Pediatrix Medical Group Inc (MD) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Pediatrix Medical Group 2004 second quarter earnings conference call.

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

As a reminder today's conference is being recorded.

Before I open the call up to the Pediatrix Management Team I want to read a forward-looking advisory statements.

Matters discussed during this conference call 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 the Pediatrix Management based on factors they believe to be appropriate in light of their experience.

Forward-looking statements are subject to risks and uncertainties and 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 or future events or otherwise.

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

I would now like turn the call over to Dr. Medel.

Please go ahead, sir.

Thank you and good morning.

Pediatrix reported another strong quarter of record revenue, operating income, net income, and earnings per share.

We continue to see solid margin improvements while at the same time attracting physician groups to join our national group practice.

In addition, cash-flow from operations was very strong, a valuable indicator of our earnings quality.

Overall, this was very solid quarter for our Company, one which should provide additional comfort in our ability to continue to execute a focused strategy of growth within our core competencies for maternal-fetal newborn and pediatric health services.

I will turn the call over to Karl Wagner our Chief Financial Officer in a few minutes and he'll provide some details of our operating results, financial condition and update to our earnings guidance.

Before that, though, I want to spend some time discussing some of the highlights of the quarter and brief review of some external issues.

During 2004 second quarter we continued to see physician groups joining Pediatrix.

We added a total of 5 practices during the period including a large Neonatal Physician Group in Lafayette, Louisiana, which is a new state for us.

A Maternal-fetal Medical Group in Atlanta that practices closely with the neonatal physicians that are part of Pediatrix there.

A Pediatric Intensive Care practice in Tacoma providing pediatric intensive services to our existing neonatal and maternal-fetal medicine physician services in that market.

A Neonatal Physician Group in Torrance, California that practices closely with our Southern California maternal-fetal medicine physicians.

And a large Neonatal Physician Group based in Columbus, Ohio a new market for us within a state where we've had a presence for almost a decade.

This was very busy period on the acquisitions front and including the 2 transactions completed in the first quarter we've now added 7 groups, spending a total of $38 million of cash throughout the first 7 months of the year.

We remain comfortable with and on track to meet our goals of spending 50 to $60 million of capital on practice acquisitions by year-end.

At the same time that we've been adding practices to our National Group we've been using our capital to repurchase shares of our common stock.

During the past several months straddling the ends of the second quarter and the beginning of the third quarter we completed a $50 million share repurchase program.

We also announced today that our Board has authorized an additional $50 million share repurchase program.

By purchasing our shares continues to be highly accretive to EPS.

Even our strong cash flows and unleveraged BS we are confident in our ability to continue to repurchase an additional $50 million of our shares while executing our growth strategy.

Today's results should bring forth confidence in the ongoing management of our core activities as measured in part by our continued margin improvement.

On a different note our Board of Directors promoted Joe Calabro to the position of President and COO.

Joe has served as COO since May of 2000.

The addition of the title of President recognizes both his contributions as a member of our Senior Management Team over the past 8 years, and anticipates his continued leadership position at Pediatrix.

Coinciding with Joe's promotion to president I have agreed to serve as Chief Executive Officer for 5 more years.

As a result of these events and when combined with our already strong Corporate and Regional Management Team, I am very confident that we have the leadership to capitalize on the long-term opportunities that are available to Pediatrix.

Obviously, as proven by our results we continue to be very successful in managing our core operations.

Moving on I want to address 2 external issues; the Federal Trade Commission review that began more than 2 years ago, and the U.S.

Attorneys review of Medicaid billing practices that was launched more than a year ago.

While we continue to cooperate in both investigations and we remain in contact with the Government agencies, at this point we have nothing new to report.

As a consequence we continue to be in a position where we are not able to predict the timetable or direction of any event for resolutions.

One area where I'd like provide some insight, and hopefully remind investors of some of the unique attributes of our core business, is what's happening with Medicaid reimbursement.

In recent months we've heard a host of companies discuss reimbursement issues on the Medicaid front and their comments have raised questions about its impact on Pediatrix.

