Pediatrix Medical Group Inc (MD) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Pediatrix Medical Group first-quarter earnings conference call.

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

Later, there will be a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded.

At this time, I would like to turn the conference over to the Director of Investor Relations, Mr. Bob Kneeley.

Good morning.

Thank you all for joining our first-quarter earnings conference call.

Before I open the call up to Roger Medel and Karl Wagner, I wanted to read a brief forward-looking advisory statement.

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

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

Forward-looking statements are based on assumptions and assessments made by Pediatrix's management based on factors they believe to be appropriate in light of their experience.

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 these statements.

Pediatrix describes uncertainties, risks, and assumptions in its most recent annual report on Form 10-K, filed with the U.S.

Securities and Exchange Commission.

Please see the section entitled " Risk Factors" in that report.

Pediatrix undertakes no duty to update or revise any forward-looking statements made during this call, whether as a result of new information, future events, or otherwise.

At this point, I want to remind you that following remarks by Dr. Roger Medel, our President and CEO, and Karl Wagner, our Chief Financial Officer, we will hold a brief question-and-answer session.

At this point, let me turn the call over to Roger.

Thank you, Bob.

Good morning.

I assume that most of you have seen the press release reporting our first-quarter results that was issued earlier this morning.

This was an outstanding quarter for Pediatrix, and our results include strong revenue growth coupled with margin expansion.

Same unit growth was at the high end of our guided range, and we're pleased with the contributions made from acquisitions completed last year.

In addition, the four acquisitions completed to date to this year, as well as what we see coming down the pipeline, make us comfortable with our targets and serve as a reminder that we are executing a strategy that is adding value to physicians, hospitals, and payers, while we work together to improve patient care.

I want to take some time to provide an update on the regulatory front, and this will be brief because there have not been any significant changes in the status of the Federal Trade Commission's review of our 2001 acquisition of Magella Healthcare, the U.S. attorney's office review of Medicaid billing practices nationwide, or the inquiry into our maternal-fetal medicine practice in Nevada.

The FTC review is now approaching two years, and we continue to maintain a dialogue with staff members at various levels.

We would describe the most recent dialogue as being more clarification of points that we have previously made, rather than suggesting a direction or possible outcome of the investigation.

As we have said since the beginning of this process, we are not in a position to predict the outcome or timing of any resolution.

The Medicaid investigations are still active, but there is nothing new to report at this time.

While we also can't predict the timing or outcome of these investigations, we remain comfortable that our billing practices are appropriate.

As I have said many times, while we have been working our way through these issues, our management team is focused on running the business and today's results demonstrate that we are achieving our operating goals and objectives.

And as we meet these goals, we are also attracting more physicians to our national group practices.

During the quarter, we acquired two physician group practices.

The first acquisition was of a group of physicians in Tallahassee, Florida that provide neonatal and pediatric intensive care.

In Denver, we acquired a pediatric cardiology practice that for years has worked closely with our maternal-fetal medicine, neonatal intensive, and pediatric intensive care physicians practicing there.

With the Denver acquisition, we have added two pediatric cardiology practices in the past six months in markets where we provide both neonatal and maternal-fetal care.

The other market is Phoenix, where our large practice sees patients throughout the southwestern United States.

These acquisitions expand a clinical care model that encompasses several physician subspecialties, as well as newborn metabolic and hearing screening services that enhance the maternal-fetal newborn and pediatric patient care experience.

I want to spend a minute discussing our approach to these areas.

Pediatric cardiology and pediatric intensive care are not new subspecialties for us.

We have provided pediatric cardiology care here in South Florida for more than a decade, and our experiences in pediatric intensive care date back to the 1980s.

Today, we are excited about the prospects that these practice areas provide, plus for growing our existing businesses because of the important clinical synergies among these practices.

Pediatric cardiologists work closely with both maternal-fetal medicine physicians and neonatal physicians, and then establish relationships with patients that expand into adulthood.

These relationships among our physicians and patients make up the nucleus of our continuum of care model.

One of the attractions for both the Phoenix and Denver physicians to join us was the opportunity to build the clinical infrastructure, research and education, clinical quality initiatives that we have established in neonatal and maternal-fetal medicine.

