Pediatrix Medical Group Inc (MD) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Pediatrix Medical Group 2003 second quarter investor conference call.

At this time, all participants are in a listen-only mode.

As a reminder, today's conference call is being recorded.

Before I open up the call to Pediatrix management team, I want to read a forward-looking advisory statement.

Matters discussed during this conference call include forward-looking statements.

All statements other than statements of historical fact that address activities or events that Pediatrix intends, expects, projects, believes, or anticipates are forward-looking statements.

Forward-looking statements are based on assumptions and assessments made by Pediatrix management based on factors they believe to be appropriate.

Forward- looking statements are subject to risks and uncertainties that can cause actual results, developments, and business decision to differ materially from those complicated by the forward-looking statement.

Pediatrix describes risk factors in its annual report on form 10-K for the year ending December 31, 2002, filed with the U.S.

Securities and Exchange Commission.

Pediatrix has no obligation to update or revise any forward-looking statement made during this call.

Additionally, during today's call, Pediatrix management expects to make reference to the term EBITDA.

Pediatrix uses EBITDA as a measure of the company's operations.

EBITDA is not considered to be a measure of financial performance under generally accepted accounting principles, and EBITDA may be presented differently by different companies.

At this point, I'd like to remind you that following remarks by Dr. Roger Medel and Mr. Karl Wagner, Pediatrix management will host a brief question-and-answer session.

I would now like to turn the conference over to the host, Dr. Medel.

Please go ahead.

Good morning.

Thank you for joining this call to discuss Pediatrix's operating results for the month ended June 30 of '03.

I am traveling this morning while Karl is back in Florida.

Forgive us if we sound less than coordinated at times this morning.

Our management team is very pleased today to present another strong quarter of growth with excellent financial results and increased operational efficiency.

This is also the period where we have taken the first steps in diversification, building on a very attractive core competencies of our national physician group practice.

While we're very early into this process, we're encouraged by its direction.

I want to spend a few minutes with you on the highlights of the quarter and what those highlights mean in the context of our long-term strategy.

We reported some significant financial results this morning, including revenues of over $133 million, net income of just under $20 million, earnings per share of 82 cents, and cash flow from operations of $40 million-- all records for a single quarter.

The combination of strong earnings and robust cash flow speak to the quality of our results this quarter.

As important during the past several months, we continue to demonstrate our ability to expand our physician group practice.

We added a neonatal group in Knoxville, Tennessee, during the second quarter.

Since the start of the third quarter, we have added a neonatal physician group in Cleveland and a pediatric intensive care practice in Chicago.

All of these are new markets for Pediatrix's national group.

We are also excited by our current pipeline of potential acquisitions and are optimistic that in the near future, we will be adding more practices to our national group model.

Last quarter, as I said, we expanded the services we provide to newborns, buying the nation's largest independent laboratory focused on newborn metabolic screening.

The company is the recognized leader in tandem mass spectrometry to screen babies for the possible presence of up to 50 metabolic conditions.

We completed this acquisition halfway through the second quarter, and it has contributed as expected.

We remain excited that there are strong organic growth opportunities for this laboratory, and we also believe there are some additional opportunities to grow through complimentary acquisitions.

We have also begun the process of developing a single identity for our newborn screening efforts.

Last week, we announced the formation of Pediatrix Screening Inc., combining the metabolic screening business with our existing newborn hearing screen program.

These programs are marketed through the same channels, and we believe there are significant cross-selling opportunities here.

Overall, Pediatrix continues to demonstrate that we have the ability to grow our core business to expand our services while remaining faithful to our mission of providing the best possible patient care to maternal, fetal, newborn, and pediatric patients.

In addition, we are running our business efficiently.

Our CFO, Karl Wagner, will discuss that in a few minutes.

To follow this very tangible progress and the positive developments in the past few months, we're more convinced than ever that our model for acquiring, integrating, and managing physician groups within our very focused area of care is the right model to counter the pressures that physicians, regardless of specialty, face today.

In a world where physicians are facing increased financial regulatory and compliance challenges, Pediatrix has a model that delivers patient services more efficiently, provides physicians the opportunity to increase their compensation through our very successful physician bonus program.

