Pediatrix Medical Group Inc (MD) 2002 Q1 法說會逐字稿

Ladies and gentleman, thank you for standing by. Welcome to the Pediatrics Medical Group-2002 first quarter investor conference call. At this time, all partners are in listen only mode should you require assistance during the conference press 0 followed by star and operator will assist you. As a reminder today's conference call is being recorded if I open up the call to Dr

, I want to read a forward-looking advisory statement. Expect for historical information that is discussed during this conference call include forward looking statements, that involves risks and uncertainties including but not limited to business and financial risk. The pediatrics detail this and other risk factors in its annual report Form 10-K for the year ended December 31, 2001 filed with the US Securities and Exchange Commission. This risks and uncertainties could cause actual results to differ materially from the projected or anticipated forward-looking statements. The forward-looking statements made during this calls were based on management's current release and expectations and the company undertakes no obligations to update or revise any such statements. Whether as result these developments no information's or otherwise. At this point, I would like to remind you that the following remarks by Dr.Roger Medel, Pediatric management, we will have question and answer session. Instructions to participate in that session would be given at that time. I would now turn the conference call over to the host Dr.Roger Medel. Please go ahead sir.

Thank you for joining our investors relations conference call this morning. The release today's financial results continues to stream a very positive news and announcements from pediatrix in the past several weeks. That is including investors confidence and our ability to manage our prime business and to attract additional physician groups to practice as part our national groups. By all accounts we had a great quarter. In a few minutes, Karl Wagner, our chief financial officer, will have some following remarks which will include some of the details of this quarter as well as the review of our earnings guidance. Following those commits, Kris

, our president, Karl and I will be happy to discuss these and other matters during the question and answer period.

Last quarter I used this call as an opportunity to discuss the value of our market presence. We are in a rare position among health care providers and that we have meaningful presence in many markets across the country. We continued to build on that presence and I will discuss some recent events in a few minutes. Today I want to focus on continued improvements to our core operations. Some of these improvements can be directly attributed to our market presence. All of them are the results of our focuse on new born and maternal field medicine. These improvements, the better co-ordination of contracting billing and collecting, the automation of many processes has been made over the past several years and they have been reflected in our financial results for the past several quarters. Yet the uncertainities caused by billing investigations announced in 1999 as over shadowed the fundamental strength of our organization. As you probably know, 2 weeks ago we announced the settlement of the Medicaid billing investigations that was being conducted by the State of Colarado for the past 3 years. We agree to reimburse the state $1.3m dollars for overpayment, interest, and their costs associated with the investigation. The after-tax impact of this settlement is $0.03 per share and it is reflected in the numbers that we reported today. Excluding these settlement costs, our earnings per share would have been $0.54 or at the highest end of our most recent guidance which we have provided in our last conference call. More important than the financial impact of this settlement is that we have eliminated a great deal of investor uncertainty. With that uncertainity now gone, let me get back to the theme of my comment.

Today's numbers demonstrate that we are growing our business and that we are doing so in a way that delivers all the commitments that we have made to our investors. Our revenue growth of 68% is significant . We are even more pleased that revenue growth is coupled with expanding gross and EBITDA profit margins. We are delivering on the promise of better operating efficiencies showing positive income state in the leverage with expanding margins. We are also on track with our acquisitions. Year to date we have acquired 4 neonatal physician group practices. Three of them this month alone. Earlier this year, we announced aqcuisitions in Memphis, Tennessee, Columbia Staff Carolina, and Charlotte, North Carolina. This morning many of you probably saw that we have completed the acquisition of a group in Lexington, Kentucky and we have also added an additional neonatal practice to internal group. So I am very proiud to present to you a company that has over come considerable challenges during the past 3 years.

One that is led by a management team that has responded to those challenges whiel at the same time re-organizing our fundamental operations in a way that is generating markedly improved financial results and preserving pediatrix is unique environment that continues to attract other physician group across the nation.

