Pediatrix Medical Group Inc (MD) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by request welcome to the Pediatrix Medical Group 2003 third quarter investor conference call.

At this time all participants are in a listen only mode and 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, suggests, 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 could cause actual results, developments and business decisions to differ materially from those contemplated by the forward-looking statements.

Pediatrix describes risk factors in it's annual report on form 10K 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 statements made during this call.

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

Although management will refer to EBITDA during the call the company does not use this metric to measure it's operating performance.

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 would 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.

Roger J. Medel, M.D.: Thank you.

Good morning and thanks for joining us today as we provide an update on our results for the third quarter of 2003 and an overview of our operations.

This was a very strong quarter for Pediatrix.

Revenue was up 19%, helped largely by the same unit revenue increase of 12.5%, profit margins, gross operating and net continue to expand.

Net income increased by 21%.

Earnings per share grew by 33%, aided in part by our share repurchase program.

Cash flow from operations was extremely strong with more than 46 million, and we continue to see benefit from very strong management of our operations.

One measure of that is day sales outstanding which were down slightly and remained below 60 days.

All in, this was a very solid quarter.

In a few minutes, our Chief Financial Officer, Karl Wagner will walk you through a detailed discussion of the financial results, and he will provide some more details to the 2004 earnings guidance we introduced through our press release this morning.

I am going to provide you with some of the operating highlights of the quarter, and an update of some issues that have been surrounding the company.

I believe that the numbers reported today for the 2003 third quarter and the introduction of 2004 guidance should speak to the viability of our model for providing a place where physicians can practice as part of a national group that enhances patient care while shielding them from many of the rigors associated with the administration of a group practice.

During this year, including the third quarter, we continued to attract physicians to our national group.

Our acquisition of a neonatal physician group practice in Tampa Bay gives us our [inaudible] presence in this dynamic, fast growing market.

We also expanded our presence in two other markets by assuming the management of neonatal physicians services at two Kansas City area hospitals and at one southern California hospital.

In the case of the Kansas City hospitals, the physicians who were employed by HCA are now employed by Pediatrix.

In southern California we are recruiting physicians to staff a Level 2 nursery at a hospital near one of our existing practices.

We are encouraged by the expansion of our national group that has occurred this year.

Clearly we have been able to improve the pace at which acquisitions have been completed.

More importantly, we remain encouraged by the status of our business development pipeline.

We are confident in our ability to complete accretive acquisitions.

This confidence comes at a time when we continue to face some external challenges.

So next, I would like to provide you with an update to the two external issues we are working through, specifically the Federal Trade Commission's review of the 2001 acquisition of Magella and the U.S.

Attorney's office review of our Medicaid billing.

In both of these matters we are active and engaged in working with the respective agencies to move these matters forward.

As many investors know the Federal Trade Commission has made two separate requests for information.

The first coming in June 2002, the most recent was in February of this year.

We completed our responses to these requests earlier this year.

Since then, many members of our legal team and our management team have met with the FTC staff and provided them with more information as part of the investigational process.

I would describe the interactions with the commission as being consistent with statements that we have made before, which is to say that they are reviewing the effects of the combination of Pediatrix and Magella in the three overlap markets of Las Vegas, Austin and Dallas.

At this point in our discussion, the FTC has not given us any indication of the direction they will take with this investigation.

The options are that they will determine to file a complaint or decide not to bring a complaint and simply close the investigation.

At this time, we are not able to predict either the timing or possible outcome of this investigation.

The U.S.

Attorney's office inquiry into our Medicaid billing practices nationwide is now a little more than four months old and we are working with federal investigators and representatives from Medicaid.

I would characterize this investigation as active and ongoing as we work towards a national resolution.

Similar to the FTC inquiry, however, we are not in a position to be able to predict either the direction or timing of a possible resolution.

As you probably know from our announcement last week, all of the class action lawsuits filed against us in June have now been dismissed.

And as we said, we announced the filing of these suits, we believe the claims were without merit.

We are pleased to be able to put these behind us now.

During the question and answer session of this call, I will be happy to address any concerns you may have about these issues.

I am very proud of the fact that throughout this period we've maintained our focus on managing our core operations.

This is something we can control and our very deliberate processes continues to result in solid financial performance.

As many of you know we manage both our clinical and administrative activities through a very strong regional network which includes a regional president who is a physician and a regional business manager.

Credit for our ability to manage our core activities through these issues goes to the combination of our headquarters and regional management team.

I believe that the results posted this morning represent another chapter in an ongoing and very positive story at Pediatrix with top line growth, continued operating efficiencies and very efficient use of capital to increase returns to our our shareholders.