In a world where a lingering and unresolved malpractice insurance crisis has forced physicians to reduce their level of service or move to other states or retire early, our physicians are shielded from the difficult market for purchasing medical malpractice insurance.

In an environment where most physicians are hard pressed to negotiate managed care contracts and try to collect on billed charges, our physicians are engaged in research and best demonstrate process initiatives that we believe will have the effect of reducing the total cost of care to those very payers.

Some of the results of these initiatives are just now reaching the peer reviewed medical journals.

Finally in an environment where physicians' decisions can be second-guessed retrospectively by payers, including government payers, our physicians are free to practice medicine with the knowledge that the business systems that support them today are designed to be in compliance with regulations.

It is this last point that provides particular solace at this time.

Many of you know we announced that a U.S. attorney's office is conducting a nationwide investigation of our Medicaid billing.

As this company has stated time and again, these investigations are part of the ordinary course of business in any health care company.

As important since the announcement of this investigation, we have not seen an impact on physician coding patterns.

We do not expect they will be impacted.

As I said at the start of my comment, this was another strong quarter for Pediatrix.

I have seen too many times that our operating results are overshadowed by external events.

I hope that I have redirected your attention to the strong business model in place at Pediatrix to a level of recognition that we are a growth company built on a solid foundation, a company that has developed assistance to meet the challenges of a competitive, regulatory environment.

Now let me turn the call over to Karl Wagner for a detailed discussion of the quarterly performance and updated earnings guidance.

We will be available for questions after his remarks.

Karl.

Thanks, Roger.

Good morning, everyone.

Thanks for participating on this call.

I want to spend a few minutes talking about the details behind the strong operating results we reported this morning and also provide an update to our 2003 earnings guidance which was increased this morning as a result of some very positive activities at Pediatrix.

Let me start with the income statement.

For the second quarter, net patient service revenue increased by 15% to $133.7 million.

That increase was principally the result of continued strong same-unit revenue growth of 11.1% for the quarter.

This growth consists of 7% NICU patient volume growth, continued growth in perinatal services and growth from other services, including hearing screens and newborn nursery patients.

Additionally, we realized same-unit revenue growth from many of the factors that contribute to pricing, including better payer contracting, some impact from a modest fee increase, as well as contribution from changes in neonatal coding by the American Medical Association that became effective earlier this year.

The remainder of the growth comes from contributions from acquisitions completed in the past year, including our acquisition during the second quarter of a metabolic screening lab based in Pittsburgh.

Profit after practice expenses was 53.3 million, up 13.3% from the prior year.

Our margin of 39.9% was down 61 basis points from the second quarter of 2002.

This margin decline is largely due to an increase in bonus expense as we share our growth and profitability with our physicians, higher medical malpractice premiums, as we continue to feel the impact of a hard insurance market and the continued escalation of group health insurance costs.

On a sequential basis, profit after practice expenses, margin increased by 224 basis points, largely as a result of our physicians meeting social security tax threshold in the first quarter.

EBITDA for the 2003 second quarter was 34.3 million, up 17% from 23.9 million a year ago.

The EBITDA margin increased to 25.7% for the 2003 second quarter, up 43 basis points from the same period last year.

The continued growth in our margin is directly related to our management of general and administrative expenses.

For the quarter, operating income grew to 32.4 million, up 16.3% from the 2002 second quarter, and our operating margin was 24.3%, up 26 basis points from the same period in '02.

Net income of 19.9 million for the 2003 second quarter grew by more than 17% from net income of 17 million in the 2002 second quarter.

Earnings per share grew by 32% to 82 cents in the most recent quarter from 62 cents a year ago as a result of higher net income and reduction in shares as a result of our share repurchase program.

Over the past year, we have used the strength of our cash flow to repurchase $150 million of common stock, of which the last 25 million was completed in July.

This allowed us to repurchase almost 4.7 million shares of common stock.

At this point, I'd like to move to a review of our balance sheet, which continues to be very strong.

At the end of the second quarter, we had a cash of 11.6 million, down 2.1 million from the end of the first quarter.