Over the past 3-1/2 years, my focus and commitment has been to resolve the Medicaid billing investigations and to improve our day-to-day operations. With so many of these issues now resolved I want to spend a few minutes talking about what comes next in the evolution of pediatrix. While we have done an excellent job as an organization in overcoming these considerable hurdles, we need to spend more time in resources in looking beyond our current operations, beyond our core business. I am announcing this morning the next logical step in a leadership succession program that began here 2 years ago. it is my intention to turn over the chief executive duties to Kris effective January 1, 2003. I will remain a very active chairman of the board and I will remain the decision leader for our company. I will still have my office, I will still have my secretary and I will still come to work. There are a number of strategic opportunities that are available to us and it is my intent to put together a team to properly analyze, explore and develop some of those opportunities. This transition will be orderly because it was begun more than 2 years and because of the depth of talents within the senior and middle management. Kris has been President of the Pediatrix since May, 2000 and has been a member of Pediatrix as a senior management group since he joined in November 1995 just after our initial public offer. Kris has demonstrated that he is a result-oriented leader. First building our acquisitions program and for the past 2 years over seeing our operations. As important he has demonstrated his ability to lead a very talented team of business executives comprised of both physicians and nonclinicians. I have total confidence in our management team. It has been in place now for several years and I have absolute confidence and variability to continue to manage and grow our business. I remain very excited and optimistic about our future and my new role as an executive chairman. With that I want to turn the call over to Karl Wagner for a discussion of about financial results for these most recent period.

Thanks, Roger. Good morning. I am pleased to report another strong quarter reflects the fundamental improvements in Pediatrix that were taking place over the last couple of years. We reported record quarterly revenue and significant growth in both net income and EPS for the third quarter of this year. We continue to generate

acquired practices including nurse practices

acquisition. Recently we realized exceptional same year growth rates which resulted in significant year over year improvements in the margins. All results include the impact of the $1.3m expenses paid in severance of Colorado Medicaid investigations. Excluding these expenses EPS was $0.54 for the high end for our most recent guidance for the first quarter.

the next few minutes reviewing more details of all results and I will review our previously stated guidance. The remaining 3 quarters of 2002 include targets beyond the current year. First I want to remind everyone we are offering results which were possibly impacted by the recent change in economy. It will eliminate goodwill amortization. For comparative purposes, all records of the 2001 results will exclude amortization expenses and

with the change in economy. In 2002 fourth quarter net patient service revenue was a $103.7m, an increase of 68 percent from a year ago. Revenue growth

further acquisitions completed on the

in a record 3 percent same unit growth. The second growth is due to a strong 4.7 percent patient volume growth and continued pricing improvement. The pricing improvement is primarily from better contracting, improved collections on noncontest

and impact of the increase that was affected in the second half of the last year. Profit as an expense was $41.3m or 81 percent from the prior year. Our margin was 38.5 percent up from 35.6 percent in first quarter of 2001. EBITDA for the quarter was $23.7m up 124 percent from $10.6m a year ago. EBITDA margin was 22.1 percent in the most recent period up 550 basis points from the 2001 first quarter numbers. Excluding impact of the Colorado settlement, EBITDA was $25m for the margin of 23.3 percent. For the 2002 first quarter operating income was $22.2m up approximately 120 percent from $9.7m for the 2001 first quarter excluding amortization expense. Operating margin was 20.7 percent for the first quarter of 2002 up 550 basis points from the first quarter of 2000, going to adjust to exclude amortization expense. Interest expense declined significantly as 2001 cash flows have been used to eliminate volumes and they were earning credits. Pre-tax earnings were up in the first quarter to $22.1b with a margin of 20.6 percent. Net income of $30.5m for the 2002 first quarter increased by

$7.8m from the adjusted 2001 results excluding the net impact of amortization expense. EPS increased to $0.51 based on the weighted average 26.6m shares outstanding versus adjusted EPS of $0.24 based on 15.7m shares outstanding for 2001 first quarter. Excluding the impact of the severance of Colorado Medicaid, EPS would have been $0.54 for the first quarter for high end of our previously

. Obviously we are very pleased with the favorable trends that are showing in our income statement.

follow Pediatrix for sometime though our first quarter is significantly impacted by 2 seasonal factors when compared to the fourth quarter of the prior year. On the revenue side, accounting works against us, mostly they will import e-mail physician services consists of bundle datas, so our expenses plus with the physician salary

monthly for the real snatch. With two

accounting days in the first quarter, we will see a reduction in revenue on a sequential basis so that

reduction and expenses. The second seasonal factor is the important

done. Both of the oppositions need this threshold during first and second quarters. The impact of these two are in the first quarter with approximately $0.08 per share after tax.