Our ability to add clinical value to a physician’s subspecialty has been and will be an important factor in deciding whether to commit resources to that area.

At the same time, we are following a pattern that is consistent with Pediatrix's management philosophy, which is to take a deliberate, methodical approach toward building our understanding of both the clinical and operational nuances of a particular subspecialty before we establish scale in a practice area.

As demonstrated by our recently completed acquisitions, there is plenty of room to grow our core neonatal and maternal-fetal medicine practices, and they will remain a focus.

Since the end of the first quarter now, we've added a neonatal physician group practice in Lafayette, Louisiana, a new state for us, as well as a maternal-fetal medicine practice in Atlanta that works closely with our existing neonatal physicians there.

We are very excited that today we've identified for you a much broader growth opportunity than we have had in years past.

We have broadened our areas of practice, established a significant presence in metabolic and hearing screening, and we will continue to look at other strategic opportunities that are consistent with our core competencies.

In executing our gross strategy, we will remain disciplined in our approach and focused on delivering superior results.

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

Thanks, Roger and good morning, everyone.

We had an outstanding quarter.

The results we reported this morning reflect the ongoing strength of our business model and our ability to grow within the healthcare services industry.

Revenue was a quarterly record.

Operating margin expanded significantly.

And we are particularly pleased that we continue not only to grow revenue at the practice level, but also leverage our general and administrative infrastructure.

Let me walk you through some of the details of the numbers reported today.

Taking a look at the income statement, revenue for the 2004 first quarter increased by 17 percent to $148.1 million.

Same-unit revenue growth continued to be strong.

We're also seeing the anticipated contributions from acquisitions completed during 2003.

Overall same-unit growth of 9.7 percent for the quarter was a result of several factors.

Same-unit patient volume at our neonatal intensive care units was up by 3.6 percent when compared to the 2003 first quarter, and we saw continued improvements from better contracting with commercial payers, as well as the flowthrough from changes made to neonatal coding by the American Medical Association that were implemented in early 2003.

The same-unit growth was also positively impacted by an extra calendar day, since this is a leap year.

Excluding the additional day, same-unit revenue growth would have been 8.5 percent, which includes the impact from same-unit NICU volume growth of 2.5 percent.

Acquisitions made throughout last year and new units added through internal contracting also contributed to revenue growth this quarter.

We are excited about the addition of a physician group practices in Tallahassee and Denver, which we acquired late in the first quarter, as well as the groups in Lafayette, Louisiana, and Atlanta that joined our national group within the last week.

These practices will contribute to earnings throughout the remainder of 2004.

(indiscernible) practice expenses was 56.3 million, up 18 percent from the prior year, with a margin of 38 percent, an increase of 35 basis points from the first quarter of 2003.

Our first-quarter numbers also show that we continue to be very effective managers of our operations.

General and administrative expenses increased by 8.4 percent for the 2004 first quarter when compared against the prior-year period.

This rate of growth is less than half of our revenue growth.

As a percent of revenue, general and administrative expenses were 13.4 percent for the 2004 first quarter, 410 (ph) basis points lower than comparable period of last year.

This positive G&A management can be attributed principally to two factors.

First, to the extent that same-unit revenue growth is weighted toward reimbursement components, we see more of that growth flow through the operating income line.

Second, we're doing a good job of managing our administrative activities.

Even after backing out the contribution from these reimbursement-related factors, our G&A expenses are growing at a rate that is lower than the same-unit and acquired volume related revenue.

These numbers validate the regional management structure that has been in place for the last several years.

The 2004 first quarter operating income grew to $34.1 million, up 24 percent from the 2003 first quarter, and our operating margin was 23 percent, up 116 basis points from the same period in 2003.

Our effective tax rate for the period was 37.5 percent, or 75 basis points lower than a year ago.

The lower tax rate is a result of changes in the apportionment of income in the states where we perform services, and we believe that this lower rate is sustainable throughout the year.

Net income of $21.3 million for the 2004 first quarter grew more than 25 percent from net income of $17 million in the 2003 first quarter.