Before opening the call to questions I want to turn to Karl Wagner of a detailed discussion of our quarterly performance and updated earnings guidance.

Thanks, Roger.

Good morning.

As you can see we had an incredibly strong quarter with record revenue, earnings, and cash flow.

We are very excited about our prospects for future growth.

As Roger said, over the next few minutes I will spend some time walking through our financial results.

I will provide some color behind the 2004 earnings guidance that was introduced this morning.

Revenue for the third quarter increased by 19% to $145.5 million.

This increase was due to strong same unit revenue growth of 12.5% and the impact of several acquisitions that have been completed over the previous 12 months.

This quarter, the same unit growth was led by improvements in reimbursement.

We saw continued contributions from the American Medical Association's changes in new unit coding that went into effect in early 2003.

Many state Medicaid programs and several commercial payors had staggered the implementation of these new codes throughout the year.

We expect to continue to realize the impact of these changes over the next couple of quarters.

Additionally, we improved reimbursement through better contracting with commercial payors, mostly managed care, and some improvement from the modest fee schedule increase that we implemented in January.

Same unit NICU patient volume growth was approximately 3.6%.

Same unit perinatal growth was solid and growth from services such as hearing screens and newborn nursery volume contributed to same unit revenue growth.

Again, this is a strong number.

Slightly ahead of where we thought we would be but as you see NICU patient volume was in the range of 3 to 5% that we see historically.

As I mentioned, acquisitions completed during the past 12 months also contributed to revenue growth for the third quarter.

We have acquired five physician group practices during 2003 as well as a metabolic screening laboratory based in Pittsburgh.

Additionally, we have added several new units through internal contracting efforts.

We are very pleased with the growth of our business and clearly that growth is occurring from a number of platforms.

Profit after practice expenses was $60.5 million, up 20% from the prior year with a margin of 41.6%, an increase of 60 basis points from the third quarter of 2002.

This was the first quarter this year when profit after practice expense margin increased.

As you have seen throughout the year, our general and administrative expenses continue to decline as a percent of revenue and were 13.6% of revenue for the third quarter down 63 basis points from a year ago.

We have been very pleased with the improvements made in this line item and we think it reflects the decision several years ago to develop a regional model for administrative functions.

As we had anticipated, we have been able to add practices particularly with the number of acquisitions in the past few quarters without significant increases in operating expenses.

We believe there is continued room for margin expansion and most of that will come from the G&A line.

In terms of absolute dollars the increase in G&A expenses is primarily from salaries and benefits as a result of the continued growth, increased legal cost related to FTC investigation and higher insurance costs.

EBITDA, which is a non-GAAP financial metric which we calculated by adding depreciation and amortization expense to operating income was $40.7 million for the 2003 third quarter, up 24% from $32.8 million a year ago.

Our EBITDA margin increased to 28% from the 2003 third quarter, up 120 basis points from the same period last year.

For the quarter, operating income grew to $38.2 million up 22% from the 2002 third quarter, and our operating margin was 26.3% up 72 basis points from the same period in 2002.

Operating income growth was slightly less than EBITDA growth due to higher depreciation and amortization expenses related primarily to the amortization of identified intangible assets obtained in acquisitions.

Net income of $23.5 million for the 2003 third quarter grew by more than 21% from net income of 19.3 million in the 2002 third quarter.

Earnings per share grew by 33% to 97 cents in the most recent quarter from 73 cents a year ago, as a result of higher higher net income and a reduction in shares outstanding due to to our share repurchase program.

Over the period of July 2002 through July 2003, we repurchased approximately 4.7 million shares at an average price of $32.15.

Even with the share repurchase, the weighted average number of shares outstanding for the three months ended in September, 2003 was higher than we had anticipated when we issued guidance for the third quarter.

The reason for the higher number is tied to the share price appreciation and its impact on calculating the number of fully-diluted shares outstanding.

Overall, we are presenting to you a very solid income statement with strong revenue, operating income and net income growth coupled with continued margin expense.

Combined with our record operating results is a very strong balance sheet.

At the end of the quarter we had cash of $10.4 million and accounts receivable increased to $89.9 million.

The growth in accounts receivable is largely due to our acquisitions and same unit revenue growth.

While AR grew, day sales outstanding remained below 60 days.

In fact, with this report we have now maintained day sales outstanding below the 60 day target for eight consecutive quarters.

As of September 30, we had an outstanding balance of $14.5 million on our $100 million credit facility.

During October, we paid off that balance and today the only debt that is currently on our books is some long-term debt and capital lease obligations with outstanding balances that total approximately $2.6 million.