I would like to remind the investment community that we are a Physician Group.

We bill for physician services in several critical care subspecialties and we bill for newborn services.

We do not, let me emphasize, we do not bill for either facilities expense or pharmaceutical.

I mention this because it's an important differentiator, one that is recognized by Medicaid Program Administrators who have consistently treated reimbursement for physician services different from other areas within healthcare.

We have completed a review of the budgets for those states where the legislative process has been completed for fiscal 2005 and we believe that Medicaid reimbursement for physician services will not be materially impacted.

We view Medicaid as a portfolio of 31pairs, the number of states where we practice.

In general, Medicaid Program Administrators have left physician reimbursement unchanged.

While there are headlines on activities that effect other healthcare organizations our analysis indicates that reimbursement for physician, and in particular prenatal and pediatric subspecialty care, we remain virtually unchanged.

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

Karl?

Thanks, Roger.

Good morning, everyone.

This is another great quarter for Pediatrix, one in which we saw increased contributions from acquisitions, as well as continued margin improvement as we manage our core operations more efficiently.

As in our practice on these earning calls, I'll provide some details on the numbers that were released today, and spend some time on our guidance for the remainder of 2004.

Revenue for the 2004 second quarter increased by 14%, to $152.2 million.

Revenue increased, as a result of contributions from acquisitions and same-unit growth of 4.6%.

As Roger stated we've added 7 Physician Group Practices this year and we are seeing contributions from many acquisitions completed last year.

As I said, same-unit growth was 4.6% for the 2004 second quarter.

Same-unit volume at neonatal intensive care units was up by 2% and remainder of the same-unit growth comes from reimbursement-related factors, including contracting and patient acuity.

I'm sure many of you know our same-unit growth for this quarter was below our expectations.

As we have said in the past volume growth is difficult to predict.

Although, based on historical averages same-unit revenue growth in neonatal unit patient-days has been between 3 to 5% on an annual basis.

Although, it will fluctuate quarter-to-quarter.

We believe that the lower than expected volume growth for the quarter was related to a very strong comparable period.

In the second quarter of last year we recorded 7% same-unit NITU volume growth as part of 11% overall same-unit revenue growth.

There were a couple factors that reduced the rate-of-growth from reimbursement when compared with recent quarters.

First, we did not realize any growth, as a result of changes made to neonatal coding in 2003 by the American Medical Association.

The anniversary of those changes occurred during the 2004, first quarter.

Second, we realized the payer-mix shift towards government payers when compared to last year.

At this point we are ahead of our revenue estimates for growth and acquisitions, and we are comfortable with our overall growth projections.

Moving on with the income statement, profit after practice expenses increased by 17% year -over-year to 62.3 million, the 2004 second quarter.

With the margin of 41% we are up 110 basis points from last year.

The margin improvement can be attributed to 146 basis point reduction in practice, salaries, and benefits, as a result of a variable compensation program that we implemented, a slight shift in payroll taxes into the first quarter, as well as better management of our medical malpractice expenses.

This was offset by higher supplies and other practice related expenses, primarily as a result of our 2003 acquisition of the medical off-screening lab.

During the 2004 second quarter we also continued to see leverage of our General and Administrative infrastructure, which includes activities at our Regional and Corporate Offices.

General and administrative expenses increased by just over 3% for the 2004 second quarter, when compared against the prior-year period.

As a percent of revenue general and administrative expenses were 12.9% for the 2004 second quarter, 133 basis points lower than the comparable period of last year.

Operating income for the second quarter was 40.4 million, up 25 percent, from 32.4 million for the 2003 second quarter.

Our operating margin was 26.5%, up 230 basis points from the same period in 2003.

As we've discussed on previous calls our effective tax rate for the period is 37.25% which is down 75 basis points from a year ago.

Record net income of 25.2 million for the 2004 second quarter was up by 27%, from net income of 19.9 million for the 2003 second quarter, net margin increased to 16.6%, up 171 basis points from the same period of 2003.