Moving to the balance sheet, we continue to add our cash

quarter and in the third with approximately $36.6m in cash as compared to $27.6m at the end of the year. Since the end of the quarter, we had used a portion of that cash to complete 3 physician group acquisitions. The cash receivable of $67.2m increased slightly during the quarter with a 4 percent minus revenue growth. In fact, day sales outstand remain below 60 days, so hold on the gain we made over the last year from the result of improved collection activity. On the liability side of our balance sheet, we continued to be totally debt free. Total debt was approximately $3m consist of some convertible securities that we assumed as part of

transaction as well as some capital lease application. We currently have no obtaining balance on our line of credit, which is a $100m revolving facility. Our capital operations declined in the first quarter as compared to the fourth quarter primarily due to the exceptional growth of the company in 2001. Our capital from operations of $4.6m was impacted by significant payments, our position in corporate and senate compensation,

contribution and a 3 note impact for the increased payable taxes we paid in the first quarter, also

these 3 items reduced cash flow for the first quarter by more then $21m. Went by the statistics of once a year, so we are extremely confident that the capital for the year will be very strong.

acquisition payments during the first quarter was $1.8m and our quarterly capital expenditure was

$1.7m. At this point, I want to bring your attention to review our earnings. All of my statements should be considered forward looking. During our last conference call we gave very specific earning guidance for the forth quarter of 2002. The first quarter results were impacted by the resolution of Colorado Medicaid Investigations, excluding those costs we earned the guidance that we had given in our earlier call. Given the recent

on acquisition front as well as our current plan in place, we got confident in our ability to meet our previous guidance. I will remind you of our guidance for 2002 EPS by quarters as follows, we announced EPS $0.51 for first quarter. Second quarter earnings were between $0.58 to $0.60 per share. Third quarter earnings are between $0.64 to $0.66 per share and fourth quarter earning are between $0.65 to $0.67 per share.

The specific component behind guidance are as follows, we gained additional contribution from the

acquisition during the second quarter. That transaction closed on May 15th of last year. We expected continued same volume increases of 3-5 percent and continued fighting increases of 3-5 percent throughout the rest of the year, and acquisition spending of $50-60m. With this

we expected quick work throughout the course of this year at multiples consistent with our stock collecting of 3 to 4 times expected first year EBITDA. One third of the rest of the year, -

. We expect that the cash flow for 2002 will be approximately $80m including the $4.6m for the first quarter and as I said earlier that is expected to be divided for the second half of the year. Long term remains confident in our sustainable EPS for 20-25 percent which includes the sale of volume growth, cash used from acquisition and continued operating efficiencies and margin improvement. In summary, we are not changing earnings guidance at this point. We are making considerable progress for achieving the numbers we described earlier this year. Take a lot of time to describe the numbers and at this point I would like to turn the call back to Roger.

Thanks Karl. Before we go on, let me clarify something you may have said that for the first quarter of 2002, net patients service revenue was $103.7 and I think you have got the numbers backwards. Net service revenue, just to clarify, for the first quarter was $107.3m. At this point, let us open up the call to questions from our analysts and shareholders. As I said earlier, in addition to Karl, Kris Bratberg is available to respond to your questions. So, Barb, will you please open up the call for questions?

Welcome, ladies and gentleman at this time if you have a question, please do press the 1 on your touch down phone. You will hear a tone indicating you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, please take up your handset before pressing the numbers. If you have any questions, please do press 1 at this time. First question in queue is from Mathew

from JP Morgan. Please go ahead.