Accounts receivable up slightly to 84.3 million, which includes the assumption of A.R. (ph) from our Pittsburgh acquisition.

Day sales outstanding remains below 60 days and declined slightly in the second quarter.

On the liability side, we used our line of credit to finance our growth and repurchase shares during the quarter.

At June 30, we had an outstanding balance of $17 million on our $100 million credit facility.

When you add the balance to our long-term debt and capital lease obligations, total debt was approximately $20 million.

Cash flow from operations was a record $40 million for the 2003 second quarter.

This cash flow and the proceeds from our line of credit were used for several purposes.

We invested about 43.5 million for acquisitions, including a newborn metabolic screening lab and physician group in Knoxville, Tennessee.

During the second quarter, we spent approximately $25 million to repurchase our common stock.

In July, we completed our $50 million share repurchase program buying 1.4 million shares between April and July.

Capital expenditures for the quarter were approximately $1 million.

By now, I'm sure that you would like more information on the revised earnings guidance we issued this morning.

This morning, we announced an increase in EPS guidance for the third quarter and fourth quarters to a range of 95 to 97 cents per share from our previous guidance of 87 to 89 cents.

This increase in earnings is expected to come from continued growth and same-unit volume, improvement in revenue due to the changes in neonatal coding established by the American Medical Association, increased revenue from the flow-through of the modest price increase implemented in the beginning of 2003, acquisitions completed in the second quarter and those completed at this point in the third quarter -- this guidance does not include any impact from additional acquisitions that we may be able to complete in the last five months of the year -- and the impact of the share repurchase program that was completed in July.

Our guidance includes estimates for medical malpractice costs as well as the current status of Medicaid reimbursement based on a review of the appropriations bills for the 30 states where we practice.

This guidance does not include, and we do not anticipate, any change in physician coding patterns as a result of the Medicaid investigations announced in June.

The strong growth in revenue that we anticipate in the last part of the year will be offset by a growth in physician bonus expense.

For 2003, we anticipate that our physicians will earn a total of more than $50 million in bonuses.

Due to some basic patient volume seasonality, we expect the third quarter EPS will exceed the fourth quarter.

For the full year, we now expect that earnings per share will be between $3.39 and $3.43.

Our previous guidance was for earnings per share of $3.20 to $3.26.

Those are the substantial increase.

In addition, we now expect that capital from operations for the full year will exceed $110 million.

At this point, I'd like to turn the call back to Roger for additional comments.

Thanks, Karl.

As you can see, this was another very solid quarter.

At this point, let's open the call to questions from analysts and shareholders.

Operator, if you would proceed with opening up the call.

Thank you.

Ladies and gentlemen, if you have a question, please press star and then one on your touch-tone 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 pick up the handset before pressing the numbers.

Once again, if you have a question, please press star, then one at this time.

Please hold for the first question.

We have a question from Bill Bonello with Wachovia Securities.

Please go ahead.

Good morning.

I have a couple of follow-up questions.

Roger or Karl, can you give us a sense of how current your information coming in from the practices is?

In other words, have you already seen and analyzed data from July that shows you that there was no change in July in the coding behavior?

Yeah.

As you might imagine, Bill, this is Roger.

We keep pretty close tabs on that.

We review that information regularly.

So the answer is yes.

We have seen that information.

We can tell you that that is true as of the end of month.

Perfect.

Then I know that there were some changes in CPT codes that went into effect at the beginning of the year.

Can you tell us what you're seeing on that front?

Has that driven any kind of an increase in your average reimbursement per day, and if it has not, would you expect that it would going forward?

Yeah.

The CPT code changes by the AMA have impacted our reimbursement.

We have seen an improvement in reimbursement from those changes.

They are included in our guidance, and that has been helpful in the growth.

Okay.

So what's going to happen, sort of, has happened?

We started seeing it in the second quarter.

We're still evaluating what the complete flow-through impact that some of them are new codes.

We're looking at the actual reimbursement we're getting on those, but we have begun to see that impact, yes.

And one final question.

I want to make sure that I understood what you said about Medicaid reimbursement.

Your guidance does include, then, states that have indicated that there will be some kind of reduction in physician reimbursement going forward?