Cash flow from operations was a record $46.3 million for the 2003 third quarter.

This cash flow was used for several purposes.

We invested about $17.1 million for physician group practice acquisitions.

We completed our previously authorized $50 million share repurchase program, spending $25 million in the open market during the quarter, and we spent spent $11.4 million in capital expenditures.

Capex for the quarter includes the purchase of our corporate offices which we have occupied for more than three years now.

The building which was previously under a synthetic lease was purchased for $10.1 million.

This purchase will not have an impact on future net income as the cost of ownership is approximately the same as our lease costs.

I would like to turn your attention now to the earnings guidance that was included in this morning's press release.

For the fourth quarter of this year we have maintained our previously issued earnings guidance of 95 to 97 cents per share.

As we announced this morning, we expect that earnings per share for 2004 will be between $4 and $4.10, as we expect to realize continued strong growth from our existing practices and through acquisitions.

With this growth, we anticipate on going margin improvement in 2004.

There are several assumptions behind these numbers, that I would like to discuss.

First, we expect continued same unit growth of 6 to 10%.

This will come from our historical volume increases of about 3 to 5%, as well as approximately 3 to 5% same unit growth from reimbursement related components including managed care contract increases that are resulting from better payor contracting.

Our regionalization with the managed care contractor responsibilities and the placement of individuals with significant contracting experience has allowed us to realize reimbursement improvements.

At this time we do not expect to see any changes in the process of negotiating managed care contracts.

Second, the EPS guidance includes assumptions for $50 to $60 million for acquisitions throughout the year.

As Roger said we are very pleased with recent acquisition activity and remain optimistic that our business development efforts will result in additional acquisitions.

Additionally, we expect to realize continued margin improvement as we anticipate that the rate of revenue growth will exceed growth in general and business and administrative expenses.

I also want to remind you have two annual events that impact earnings in the first half of the year.

There were fewer calendar days in the first half of each year than in the second half.

Next year, which is a leap year there are 91 days each in the first and second quarters and 92 days each in the third and fourth quarters.

Our neonatal physician billings are based on based on 24 hours of care to a patients, so we lose one day of neonatal revenue each of the of the first and second quarters as compared to the third and and fourth quarters.

On the expense side most of our businesses meet the Social Security payroll tax threshold during the first half of the year.

That obligation is significantly weighted toward the first quarter.

One other reminder about the timing of our results, cash flow from operations will be negative during the first quarter of 2004 as we pay out the performance bonuses to our physicians.

Consistent with prior years, we have accrued for physician bonuses throughout the year and pay these bonuses during the first quarter.

We will provide more specific earnings guidance and introduced cash flow guidance during our fourth quarter conference call.

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

Thanks Karl.

As you can see this was another very solid quarter.

Now lets open up the call for questions from analysts and shareholders.

Operator?

Thank you.

Ladies and gentlemen if you would like to ask a question please press star then 1 on your touchtone 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 the pound key.

If you are using a speakerphone please pick your hand set before dialing.

Once again, it is star 1 for any questions.

Our first question comes from the line of John Szabo from CIBC World Markets.

Please go ahead.

Good morning, thanks.

Just a quick question, Karl.

I didn't quite catch the number on the acquisitions in terms of your guidance for next year.

Could you just repeat that?

Yes.

We expect to spend $50 to $60 million in terms of acquisition next year.

In terms of putting it into the guidance after taking it out does that really speak to a high level of of confidence?

I know you mentioned that in the prepared remarks, but do you already have enough visibility going into next year that you have got these deals are pretty close and you feel pretty comfortable comfortable putting it out there now?

Yes, based on what we have seen from acquisition activity this year, as you have seen we have been able to complete several acquisitions recently.

And with the status of our pipeline, we are confident that we will see acquisitions next year.

I think when we took it out of the guidance we were issuing earlier this it was because we had seen a pretty big gap in our acquisitions.

We don't expect to see that again.

We are very confident in our ability to get deals done in next year.

Okay, great.

A question for Roger, if you look at the consolidation in the payor market here in the last week or two and assuming that that trend continues and perhaps even accelerates, how do you think about that in terms of how you run your business and your ability to continue to extract pricing and I guess indirectly, do you think that could have any implications for the FTC investigation, realizing that there aren't necessarily overlapping markets and the ones that are in question, the FTC investigation but just general payor consolidation, could that help you with that investigation?

Roger J. Medel, M.D.: Hi John, good morning.

You know, we took a pretty hard look at those that were announced last week.

You know, clearly, there is no impact this year, and clearly, you know, if they do get the deals done, it will be halfway through next year, even before, you know, the deals are finalized.