Yes, this is Mat

from JP Morgan. Just a few questions here. First question is you have done overall consolidated margins. In 1998 you peaked out at an EBITDA margin over 31 percent. I guess, and you finished last year at 22.8 percent for the year 2001. I guess I am just wondering, is there anything fundamentally that has changed in the business that would basically prevent you from getting back to that type of margin level going forward?

This is Karl. As we said in the past, you know, the 30 percent margin was a high level in the past. We do expect that we can continue to grow our margins, expand beyond last year as we said for this quarter we had an EBITDA margin of 22.1 percent and we expect to be able to grow that further, we want to get to the excess of 40 percent. I don't know we can stay there over the next several years. So we are confident in saying we should be getting into the high 20s, we are heading towards that number.

Matt, this is Kris. One of the things that has changed somewhat as you know we don't force oppositions to cool in any way that they are uncomfortable in coding and the utilization of the Critical Care code today has been down relative to what was in 1998. We educate our physicians extensively on how to use the

and we have always believed and continue to believe that our coding is appropriate. But it is important, we believe, for the physicians to make the ultimate coding decisions at the bedside and that result, you know, they have the final say on the codes that are used and because utilization is down to 98, there is one thing that has changed that would make it more difficult for us to get all the backups to the margins of the 1998 level.

Okay. Even though your commercial pricing today is conservatively above what it was back in 1998?

Yeah and that works to, obviously with the margins and we were seeing that, but to answer your question, it is the rating that has changed from 1998 and the utilization in the critical Care code has changed from that time frame.

Okay. Second question is the followup to the commercial pricing. You benefited from over a 10 percent year over year commercial rate increases in aggregate this quarter and your guidance for the year is for that to trend down to 3-5 percent increases for 2002. I guess I was wondering, you know, why fundamentally you would project that to slow to the lower level for the whole year versus what you reported in the first quarter?

We had a very strong first quarter. I think we will see that going into the second quarter, starting in the second half of the year with low beginning

the acquisitions we made in the last year. There will be some impact from that. I think there is some potential, we will see the 5 percent of our guidance. But it is not comfortable at this point saying after some time we are going to do that. That is open to our earnings numbers as far as where we expect it for the year. So at this point we got the 3-5 percent knowing we start

numbers in the second half of the year where we got some very strong same unit pricing growth. There we have seen it continue. Like you said, it is not comfortable saying that it is going to be 5 percent for the whole year at this point but in the

of 5 percent we do expect the guidance.

Okay. And last question here. Karl, you mentioned that your cash flow is over impacted by $21m related to 3 items in the quarter. I just wanted to see if you could provide a break down between in terms of those 3 specific items, how much of the $21m each contributed to the quarter?

You know, we have a break up, you know, it is still predominantly all the 3 quarters that was really the position and it is in compensation. Now I put the new bonus points in place for calendar 2001, we were above the certain level of possibilities with the number of practices that have been with Pediatrix for a longer period of time. We are sharing a very significant amount of the profitability above that threshold and so, you know, a big piece of that of the bonus payments will function as that new profit sharing plan. And you know, we remain confident with that plan and we think that it will actually work to set up

practice and will generate more profits consolidated for Pediatrix, but it does increase the actual dollar amount of the bonus payments for the physicians.

Ok, thanks very much.

Thank you, next question is from Ken

from UBS Warburg. Please go ahead.

Thanks. Good morning everyone. I was wondering if there had been any changes like you have seen any notable changes to the benefit packages in

contracts so that is it positive or negative for services coverages and some talk about the hearing test now being covered by some of the HMOs and I was just wondering because of all the pressure, manage care seems to be under what sort of changes they are trying to push through onto benefit design/

I don't think we have seen anything changing, you know, currently. To a great extent

is an emerging care and so we benefit from that. You know, it has been a difficult environment for reimbursement for years and now we see that continue. We don't see any changes currently.

Okay and in terms of may be putting a range round the pricing and the cost range geographically, is there a big spread over or is that all fairly representatives of what you are reporting in your consolidated numbers?

We are aware of this disparity when we look at different markets and states and regions, is that was your question?

Yes, that is my question.

Yeah, it varies pretty considerably, you know, from market to market.

