Pediatrix Medical Group Inc (MD) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Good morning, and welcome to the Pediatrix Medical Group's fourth-quarter 2003 earnings release.

Now at this point, all of your phone lines are muted or in a listen-only mode.

However, later during the release, there will be opportunities for questions, and those instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded for replay purposes, and that information will be announced at the conclusion of our call.

Now, ladies and gentlemen, before I open up the call to Pediatrix's management team, I would like to read the following 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's management based on factors they believed 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 statement.

Pediatrix describes risk factors in its annual report on Form 10-K for the year ending December 31, 2002, filed with the United States Securities and Exchange Commission.

Pediatrix has no obligation to update or revise any forward-looking statements made during this call to confirm to actual results or changes in the company's expectations.

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

With that being said, I would now like to turn the conference over to Pediatrix Medical Group's President and Chief Executive Officer, Dr. Roger J. Medel.

Please go ahead, sir.

Thank you, and good morning.

As I'm sure most of you have seen by now, we reported this morning another impressive quarter of top-line and bottom-line growth coupled with a strong increase in operating margins.

Our earnings per share of 97 cents for the 2003 fourth quarter were at the high end of our guided range.

Our revenue, operating income, and net income established new records for both an individual quarter and a full year.

As important, our business continues to become more efficient as it grows larger.

Operating margins continue to expand, reaching 24.8 (ph) percent for all of '03, plus 75 basis points from the prior year.

We will follow our customary conference call format this morning.

Carl Wagner will provide you with the detailed review of our financial results for the 2003 fourth quarter, as well as a discussion of our earnings guidance for '04.

This morning's press release includes a range of earnings per share for each of the 2004 quarters, as well as an estimate for operating cash flows for the year.

I want to take a few minutes to go over some of the operating highlights of 2003 and then spend some time providing a little bit more color to our growth strategy.

First, though, let me update the status of some external issues that are affecting Pediatrix -- the Federal Trade Commission's review of our 2001 acquisition of Magella Healthcare, the U.S.

Attorney's office review of our Medicaid billing nationwide, and a specific Medicaid billing investigation to our perinatal practice in Nevada.

As I mentioned in November, when we presented our third-quarter results, we are engaged in a dialogue with FTC staff members at various levels.

While these discussions are ongoing, at this time, we're still not able to predict whether or not the FTC will take any action or how long this process might last.

The U.S.

Attorney's review of our Medicaid billing is active and ongoing.

This investigation was announced in late June of last year, and we continue to have dialogue with the investigators.

Since the Nevada investigation was announced last November, we've cooperated with authorities there by providing them with additional information that they have requested.

There's not much new to report on these investigations, and we cannot predict either the outcome or timing of any resolution.

But we remain comfortable that our billing practices are appropriate.

We believe the FTC and Medicaid investigations represent a drag on the valuation of Pediatrix.

Since it's difficult for us to predict any possible outcome for these investigations, it is understandable that investors may be having a hard time assessing what impact, if any, they may have on our company.

And while our management team continues to work through these issues, we also remain focused on executing our strategy, which involves managing our existing operations more efficiently while at the same time capitalizing on opportunities for growth and evaluating new opportunities for the future.

In fact, the results we reported on this morning should offer concrete evidence that we are very much focused on these opportunities.

2003 was a period in which we saw remarkable progress in our goal of developing a healthcare organization that is built around physician services for newborn and maternal-fetal care.

Throughout the year, the pace of our acquisition program accelerated.

We added a total of 7 physician group practices during the year, including neonatal groups in Knoxville, Tennessee;

Cleveland, Ohio;

Tampa, Florida; and Lynchburg, Virginia.

Our neonatal practice growth also included new contracts to manage NICUs in Texas, Kansas City, and southern California.

We also acquired two pediatric cardiology practices -- one in West Palm Beach, Florida, early in the year, and another based in Phoenix, Arizona, serving patients statewide, which we completed in December.

In addition, our pediatric intensive care services were expanded with an acquisition of a large practice in Chicago.