So, you know, we not expecting to see any impact, you know, from any of this over the next 12 months.

There is little overlap in these deals, I mean, there is not a situation where, you know, one company has a big presence in a market and the other company also, and we can expect you know, pressure coming from that.

In fact, you know, with some minor exceptions, there is no overlap at all.

So, the way we are reading the situation right now, is we are not expecting that this is not going to have any kind of impact on our ability to contract or to get, you know, rates that are consistent with what we have gotten in the past.

How the FTC might think about this, I don't know again, I suspect that because there is little impact, you know, as far as the overlapping of the markets, I don't know that the FTC will, you know, I can't speak for them.

That's a good question to ask them, I guess.

Okay, thanks.

Thank you.

Once again, for any questions, please press star, then 1.

We will move on to the line of Bill Bonello with Wachovia Securities.

Please go ahead.

Yes, a couple of questions.

It seems like you should have about $40 to $50 million of free cash flow after acquisitions in '04.

And no debt.

Any thoughts on expanding your share repurchase program?

Well, hi, good morning, Bill.

You know, we have not had that discussion at our board of directors meeting.

We, of course, you know, would rather spend our cash investing it in acquisitions.

So that's kind of the first area we are going to look at.

But, you know, at this stage of the game I would say that personally I am comfortable with, you know, where we are, where our share repurchase program has taken us, and, you know, we just haven't had that discussion at the board level.

Is there enough of an acquisition pipeline.

I know your guidance, you are saying, implies 50 to 60.

But I mean, is there enough of an acquisition pipeline that theoretically you could dip into that additional cash resource?

Roger J. Medel, M.D.: Well, you know, we are pretty confident, with, you know, we have rebuilt our business development team, you know, it's a pretty robust team.

We have added people in many of the areas on the team.

I get a pipeline report, you know, on a weekly basis.

So we are feeling good, you know, about about what the pipeline report demonstrates to us.

As you know, you know, we tend to break our deals into different buckets, there is the deal, you know, there is the bucket of deals that have been accepted and we are going through the due diligence process, there is the bucket of deals, you know, where we have made offers, and we are waiting, you know, to hear back.

There is the bucket where we are evaluating the information that has been given to us so that we can make an offer, you know, so there's four or five different buckets.

I can tell you that each one of these buckets has a number of deals in them.

So, we feel good and we are going to work very hard to beat our own estimate of the $50 or $60 million for next year.

Sure.

And then, is there an opportunity to assume management of more units the way you did in Kansas City and southern California.

Is that likely to become more of a trend going forward?

Roger J. Medel, M.D.: Well, I wouldn't want to represent to you that we think that's going to be, you know, a strong area of growth for us.

There are always those opportunities out there.

Although, you know, the timing is size of them is very hard to predict.

But, you know, there are hospitals that are under construction in some of the fast-growing areas like in Vegas and in Texas.

We expect that we will expect that we will have some of those contracts awarded to us as we work through those processes next year.

So I wouldn't be surprised to see you us, you know, continue to obtain some of those contracts.

Okay, and then just finally, on the FTC, I am just curious, would you characterize the pace of discussions as having picked up over the course of the of the past couple of months?

I am just wondering if you can give us any more sense of the issues that you are actually discussing with the FTC, what type of information they have been looking at?

Roger J. Medel, M.D.: Yeah, I would say definitely, things, the pace has picked up since this summer, as we said, that we were, you know, having, you know, that the process was moving along.

It's definitely picked up.

You know the issues seem to us that they are same as we reported to you originally, which are the three overlapping markets, you know, Vegas and Dallas and Austin.

Those seem to us to be the issues, you know, the areas that they are focused on.

You know, they have asked for a ton of information, written that we had given them, they have asked for interviews and we have made every one available that they wanted to spend, you know, some face time with.

So, you know, we are just waiting for them to tell us what the next step is going to be.

Okay, great.

Thanks.

Roger J. Medel, M.D.: Thanks, Bill.

Thank you.

Our next question is from Matt Ripperger with J.P. Morgan.

Go ahead, please.

Hello, this is Gee Bell from Matt Ripperger's team at J.P. Morgan.

Just a couple of quick questions here.

I want to go back to the revenue guidance for 2004 and a component of it.

So the same store revenue rose from 6 to 10% and you projecting to spend about $50 to $60 million on acquisitions, and that implies about 5% acquisition revenue growth.

So, the total revenue growth for 2004, is that in the mid-teens range for next year?

We really haven't broken it out and we will give more guidance as we go forward in the next call what the revenue growth expectations is.