Yes.

There have been few states that -- you know, majority of states did not touch the Medicaid reimbursement, but there had been a few that have reduced their impact slightly -- I think Georgia, there was a slight change in Texas, and it looks like California, but not until the beginning of next year, I think.

We have considered those in putting our guidance together.

And are there any big ones out there that, you know, have changes that haven't been put into effect, but that are still potentially lingering?

I don't think there's anything out there that's of size that has not been dealt with at this point?

We have also seen increases, by the way, Bill.

There is particularly one state that has, in fact, increased the reimbursement for neonatologists.

So that's all included.

Great.

Thank you very much.

We have a question from Matt Ripperger with J.P. Morgan.

Please go ahead.

Hi.

Thanks very much.

Just a couple of questions.

First of all, how many docs were on the bonus program in the quarter?

I don't have that number of Docs.

I would say about 80% of our practices are on this bonus program at this point.

Okay.

You said that the estimated bonus payments would be 50 million this year?

We expect that they will earn 50 million; a chunk of that will be paid next year.

Okay.

So that the majority is still paid out in cash at the beginning of each year, but you accrue for it the whole year

That is correct.

What was that 50 million a year ago?

For 2002, we paid a little over $30 million.

Okay.

And the second question, just related to the same-store volume in the quarter.

You said it was up 7%, which is higher than the long-term range.

I just want to see if you can give color as to what you think contributes to that, whether any particular geographic areas that shows stronger strength, and are you changing your volume guidance going forward?

Well, I'll do the last piece of that first, I guess.

We are not anticipating to change that.

We've kind of seen over a long period of time, we have ups and downs in the growth rate, but typically it does fall into that range.

We are seeing growth across the board in several different markets.

So I can't say that it's one specific market that has seen a huge impact.

You know, we could -- I don't know that I want to say a specific markets, but we have seen it all over the place.

So your long-term guidance in terms of volume growth is still in the 3% range?

Three to five is what we've said.

We expect that long-term that's the right range.

We don't see that that should be changed at this point.

There will be fluctuations quarter to quarter.

Lastly, can you comment on the acquisition environment in terms of prices that you are paying, and are you seeing any change there?

As far as the acquisition environment, we have completed a few deals.

We're very encouraged with our pipeline.

It's very strong with the way that that looks.

So, you know, we do hope to be able to see deals get completed throughout the next five months of the year.

I think we're excited about where that pipeline has gone in the last six months or so.

It clearly has strengthened.

As far as pricing, I think we're still seeing average pricing still in that range of three to four times expected first year EBITDA.

We are seeing that in the deals that we are completing.

Okay.

Thanks very much.

If there are any additional questions, please press star then one at this time.

Okay.

There are no additional questions.

Is that correct, Gwen?

Actually we do have some that just queued up.

We have a question from Mark Albert (ph), Texas Teachers.

Please go ahead.

Good morning, gentlemen.

Congratulations on a great quarter.

Thanks, Mark.

Good morning.

Quick question.

In the past when there has been these investigations, there has been a pattern of the physicians downcoding.

Can you kind of describe why -- I think it's certain systems that you put in place - but why we should expect that pattern of behavior not to repeat itself?

Yeah, that's exactly correct.

We have, as you know, computerized our note system where the physicians write their daily notes, and from there the code is generated.

And so, because we have taken, you know, a lot of the subjectivity out of it by simply having the medical records get the code from what the physicians have inputted, I think the physicians are a lot more comfortable accepting what the medical records recommend.

So, you know, that's our information across the country, as we have spoken with the medical directors and regional medical officers is that there has been -

Yeah.

I'd like to add to that a couple of things.

One in the new CPT codes that we talked about that the AMA instituted earlier this year has added clarity to the codes that are out there.

So I think there's better guidance from outside that clearly it's helping that the coding is -- the physicians are comfortable with that.

And the education process that we put in place over the last several years, we educated all of our physicians on coding.

We re-educated them about the coding changes and going through that process.

So that clearly is helpful in giving us comfort in maintaining the level.

So it sounds like you have taken a number of steps both structurally and then also what external people have done is provided better guidance and clarity that, you know, it's very reasonable not to expect the kind of impact that we saw in the past?