Pediatric cardiology and pediatric intensive care are exciting growth opportunities for us to continue to expand our national group practice.

Today, the growth opportunities for our physician group network looks even stronger than it did at this time last year.

And we believe that we have the capability to deliver to physicians within these (ph) subspecialties the kind of value-added clinical and administrative support that our neonatologists have enjoyed for years.

Today's press release includes our annual report of operating data including neonatal admissions and neonatal patient data.

During 2003, we crossed an important milestone -- more than one million patient days of service by our physicians.

Average length of stay at neonatal intensive care units managed by our physicians increased to 19 days in 2003 from 17.8 in 2002.

This number has grown consistently over the past several years and principally as a result of two factors -- number one, changes in our practice mix as a result of our acquisition program, and number two, advances in both maternal-fetal and neonatal care that make it possible to successfully treat patients.

Neonatologists today are able to treat babies born prematurely at 24 weeks gestational age, and many of these babies are in the hospital until what would have been their due date had they carried to term.

Because our physicians provide care for the most critically ill newborns at a hospital, they are recognized as the newborn experts at their facilities.

So while we care for a relatively small percentage of the babies born at a hospital, we believe that there are opportunities to expand our relationship within existing hospital partners.

And during 2003, the opportunity of serving more of the newborns at our hospitals and other hospitals across the country began to take shape with our acquisition of the nation's largest independent laboratory providing newborn metabolic screens.

This is a service that is performed on all babies born in the United States, although state mandates apply this screening inconsistently.

This business is similar to the newborn hearing screen program we started back in 1994 and built into the nation's largest.

Our strategy is to contract with hospitals -- and in some cases, state agencies -- to screen all babies before they are discharged home.

With folk (ph) screening services, we believe that our focus on quality outcomes, including low false positive (ph) rates, creates an important differentiator for Pediatrix.

The newborn screening opportunity -- hearing, metabolic, and possibly other areas -- is an example of how we are able to expand within our core competencies of maternal-fetal and newborn physicians services.

During 2004, investors should expect us to continue to expand our network of physician practices.

In addition, there are attractive niche opportunities in other areas surrounding our maternal-fetal-newborn and Pediatrix subspecialty care services.

Today, we are embarked on a growth strategy that builds on our current strengths.

It is the right thing to do as part of our patient care continuum, and it is the right way to expand our existing hospital relationships.

At the same time, we remain optimistic that we will continue to grow our business in the same way that we have grown it for years -- acquiring and integrating physician groups into our national practice.

During the past few years, same unit growth has increased and our management team remains focused on opportunities to grow within our existing place of service.

Additionally, we are excited about the prospects of growth in the several very complementary services that I have discussed this morning.

I hope this provides you with a sense of the direction that Pediatrix is taking.

Throughout our history, we have been very disciplined in how we look at growth opportunities.

And that will continue.

As important, we remain dedicated to achieving superior financial results.

And once again, our results for the most recent three-month and year demonstrate our ability to meet those goals.

At this point, let me turn the call over to Karl Wagner for a detailed discussion of our quarterly performance and updated earnings guidance.

Carl?

Thanks, Roger.

Good morning.

As Roger said, this is a very strong quarter, as a continuation of improvements that have been taking place at Pediatrix over the past several years as well as an indicator of our promising future.

In fact, as I walk through some of the details of the numbers we report today, it's our expectation that you will see a picture of a company that is focused on its core operations -- one that is able to expand its breadth, both geographically and across new service areas while delivering superior financial results.

Looking at the income statement, revenue for the 2003 fourth-quarter increased by 22 percent to $145.8 million.

Same-unit (ph) revenue growth continues to be strong, and we're also seeing the anticipated contributions from acquisitions completed in 2003.

Overall, same-unit growth of 13.6 percent for the quarter was led by improvements in reimbursement.

We saw continued contributions from the American Medical Associations, changes in neonatal (ph) code went into effect in early 2003.

Additionally, our managed care professionals have been able to improve reimbursement through better contracting with commercial payers.

And we have seen a positive impact from the modest fee schedule increase that we implemented in January.