EPS grew by 21% to 99 cents based on 25.5 million fully diluted shares outstanding.

This compares to EPS of 82 cents based on 24.3 million shares outstanding for the 2003 second quarter.

Our share count is increased during 2004 as a result of share price appreciation, as well as an increase in the number of options exercised so far this year.

Shares repurchased during the second quarter came late in the period and had a result -- and as a result had a variable impact on weighted-average shares outstanding.

Excluding the impact of the repurchase, EPS would have remained at 99 cents for the second quarter.

We continue to have a very strong, very attractive BS.

We ended the 2004 second quarter with cash of $19.7 million even after significant investments in practice acquisitions and share repurchases.

We remain unleveraged with total debt of less than $2 million.

We had no amount outstanding under our line-of-credit.

Accounts receivable were 100.3 million and days' sales outstanding remain right at our target of 60 days.

We remain comfortable that we will maintain DSOs at this current level.

On the liability side of the BS, accounts payable and accrued expenses were $92 million.

As we move further into the year we are seeing the expected increase of accruals for physician incentive bonuses that will be paid during the first quarter of next year.

As I said with no debt, ample cash, and a very solid business our BS is very strong.

Capital from operations for the 3 months ended June 30 was $41.2 million.

This consists principally of net income plus the accruals for compensation including physician incentive bonuses.

Payments for the acquisition of 5 physician group practices completed in the quarter totaled $30 million.

In addition, we bought back approximately 348,000 shares of our common stock, spending $23.2 million during the quarter.

Since the end of June we have completed that share repurchase using $50 million of cash to retire approximately 744,000 shares.

Today's announcement of a new $50 million share repurchase program is an indicator of one of our uses of cash-flow for the remainder of this year.

For the quarter CapEx were relatively light at $1.4 million.

At this point I'd like to spend a few minutes talking about our earnings guidance and this will be considered a forward-looking discussion.

The results we reported for the 2004, first and second quarters were in the middle of the range that we had established when we first issued the 2004 quarterly guidance late last year.

The most recent EPS guidance for each of the third and fourth quarters was for a range of $1.09 to $1.12.

When added to the $1.84 we earned in the first half of this year expectations for EPS would be between $4.02 and $4.08 for all of 2004.

This guidance included assumptions about savings and growth and contributions for acquisition at the mid year point we are comfortable with the progress made thus, far on both front.

These numbers did not anticipate any impact from share repurchases.

With the completion of the most recent share repurchase program, we feel comfortable raising EPS guidance to a range of $1.11 to $1.13 for both the third and fourth quarters of the year.

Adding the actual earning of $1.84 per share for the first half of the year, to our range for the second half raises full-year 2004 EPS guidance to a range of $4.06 to $4.10.

Since we can't predict the timing of the future share repurchases this EPS guidance does not include any estimated impact from the repurchase program announced this morning.

With this guidance we are not changing our assumptions for either same-unit growth or for contributions from acquisitions.

Finally, I want to remind you that we completed a newly revolving credit facility which was announced yesterday.

This is a 5-year, $150 million line-of-credit that replaces a $100 million facility that was due to expire later this month.

With the combination of our strong cash flows and this expanding credit facility we are very comfortable that we have access to the capital needed to continue to grow our business.

I want to thank you for joining our call today.

It is a very good 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 Karl.

Good job.

As you can see this was another strong quarter with contributions coming from acquisitions and continued margin expansion.

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

Thank you. (OPERATOR'S INSTRUCTIONS) And we open the question from Bill Bonello with Wachovia.

Please go ahead.

Good morning.

Just want to revisit the same market or same-unit growth statistics a little bit.

You mentioned, Karl, no change to your expectations.

And I understand the volume does fluctuate from quarter-to-quarter.

But the pricing also seemed to be a little bit less than maybe what you had expected or what we had expected.

And you mentioned that that was due in part to mix shift.

I guess I'm just wondering why that shift wouldn't be ongoing and cause you to be a little bit more conservative in your internal growth outlook?