That's correct.

That's what we are projecting that we're not going to see impact.

In fact, as I said earlier, our information throughout the end of the month, that would be the case.

Great.

Congratulations.

Thanks, Mark.

Thank you.

We have a question from Amir Shakaz (ph) with Cobalt (ph).

Hi.

Great quarter.

Thanks, Amir.

I have a few questions for you.

Number one, what were the shares outstanding at the end of the quarter?

You know, actually, I don't have that number sitting in front of me.

It's in the 22 million range -- actual outstanding.

Okay.

Second question, what was maintenance cap ex in the quarter?

We spent about a million dollars in capital expenditures.

The maintenance cap ex from an annual standpoint is only about $7.5 million, we say we spent.

I think we're on a run rate lower than that this year.

Okay.

All right.

And you increased your cash flow from operations guidance from 100 million to 110 million, is that correct?

That's correct.

It seems that EPS guidance went up about 15 cents or so, so that would explain roughly 4 million of it.

What's the other $6 million?

Expense drawn cash flow that we see coming in throughout this year, our accounts receivable cash flow has come in very strong.

So, you know, with the 40 million in the -- basically, I looked at it, 40 million in the second quarter, we believe we can sustain that level over the next couple of quarters, which would put us in excess of the 10.

Ok.

So working capital is going to be a source of cash is the short answer?

Yeah.

Working capital clearly will be a source as we increase our accruals for bonus expense and all of that.

And next year, we'll have the same phenomenon that we had this year with the first quarter being, probably, negative as we pay out all these bonuses and then ramp up in the next three quarters of the year.

Ok.

And last question, DSO, 60 days, I think, you mentioned?

Karl Wagner It's under 60, that's correct.

What's doable as a target?

We think we're in the range where we should be.

I think under 60 days for the services that we provide is a great DSO level to be at.

When you consider the issues with getting paid from some of the payers and the fact that we're dealing with newborns who have to get added to insurance policies that don't have Medicaid numbers that we have to get added to the Medicaid programs is a delay and being that we can get reimbursed in the first month.

So I think we're at a level that we're very happy with.

We'll see that fluctuate up and down, you know, within that range.

But our goal is to keep it under 60 days.

Ok.

Excellent.

Thank you.

Thank you.

We have a follow-up question from Bill Bonello from Wachovia Securities.

Please go ahead.

Guys, thanks.

Actually have a couple of follow-up questions.

Roger, wondering if you could give us any kind update on the FTC, if you are still at a place where you have just provided them some information and you're not hearing much, or whether you're actually maybe in discussions at this point?

You know, we have provided them all of the information that they requested, and I think I'm comfortable telling you that we believe the process is moving along.

So, you know, we're expecting to hear from them what the next step is going to be.

But the process is moving.

Okay.

And then can you just comment a little bit on what you might do in terms of using your free cash flow going forward?

I mean, obviously there are still acquisition opportunities, but would you consider additional share repurchase?

You know, at this point, the board really has not discussed any additional repurchasing of our shares.

We believe that we have got a pretty strong pipeline, that the opportunities for continued growth, you know, in the neonatology and perinatology and cardiology and pediatric intensive care are very real for us.

Of course, we would rather spend our money doing that than buying back our shares.

I think the bulk of the cash utilization for us is going to be growing our practice.

Do you think would be limited to acquisitions that are essentially in the realm that you're already operating in, so neonatology, perinatology, you know, the lab kinds of things, or would you consider something that's one degree away from that?

No.

We're not considering anything outside of our realm of expertise as far as physician practice and management is concerned.

We're very happy with our niche, and we do it well and we're going to continue to do it.

You know, the lab is -- we see it as a complementary area for our newborn opportunities there that we might consider in the future, but it's -- you're not going to see us doing, you know, anesthesia or radiology or anything.

Thanks a lot.

Thank you.

Once again, if there are any additional questions, please press star, then one.

And there are no further questions at this time.

Please continue.

Okay.

Well, if there are no further question, we thank you for listening this morning.

Gwen, if you would be kind enough to repeat the instructions for the playback?

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