're happy with the way things have progressed.

Rishi Parekh, Analyst

And then as a follow-up, I know you started the radiology sales process pre-COVID. But since you officially announced it in June, has there been any significant momentum in the process? Or is this on hold due to the current environment?

Mark Ordan, CEO

It's Mark. I think it's not on hold. It's an ongoing process. Given the strength of the business, I believe there will be a lot of interest, and we'll update you as we progress, but we don't have any additional updates to share today.

Rishi Parekh, Analyst

Thank you.

Operator, Operator

And our next question comes from Whit Mayo with UBS. Please go ahead.

Whit Mayo, Analyst

Hey, thanks. Stephen, the $10 million of take-out expenses, I think as you referred to it a couple of times. Is that an annualized number and that's on top of the G&A savings and the prior year restructuring and cost-saving programs? Is this something that's new and incremental? And I guess I'm just trying to understand a little bit better where those costs really came from?

Stephen Farber, CFO

Yes, sure. That was all additional. Essentially, we exited anesthesia, and in the weeks that followed, we identified and executed an additional $10 million in savings, primarily related to full-time equivalents. Most of it was linked to general and administrative costs. At that time, we mentioned that we recognized potential for a significant amount of similar incremental work, and that’s the context of our comments today as we continue to work toward that. We are confident in our ability to reshape our cost structure for the future business.

Whit Mayo, Analyst

Okay. So just to be clear that wasn't like eliminating stranded costs associated with the sale of anesthesia that was actually working down the remaining costs. Is that fair?

Stephen Farber, CFO

Actually not. I think we did get some clarity here. However, the reality is we had certain costs that were present historically but were not necessary moving forward after we exited anesthesiology. It's a bit difficult to determine how much of those costs were stranded versus other categories, but there are definitely costs that we no longer need following that exit.

Whit Mayo, Analyst

Okay. So a portion of that was clearly eliminating some stranded costs and some might be tied to the core business, just hard to tease that out. Okay. That's helpful. And my follow-up, I just want to make sure that I get this number right. The revenue in the quarter from American Anesthesia, I'm not sure if you have that. If I take the restated prior year revenue and back that out from what you reported, it looks like last year anesthesia had about $307 million of revenue. I just want to confirm that's the right number and that nothing else is influencing that?

Stephen Farber, CFO

There shouldn't be anything else influencing that. In our reported results today, and we did restate last year, you can see a full apples-to-apples without any influence from anesthesiology, which is all in discontinued operations if that helps.

Whit Mayo, Analyst

Okay. I expected there would be some revenue, at least from April and part of May related to American.

Stephen Farber, CFO

No, that was entirely stripped out and moved down to discontinued operations. So there is zero contribution from anesthesiology in our reported results.

Whit Mayo, Analyst

Okay. That’s helpful. Thanks.

Stephen Farber, CFO

Sure, excellent.

Operator, Operator

And there are no further questions on the phone line at this time.

Mark Ordan, CEO

Great. Thank you all. Have a great day. We look forward to speaking again.

Operator, Operator

And that does conclude our conference for today. Thank you for your participation and for using AT&T event conferencing. You may now disconnect.