You know, we always do expect to see a little bit different as we see our margin growth over the quarter so we do expect a little bit lower growth in revenue than we would see in profitability as we expect to see expanded margins.

But, you know, I think we will get more guidance on our fourth quarter call about some specific line items.

Okay.

And the second question, just going back to the internal contracting effort.

I think that you are getting some momentum in the front.

If we see additional contracts signed over the next year, is that included in your 3 to 5% volume growth or is that 3 to 5% volume growth basically coming from the existing contracts?

The 3 to 5% volume growth is from existing contracts.

You know we have been very effective this year in obtaining contracts from hospitals, a couple of large one, Kansas City and Driscoll Children's in California, Driscoll Children's in Texas were good contracts for us.

So we are very happy and sizable.

Those are unusual but we do not build any of that into our guidance because as Roger said earlier it is difficult to predict when those will happen.

I think we are seeing hospitals looking favorable upon us in the quality initiatives that we can bring to those units and have really looked at pediatrics being a great option to them as a great way to improve the quality and bring quality into into their practices.

I've been working with their physicians so I think there is potential to see more of that in the future.

And can you update us on Medicaid reimbursements [inaudible] for 2004.

As far as Medicaid reimbursement for 2004 we don't really have a look much at what the states are talking about as they go through next year's budgets.

As we said in the past, what we saw last year that will impact next year is California, it was a 5% reduction in the Medi-Cal payment rates .

In Texas, they had proposed, they had put in place a 5% reduction but then they brought that down to about 2.5% in taking the federal money they were given to reduce, to bring about some of that position improvement.

And then in Georgia, we saw, I believe, it was a 5% reduction.

Other than that, everything else maintained, and I think we expect at this point to see that next year.

Okay.

So your 3 to 5% projection for next year takes into account all of those reductions?

Yes.

Okay.

And the last question, can you just give us the run rate revenues from your Pediatrix screening business, and do you expect the growth rate to exceed the 6 to 10% for your consolidated business and the margins on the business?

Yes, at this point we haven't broken out those numbers, and, you know, we don't expect to do that at this point.

But we do expect to see a good revenue growth in that business, you know, we are still working through understanding that whole business.

We do expect to see, you know, good, probably over 6 to 10% growth in that business, going forward, in the long term we expect a significant grow in that business.

Okay, thanks very much.

Thank you.

And once again, a reminder, it's star 1 for any questions or comments.

We do have a question from the line of Jack McPherson with Pioneer Investment Management.

Thank you.

I apologize if I missed this but on the $50 to $60 million of acquisitions is that only in the physician area or would it also include things like the labs or some other things you've contemplated getting into?

Roger J. Medel, M.D.: Good morning, that is only in the physician acquisition issue.

Okay are there still opportunities out there you are looking at that would be similar to the screening business that you just acquired?

Roger J. Medel, M.D.: Yes.

We are looking at other opportunities that are similar to the metabolic screening business, yes.

I mean, is there anything, I don't mean close or anything that is more logical or more likely to happen that you would be willing to talk about?

I would characterize it that we have we have some things that are interesting, but I don't think there is anything that is anywhere near us saying that we are going to get something done in that area.

But there are some things clearly out there that are interesting to us.

Then a apologize, I missed part of the earlier response to some of the investigation questions, but did the information that you said you sat down, you have been providing to the FTC, is there anything new or different that they are asking about, or is it pretty standard from the beginning and you have just been providing more data for them?

Roger J. Medel, M.D.: That's right, no.

There is nothing new that they are asking about.

It's been pretty much the same questions from the beginning, we are providing them more data.

But they don't seem to be going down a different or new path at this point.

On the medicate side, are those kinds of questions they are asking similar to previous investigations that have been settled favorably?

Roger J. Medel, M.D.: Those are exactly the same questions that the other states were asking individually.

It is exactly the same question.

So then you are providing them, obviously, with the results of the previous investigations, but are they, you know, seem like they are willing to accept that information?

Or is there, you know, are they just sort of dismissing that?

No, they are asking for their own set of information, their own set of questions but the questions that they are asking are the same questions that were asked by the other states on an individual basis.

So, it is not up to me to decide what they accept or don't accept.

We are just giving them the information that they are asking for.

All right.

Thank you.

Roger J. Medel, M.D.: Thanks.

Thank you, and we have no further questions at this time.

Please go ahead with your closing remarks.

Roger J. Medel, M.D.: Okay.

Well, thank you very much.

If there are no further questions, we appreciate the opportunity to present our results for you this morning, and we will look forward to speaking with you next quarter.

Okay.

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