May be can you spend some time on that, going through a couple of markets where it is really strong and a couple of markets may be where it is not. What are you going to change that?

you know, a big part of what we always talked about is we seek to increase our presence in existing markets which allows us to have additional leverage with third party payers and we have proven that with the additional leverage we are able to increase reimbursement from third party payers and you know contract there with them. As compared to markets really don't have a significant presence we typically receive significantly less reimbursement just because we were not in a strong position to negotiate the third party payers for imbursement.

I would also like to add that we are still seeing pricing may be improvements but not at the same level of markets where

strong in Southern California. There is still some pricing pressure in those markets that has always been in that markets. So remarks like

working to see price increases but they are not as

.

We have a piece of that

, as you know a large percent of our patients are Medicaid patients. 20 percent of our net revenue comes from Medicaid programs in all the states were we have practiced. And there is a very wide range in the reimbursement level among the Medicaid program as well. So, that will also change the reimbursement levels from state to state.

And one more question for Roger. I was just wondering you kind of given us a broad sense what you looked to be doing, may be you want to spend a little more time on giving us something about what we should look for further developments for Pediatrix-

?

Sure. You know over the last 2 years we just really focused all our energies in getting past all these hurdles and you know you have followed this for long time and you know what I am talking about. ACC and KPMG and you know shareholder losses and Medicare Investigations, so it has been really a focus on getting through those hurdles as well as managing our operations. I really have been frustrated every time I started to look at some opportunities that I had to, you know, look at, cancel that and pay attention to the basic business, so the most obvious thing I have got to pay attention to are the University, the Academic Practices, you know, it is important for us to come up with the model that will assist us in cooperating some of those academic practices into our group, so you know, that is one area that I need to spend time and I think I will be pretty good at it because, you know, I do have some background in that area and I hope to be able to put a team of people together that will be able to identify opportunities there. You know, other areas we have a group of pediatric cardiologists we have had as a part of our group for, it is just 3 pediatric cardiologists but you know, they have been here for more than 10 years. This is the group that is extremely profitable for us and what I need to do is figure out whether you know some thing that we can duplicate across the country and you know that is an another area I want to pay attention to. The international market as I have said in the past for neonatology is very attractive to us. We are very very very good at neonatology and neonatology is the same across the world. We have as you know our Natal u which is our presence in the website, University without walls as we call it and fully half of neonatologists that are registered routinely, log on through our international neonatology service. So, you know for me although clearly the business side is different on the international markets, the clinical side is exactly the same. The name pediatrics is probably known internationally among most neonatologists because of not only our presence in natal view but also our continued presence in meetings, scientific meetings

in a week and I get calls and request from international neonatologists occasionally to come visit and try to work something out of them. Those are the areas, I look at other opportunities that there have been other people who have requested other things and we have got lot of things to look at but I am going to try and stay as close to our meeting as possible and I believe that we will continue to draw but I think you know five years from now we are going to have to have other eggs in the basket.

Okay, thank you.

Next question is from John

from CIBC. Please go ahead.

Actually I am

for John. My question is that I think there are 45 markets where you have a presence. Is there anyway to quantify what percentage of those markets where you will be a dominant supplier?

Not really. In presentations to investor groups, we show a map of US and where we have a presence and talk a lot about a number of different markets, the ones most typically mentioned are

San Jose, Orange County, California, Phoenix, and Arizona, Las Vegas, Nevada, Denver. Really all the large markets in Texas with the exception of Houston. There is a market where we do have very significant presence in, but in terms of specifically qualifying each market, we haven't done that for anyone.

Secondly on a Medicaid, has there been any significant change where you see any pressure or is that pretty stable?

there are a number of states are facing pressure in their budgets this year and upcoming years. Medicaid reimbursement is certainly an area where they can get impacted.

pay very close attention to that at the state level and have gotten involved in some of those efforts to impact and maintain our reimbursement.

typically we use that pediatrics are specialists typically reimburse significantly less than adult positions for providing the same care and there is no good reason for that. These views are also making the past actually help increase reimbursement in marketplace California, South Carolina over the last couple of years. We are not aware of any state currently where we see decrease in Medicaid, but let us watch very carefully and if necessarily we will try to get involved and to protect our reimbursement in those markets.