Net margin increased to 14.4 percent.

Earnings per share grew by 25 percent to 85 cents from 68 cents.

The number of fully diluted shares outstanding was virtually the same for both periods at $25.1 million.

Our share count increased from the 2003 fourth quarter as a result of both share price appreciation and options exercised during the period.

As I said at the start of my comments, this is a very strong quarter and represented a very solid income statement for the period.

Our results for the quarter, again, contributed to making our solid balance sheet even stronger.

Looking at some highlights, we had cash of $24.3 million and virtually no debt at the end of the quarter.

Accounts receivable were $97.9 million and Days Sales Outstanding were right at 60 days.

Last quarter, we discussed some HIPPA regulations that caused some payers to delay claim disbursements to us and other providers.

We saw a delay continue during the early part of the quarter, and we saw a corresponding increase in Days Sales Outstanding.

This trend reversed itself in the second half of the quarter with strong collections.

We believe that the transition by payers under the HIPPA regulations is basically complete, and that going forward, our Days Sales Outstanding should remain at approximately 60 days.

From the liability side of the balance sheet, we realized a $37 million reduction in accounts payable and accrued expenses from year-end, largely as a result of the payment during the first quarter of incentive bonuses that accrued during 2003.

As I said, our balance sheet remains very strong and exceptionally clean.

During the first quarter, we used approximately $7.9 million of our cash to fund operations.

As you know, we expect negative cash flow from operations for the first quarter of every fiscal year.

Bonus payments that accrued throughout the period prior year are paid during the first quarter, which leads to accelerated FICA payroll taxes, which are normally higher during the first and second quarters, as many of our employees, including physicians, reach FICA tax thresholds.

In addition, we fund our annual 401(k) plan matching contribution during the first quarter.

To continue with the cash flow discussion, we paid 8.7 million to acquire two physician group practices during the first quarter and capital expenditures were $2.4 million.

At this point, I would like to remind you of our existing earnings and cash flow guidance.

With today's results, we expect that earnings per share for 2004 will be in a range of $4.01 to $4.10.

The quarterly progression for earnings per share in the range of 98 cents to $1 dollar for the second quarter, and earnings per share of $1.09 to $1.12 for each of the third and fourth quarters of the year.

This estimate for cash flow from operations remains at $130 million for the year.

This guidance includes same-unit revenue growth of 6 to 10 percent.

This growth anticipates NICU patient volume increases of about 3 to 5 percent and improvements in reimbursement contributing an additional 3 to 5 percent.

The earnings per share guidance also includes assumptions from contributions from acquisitions that we made throughout the year.

As we said when we first issued 2004 guidance, we expect to invest $50 million to $60 million of capital in physician group practice acquisitions throughout the year.

We remain very confident in our ability to meet this target, but we cannot control or predict the timing of these acquisitions.

In fact as our recent activity would suggest, sometimes these acquisitions don't happen for awhile and then they all come at once.

I want to thank you for joining our call today.

This was a very solid quarter in which we have delivered excellent results while at the same time making very strong progress in expanding our national group practice.

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

Thanks, Paul.

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

Thank you. (OPERATOR INSTRUCTIONS) Bill Bonello with Wachovia.

Yes, two questions.

I will ask the first one and let you answer.

You mentioned, Karl, that you had spent $8.7 million on acquisitions in Q1.

Can you tell us where you're at year-to-date?

Through the acquisitions that we have completed at this point, we are in the $20 million to $25 million range in total acquisition spend, up to this point of the year.

And we think we are on track to what we expect to spend for this year.

Okay.

And then secondly -- actually I have a third question, too -- secondly, can you give us some sense of your outlook for margins, given the acquisition of pediatric cardiology, NICU and maternal-fetal practices?

Is that going to have a much of an impact on margins going forward?

From a margin standpoint, we don't see a significant change.

As we have said the past, the margins that we have received on our maternal-fetal medicine practices have not been at necessarily the same level as the neonatal practices, although we think it's a strong component of our business, clinically as well as operationally.

I would say we would expect to see the same dynamic in the cardiology practices, where the margins may be lower.