Same-unit NICU patient volume growth was approximately 2.3 percent -- slightly below (technical difficulty) although same-unit patient volume growth for the year was 4.2 percent, or right in the middle of our expectations.

During 2003, we acquired seven physician group practices as well as the newborn metabolic screening laboratory based in Pittsburgh.

And those acquisitions, along with several new neonatal intensive-care units, added through internal contracting efforts, and they're (ph) contributing to our revenue growth.

Profit after practice expenses was $60.4 million, up 26 percent from the prior year with a margin of 41.5 percent, an increase of 136 basis points from the fourth quarter of 2002.

Gross profit at this level can be attributed to the strong revenue growth for the quarter.

We continue to manage our operations efficiently.

General and administrative expenses were 13.3 percent of revenue for the 2003 fourth quarter, up 31 basis points from the comparable period of last year.

But that increase can be directly attributed to significantly lower legal expenses in last year's fourth quarter.

When compared with the 2003 third quarter, G&A expenses are down 31 basis points, giving us confidence that we continue to see G&A improvements as we grow our business.

For the (ph) 2003 fourth quarter, operating income grew to 38.7 million, up 26 percent from the 2002 fourth quarter.

And our operating margin was 26.5 percent, up 84 basis points from the same period in '02.

Net income of 24 million for the fourth quarter grew by more than 26 percent from net income of 19 million for the 2002 fourth quarter.

Net margin increased to 16.4 percent.

Earnings per share grew by 33 percent to 97 cents in the most recent quarter from 73 cents a year ago.

This growth was a result of higher net income and a reduction in shares outstanding from our share repurchase program.

While the fully diluted shares outstanding decreased by approximately 6 percent as compared to the prior year, the number of fully diluted shares outstanding was higher than we had anticipated due to the share price appreciation throughout the 2003 fourth quarter.

As I said at the beginning of my formal remarks, we're presenting a very solid income statement with strong revenue, operating income, and net income growth coupled with continued margin expansion.

Clearly, our financial results speak to the strength of our business model.

These record operating results have been a contributing factor to making a very clean balance sheet even stronger.

At the end of the quarter, we had cash of $27.9 million and total debt of less than $2 million.

Accounts receivable increased to 94.2 million, which was due to several factors, including our acquisitions and same-unit revenue growth.

During the quarter, we realized a slight increase in days sales outstanding, although they remain at less than 60 days, which is very solid given the nature of our physician services.

The increase in days sales outstanding is due to delayed claim disbursements by payers as new HIPAA regulations became effective October 16, 2003.

This is a delay in reimbursement that we and other providers have experienced during the fourth quarter.

We anticipated some of this activity, and obviously, we will continue to closely monitor cash receipts.

On the liability side, accounts payable and accrued expenses increased to $112 million.

A significant component of that liability is accrued physician incentive bonuses that will be paid out early this year.

We expect to make bonus payments of more than $50 million in the first quarter of 2004.

These payments are the direct results of the growth in our practices above established profit thresholds.

This bonus program has become a significant asset to the company, as it enhanced our physician recruitment and retention program.

During the 2003 fourth quarter, we paid out the outstanding balance on our $100 million credit facility.

And today, we have some long-term debt and capital lease obligations with combined outstanding balances that total less than $2 million.

As you can see, our balance sheet is very clean and very strong.

Cash flow from operations was 38.2 million for the 2003 fourth quarter, and grew by approximately 25 percent over the same period in '02.

This cash flow was used for several purposes.

We invested about 11.9 million in physician group practice acquisitions.

We spent 1.5 million in capital expenditures.

And as I said, we paid down 14.5 million in short-term debt.

Our strong fourth quarter results cap (ph) can only be described as an excellent year.

When compared to the prior year, 2003 revenue grew by 18 percent to $551.2 million.

Operating income increased by 22 percent to 136.9 million.

Net income increased by 23 percent to 84.3 million.

And earnings per share increased by 33 percent to $3.43.

During 2003, we saw strong margin expansion, largely as a result of general and administrative expense leverage.