29 different programs around the country right know and receive reimbursement for 29 different Medicaid programs so the

from any one program is not a significant since we are predominantly a Medicaid provider, it will be one government payer across the country.

Ok, thanks for that.

Next question is from Bill

from US Bancorp Piper Jaffrey. Please go ahead.

Hey guys, I have couple of followup questions. On the acquisition front, I think you mentioned it or somebody mentioned that acquisitions were getting done essentially at the historical multiple and I am just curious if you might be a little bit more specific. I would imagine that with the

any competitor may be they are getting done at the lower end of the range if not below that?

Good morning Bill, this is Kris. You are right, there is no competitor out there. There is actually no reason for us to chase the

multiple and the guidance that we have been given is that we will pay in general from 2 to 4 times forward-looking EBITDA for these practices. The deals that we are doing today are within that range, with each individual acquisition, you know, having done that deal

chances would have been if they would have been

so we will probably would have paid a little been that they would have been talking with

as well and we probably would have paid a little bit more. It is impossible to quantify how much we are saving as a result of having merged with

but there is some possible impact there.

Okay. In terms of the acquisition pipeline, any teller remain?

Just like there continues to be very active, we are a little bit disappointed that we didn't get some deals done earlier in the year. April was obviously a beginning month for us for acquisitions. The pipeline is active and we are very comfortable in putting capital to work throughout the rest of the year at multiple

.

And just circling back on the pricing and the guidance one more, can you give us the timing on when the California Medicaid reimbursement increases annualized?

The California Medicaid increases that one in effect primarily for all of 2001, actually it was

so there is actually comparison within the numbers of this one.

Just we will look at the second quarter, if there was an instant impact from sort of calendar and

items this quarter. I assume some of that must lag into the second quarter just why else then your guidance be $0.08 higher at least sequentially?

Yeah, in the second quarter the guidance when we talked about in the issues that affected first quarter we really compared sequentially to the forth quarter and in the second quarter we still have one less calendar day than we have in the forth quarter and we do have some people still working on

the payroll package expense. There is some impact in the second quarter.

Great, thank you very much.

Thank you, next question is from Leo Murphy of

. Please go ahead.

Good morning, how are you?

Leo, fine. How are you?

I am very good. I am glad to see that at least I gave you a secretary.

I had a just a couple of followups if I could. The state issue on the Medicaid, we have seen relatively substantial growth among some of the manage care organization in getting in to that business over the last couple of years. There is accelerations in your growth rates have any meaning for you Roger, anymore difficult and I have a couple of other followups.

Historically, the answer for that has been no, we have a hard time cutting physician reimbursement today typically we deal more with hospital reimbursement. So you know historically answer to that has been no, we don't see any impact, one way or other from that.

Okay, the ligates, are there any ligates among the third party payers during

manage care organizations? Liagates in terms have not stepped up to the pricing issues yet, in other words, is the best behind us now and the pricing revisions I do see or is it

from the manage care?

We are constantly discussing and renegotiating contracts throughout the years. We don't renew every contract every year so there are plenty of offers we are still working on. So it is funny out there

we work on the

efforts, so may not see the level of growth you have seen over the last couple of years but there are still large contracts in market that we are working for price increases, then we can negotiate.

Last question is, 3 to 4 years out there, if you are looking back, this sustained a 20-25 percent growth rate, you guys talked about, would you have had diversified into other areas at that point or is the diversification whether to an international cardiology or whatever is that an issue as much to sustain 20-25 percent growth rate?

. No, I think we are talking about further than that. I think the Neonatology growth is how we were talking about when we were saying 3 to 4 years of 20-25 percent.

I appreciate you on a good quarter.

Thanks, Leo.

Thank you. Ladies and gentleman, again if you have a question please press 1 on your touchdown phone at this time. No further queue at this time.

Thank you operator, if there are no further questions then we will call it a day until next quarter. Thanks very much.

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