But for the foreseeable future, we still see the neonatal business being the largest part of our business, and will continue to be so.

We don't see those impacting our margins to any significant factor anytime soon, and we do think they are quality practices to invest in.

Okay.

And the final question is can you just give us some thoughts on how you are viewing the balance sheet?

You're totally unlevered right now with pretty strong free cash flow.

What are your thoughts about what you might do with excess cash and your willingness to lever up going forward?

It has always been our stance that we, for the right opportunity and the right acquisition, we would love to add cash flow and earnings through putting appropriate level of debt on our balance sheet.

We have just been a little cautious of levering up for purposes other than to add a ranging (ph) cash flow.

Although as we build cash, it is something we will evaluate, whether we should be looking at a stock repurchase program or other opportunities that we will be talking about with the Board.

But I am correct in thinking that you would build a significant cash position, given your cash flow and acquisition outlook, if you don't do some kind of share repurchase?

That would be correct.

If we didn't do some type of share repurchase, short of a significant spike in acquisitions above what we had anticipated, we would build a cash balance by the end of the year.

That was all.

Thanks.

(OPERATOR INSTRUCTIONS) John Szabo with CIBC World Markets.

Good morning.

Thanks.

I was wondering if you could maybe help us scale that pediatric cardiology opportunity.

I think you mentioned Phoenix as a market.

How many pediatric cardiology practices would there be in a metropolitan area like Phoenix?

And if you just sort of help us size the opportunity, I think it would be helpful.

Good morning.

It's Roger.

Just to bring this whole thing to a circle, we look at -- pediatric cardiologists get involved before the baby is born.

If the perinatologist or the high-risk obstetrician determines that there could be something wrong with the baby's heart, the cardiologist will get involved while the babies are still in utero and will view (ph) echocardiograms.

And that's why it's important for us to be practicing this specialty.

The newborns that are born undetected with congenital heart disease will be detected by the pediatricians, who will then transfer the patient to the neonatologist, who will then decide that they need a cardiologist and get the cardiologist involved.

So the continuum of care there starts even prior to the delivery, with some cases, with the obstetrician in fact calling for the cardiologist.

The number of pediatric cardiologists in the country, I don't have an exact number.

There's probably close to 2000 of them.

Their practice patterns are similar to neonatology from the standpoint that there are probably a couple of cardiology practices in each market.

So again, it's a market where coming in and making an acquisition gives you a presence in the market.

So we see some pretty close dynamics to what exists in neonatology and perinatology.

And they are distributed more or less along the same lines, because that's what they're getting their patients from.

They get the majority of their patients are coming from them -- the majority of pediatric patients that have heart disease have congenital heart disease.

They don't have acquired heart disease.

They don't have heart attacks and they don't have high cholesterol and they don't have high blood pressure.

They have structural damages in their heart that are from birth that are congenital.

So they are getting their patients from the pediatricians, the obstetricians and the neonatologists, and so they tend to practice around those areas where there are already neonatologists and perinatologists.

So if we look at your guidance for acquisitions for the year, would pediatric cardiologists account for 1/3, 1/2?

Much less than that.

We have acquired these couple of practices.

We might do one more this year.

We have been practicing cardiology for more than 10 years, but we don't want to jump into it too deeply right now.

We have the practice in Denver, which is a nice practice for us, and the practice in Phoenix.

We might do one more cardiology practice.

Okay, thanks.

That's helpful.

One other question, sort of a bigger picture question.

You had very solid margin improvement year-over-year, and I guess when you look out over the next couple of years and you are mapping out your earnings growth plans, what percentage of that do you think is going to come from continued margin improvement versus topline growth, be it acquisition driven or same-store?

I'm just trying to get a sense as to what maybe the top end of the margin potential is with your business as it is currently configured.

John, this is Karl.

When we look at the margin growth, there are a few factors to think about.

One that I talked about my earlier remarks was over the last year we have had a sizable amount of growth in our revenue line through reimbursement.

So to the extent we are getting reimbursement improvement, that doesn't require an increase in infrastructure demands to manage that business.