For the year, G&A expenses declined to 13.9 percent of revenue, 79 basis points lower than for all of 2002.

For the full year 2003, cash flow from operations was $118 million, up 21 percent from the prior year.

We invested 75.2 million in acquisitions, including approximately 40 million in physician group practices while buying $100 million worth of common stock on the open market at an average price of $33.63.

I'd like to turn your attention now to the earnings per share and cash flow guidance that was included in this morning's press release.

During our 2003 third quarter conference call, we had introduced 2004 guidance of $4 to $4.10.

We remain comfortable with that range.

Before I introduce the specific quarterly numbers, I want to reminder you of factors that affect the progression of quarterly earnings.

There is some seasonality to our business.

Specifically, neonatal physicians services are billed based on a bundled day of service.

There are fewer days in the first and second quarters, 91 each this leap year, than the third and fourth quarters.

In addition, many of our employees, including physicians, meet the FICA or Social Security payroll tax thresholds early in the year, so salaries and benefits are higher during the first two quarters.

As a result of these two annual events, along with the impact of acquisitions to be made throughout the year, we expect that earnings per share in the 2004 first quarter will range from 84 cents to 86 cents.

Second-quarter EPS will range from 98 cents to $1, and earnings per share of $1.09 to $1.12 each for the third and fourth quarters.

With this growth, we anticipate continued year-over-year margin improvement in 2004.

I want to remind you of the assumptions included in these numbers, and which therefore affect our ability to meet these numbers.

First, we anticipate continued same-unit revenue growth of 6 to 10 percent.

This will come from NICU patient volume increases of about 3 to 5 percent, which is in line with our long-term trend.

In addition, we expect same-unit revenue growth of approximately 3 percent to 5 percent as a result of better reimbursement, including a modest fee schedule increase; better payer contracting; and continued impact from the 2003 CPT code changes that were adopted throughout the year.

EPS guidance also includes assumptions that we'll (technical difficulty) invest 50 to 60 million in capital in physician group practice acquisitions throughout the year.

Last year was a very good year -- very strong year for acquisitions.

And we are encouraged by both the size of our pipeline and the quality of practices that are interested in joining Pediatrix.

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

With this morning's release, we also introduced an initial estimate that annual cash flow from operations will exceed $130 million for 2004.

Our cash flows are significantly impacted in the first quarter by tax payments, company 401(k) plan matching contributions, as well as by the sizable physician incentive bonus payments that accrued during prior year.

As a result, investors should expect cash flow from operations to be negative during the first quarter of 2004 and then return to a significant positive level in the last three quarters of the year.

In summary, Pediatrix is well-positioned to continue to execute its growth strategy for 2004 and beyond.

We have virtually no debt, and our business generate strong, predictable cash flow which provides us with the financial flexibility to take advantage of new growth opportunities.

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

Well said, Carl.

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

(OPERATOR INSTRUCTIONS) Bill Bonello, Wachovia Securities.

Just a couple of questions -- first, just a clarification.

Can you, Carl, just restate what those internal growth assumptions were?

Did you say 6 to 10 percent with half volume and half pricing?

Good morning, Bill -- yes, it's the same that we had seen -- we had expected throughout this -- '03 and we expect for '04. 3 to 5 percent will come from volume, we expect.

And as we've seen in the past, that volume growth tends to fluctuate quarter to quarter.

But on an annual basis, we typically see in that 3 to 5 percent range -- and 3 to 5 percent coming through pricing.

Okay.

And then can you give us some sense of how much of the internal growth this quarter was attributable to the new CPT codes?

We haven't really broken that out.

I mean, it is a good-sized piece of that growth.

As you saw we had significantly higher component of it being reimbursement-related this quarter.

But really don't break out all those (multiple speakers)

I mean, would that -- can we assume that's why your guidance for internal growth is a little bit lower than where internal growth has been coming in for the past year?

Absolutely.

That's one of the reasons for '04 -- our growth will be (ph) lower, same-unit.

We expect to be lower same-unit than it was for all of '04 because we won't get the same level of impact that we saw in '03.

Okay.

And then -- what are you going to do with your excess cash?

I mean, if you do 50 to 60 million in acquisitions, that leaves you probably with another $60 million -- or $50 to $60 million of free cash flow.

I think at this point, you haven't announced an expanded share repurchase.

Just curious what the prioritization there is?

And if whatever activity you do has to be immediately accretive, or if you would think of something strategic even if it's not immediately accretive?

Just any thoughts you can share on that?

This is Roger, Bill.

Good morning.

You know, there are good problems and bad problems.

And this is a problem that we like to have.

Having the cash flow gives us a lot of flexibility.

Our Board has not made any decisions as far as continuing our share repurchase -- although that certainly is a possibility.

I think that we are looking at enough potential growth opportunities that we want to keep that flexibility available.

And we will be making some decisions probably towards the end of the first quarter as we get more visibility as to exactly how many deals are out there to be completed and whether we in fact want to continue our share repurchase -- the numbers -- the stock price is getting high, the volume is -- the daily trading volume is not where we'd like it to be.

So, there's a whole bunch of other things that we need to consider.

And I think the best thing for us to do is just to carefully analyze what our options are and make some decisions later on this year.

Matt Ripperger, JP Morgan Chase.

Just a couple of questions.

First of all, in terms of the 60 million you plan on spending on acquisitions in '04, can you help prioritize what areas you would like to focus your growth on -- whether it will be in NICUs or pediatric intensive care or cardiologists?

Well, you know -- good morning, Matt -- as we look at what our universe is, I would say our universe starts with the genetic testing opportunity that we have through our perinatologists basically doing amniocentesis and identifying high-risk pregnancies.

Then we have a perinatologist caring for those high-risk pregnancies.

And then we have the perinatologist handing off the high-risk births to our neonatologist.

Then we have the neonatologists and the general pediatricians looking at taking care of the patients as well as doing the metabolic screening for the babies, and then looking at the babies with complications -- you know, cardiac -- cardiologists are seeing, as well as, you know, when they get readmitted to the hospital, the pediatric intensivists taking care of them.

So that's kind of what our universe looks like to us.

Within that universe, clearly, we're going to remain focused on neonatology and perinatology.

But I think you can expect to see growth in all of these areas, because as we identify this strategic opportunity for us, you know, we think that we have opportunities to grow.

And in fact, we have stuff in our pipeline that covers all of those areas -- PICU, metabolic screening, neonatology, perinatology, cardiology -- and we expect that we will do deals in all of those buckets.

And as you stand here today, you still see a very robust pipeline in terms of neo activities?

Not only -- robust, yes, but also the quality of the groups that we're talking to is just excellent.

It's very exciting to see what we have in them (ph).

Okay.

Second question is -- just if you could give a little more color on the integration of the lab acquisitions and maybe some color in terms of requisition volume growth year over year?

Yes, I think that we said we would spend a big part of the first year just kind of getting our arms around.

And we weren't really going to start to -- we just wanted to make sure that our operations and our systems were in place.

We have done that.

We have hired a lab director.

And we're very comfortable with the progress that we have made over this last year.

We're focusing on growth now for '04.

And although we haven't made any -- we haven't broken out what the projections are that we have for the metabolic screening lab, some of that growth is included within our guidance for '04.

Great, last question I had, Karl, was -- if you could remind me what the cash bonus payment was to your physician partners in the first quarter of '03?

I'm thinking it was about 30 to 32 million, but I --

It was in the 30 million range.

And does the growth in that reflect just the growth in the current performance of the physicians?

Or is that growth because new physicians have been added to the program?

I would say it's a combination of practices getting to a point where they first in 2003 exceeded the threshold that was established for their practice growth to be able to participate in the program, as well as continued growth in the practices that were already in the bonus program.

(OPERATOR INSTRUCTIONS) And allowing a few moments, Dr. Medel and Mr. Wagner, we have no further questions.

Please continue.

Okay.

If we have no further questions, then we just thank you for participating this morning.

And we will look forward to speaking with you next quarter.

Very good, and thank you.

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