So while we have been above our guided range in the past, a piece of that being the change in the coding last year that did flow through into this quarter as well, you are going to see bigger margin and expansion because of the growth from reimbursement factors than growth from volume increases and additional practices.

While I think we will be able to continue to keep our G&A infrastructure in check as we grow at those levels, it will be marginal improvements, not at the level that we saw this quarter or through last year, because as we move back into the range of the 3 to 5 percent from reimbursement, you won't have as big a flowthrough down there to the operating margin.

So that piece of the growth from just improved pricing will not improve the margin as much on a go-forward basis as we move into the range that we've laid out in our guidance of 3 to 5 percent from reimbursement.

That being sad, incremental margin improvement is part of it, but it is a small piece of that.

We do expect to see same-unit revenue growth and acquisition growth to be a big part of our growth in the future.

Thanks.

Matt Ripperger from Smith Barney.

Great, thanks very much.

I actually had three questions.

The first was, Karl, I wanted to see if you could give us the exact amount for the cash bonus payment in the quarter.

I know you mentioned that the accruals and accounts payable decreased.

I just wanted to see if you could break out the bonus payment, and whether it was all recognized this quarter or whether any of it was deferred later?

The second question, I wanted to see if you could update us on the clinical lab business and how that was progressing relative to your expectations and maybe give us an update in terms of who's running the business right now for you.

And then third, I wanted to see if you could give us an update on the timing for filling the Chairman's role and what we could look going forward?

Thanks very much.

As far as the cash bonus payments for the quarter, we paid a little more than $50 million in cash bonus payments during the first quarter.

We had said we had a $37 million reduction in accounts Payable and accrued expenses, and that $50 million was offset slightly by improvements -- by accruing again for the 2004 bonus payments we have to pay, as well as other accruals during the period.

But it was in excess of $50 million, between $50 million and $55 million.

As far as the clinical lab business.

The clinical lab, we are happy with the lab business.

We have made progress.

We like the opportunity there.

We, as you know, think that because we have so much contact with newborns in our hospitals and because we are the newborn experts at our hospitals, that puts us in a pretty unique position to be able to market these services.

We have gotten into some small international contracts where we can provide some of the screening to some hospitals in Central America.

So we like the business.

It is more or less on track with where we thought we were going to be.

We like the potential for expansion there for same-store growth opportunity within that business.

Running it for us now, the original owner, Dr. Nader (ph), is still there.

He is more involved today in the research and finding of future tests for us than he was in the past, as far as the day-to-day runnings of the Company, and that is exactly where we wanted him.

We wanted to move him more into a position where he would be doing research and coming up with new tests for us to be able to market.

And we have hired a lab person that is the operational person in place, and he has been in place for a couple of months.

And we like that hire; we like the way that he's running the company.

There's also a physician who is a neonatologist with an MBA that was put there originally when we completed the acquisition -- his name is Phil Vaughn.

And Phil now is more in charge of developing our follow-up program.

We think that we have a big opportunity, not only in diagnosing these kids, but in developing a good, solid follow-up program, which is something that we think is vastly needed.

So we like the business.

We like where we are today.

We see a lot of potential future opportunities for us in that area and we're going to continue to make investments in that area.

The Chairman.

John, when he first came on board, John Carlyle, he had mentioned that he wanted to stay and make sure that the integration of Magella was carried out successfully.

Needless to say that it has been three years and we are very happy with the acquisition.

The acquisition has been fully integrated into Pediatrix.

John has told me that he is considering other opportunities, and so this was a good time for him to step down.

We will have an annual meeting on the 20th, and following the annual shareholders' meeting, we will have a Board meeting on the same date.

And we expect that we will appoint a different Chairman, a new Chairman, who will also be independent and who will be not part of management.

Thanks very much.

(OPERATOR INSTRUCTIONS) Bill Bonello with Wachovia.

My question was answered, thanks.

At this time, I am showing no further questions in queue.

Okay, if we have no further questions, thank you for listening this morning.

Ken (ph), thanks for your help, and we look forward to speaking with you next quarter.

Thank you.

It's been our pleasure.

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