Yeah, looking at the mix shift when we began seeing some mix shift during the latter part of last year, as you probably saw in our full-year results, we saw a slight mix shift last year moving our government to 25% of our revenue.

And a lot of that shift came in the second half.

So some of the comparables will have a higher shift in it.

And at this point in looking at our managed care contract and strategy, we are looking forward to a good second half of the year in our contract renegotiations.

So we have an expectation of being in that 3 to 5% range.

It was lower than we expected this quarter, but we expected to try and get it into that range.

Great.

Thank you.

Thanks.

And we have a question then from Andrew May's line with Jefferies and Company.

Please go ahead.

I wonder if you could give us a little more information on the mechanics of what's going on in the practice, salaries, and benefits line, where there was sequentially $3 million lower, in -- pretty dramatic change in practice, salaries, and benefits as a percentage of revenue.

And you mentioned in your prepared comments that it reflected 3 things, but give us a sense of how -- what the contribution, relative contribution of those 3 items might be, and the mechanics of the change in the compensation plan that gave rise to the reduction?

Well, I mean there are a few components to that when you look at it on a year-to-year basis.

First off, we have done a good job of managing some of our benefit costs on the salaries and benefits side.

So we've seen improvement on our Med-Mal cost as we have through our Captive Insurance Company taken a little more risk and managed that very well over the last year.

So we've seen some improvement there.

Additionally, we did see a push of some of our -- on a sequential basis the reduction would be the reduction in payroll taxes.

And we did see a push of some of that back to the first quarter as the significant amount of bonuses we paid in the first quarter would have moved some of that into the first quarter and less as a percent of revenue in the second quarter.

Also, with the revenue growth moving forward we are not seeing -- we are not having to add positions at the same rate for the revenue growth as we continued to grow.

So typically the salary side of it will grow at a lower rate.

There have really been no significant changes in our bonus program over the year.

But with same-unit growth being at the 4.6 range we haven't seen the growth in the bonus program this year as compared to last year at the same rate we've been seeing.

Gotcha.

So with same-unit growth where it is you just don't need to make as big a bonus accrual as you might have had to a year ago?

Right.

The bonus accrual will grow in theory at the rate of a same-unit revenue growth rate since most of our programs -- most of our acqui -- practices that have been with Pediatrix, about 85% of our practices are under this bonus program.

Right.

When does your Med-Mal role?

We just renewed our Med-Mal policy effective May 1st.

So we have -- our policy will be in place until -- through April 30th of next year.

Right.

So the improvement that you were able to achieve in Med-Mal did help Q2 relative to Q1?

It helped Q2 relative to Q1; that's correct.

As we've continued to control our cost and our losses on the retained piece of our Med-Mal policies.

Right.

And with the big bonuses from last year, just to make sure that I understand, you had a lot of your doctors hit Social Security maximums in the first quarter?

That's correct.

A higher percentage this year than we had last year.

Okay.

Good.

Thank you very much.

That's very helpful.

Thanks.

And once again if anyone does have a question please press the star, and then 1 at this time.

We are showing a follow-up question from Bill Bonello's line with Wachovia.

Please go ahead.

Just wanted to follow-up on your comment that you don't need to add as many doctors to achieve your revenue growth.

I'm assuming that's due to the contribution of things like the lab, and the hearing screening, and the well-baby program; is that correct?

It's lab, well-baby, hearing screening.

Additionally, as we've seen pricing increases we don't add physicians for pricing increases either.

That wasn't a significant component this period as well, but as we add some of those other services as well, we don't have to add physicians for all those services.

Okay.

And just curious if you can give us any kind of an update on either the hearing screening or the lab, sort of how those are growing, and how they are doing relative to your expectations?

You know, I think, when we look at both of those businesses, we are looking at those businesses as a combined program from a marketing and growth standpoint as they've got a lot of the same factors from a screening standpoint that makes them attractive for hospitals to want to offer to their patients throughout those programs.

So we are very excited about the potential of these programs.

We've spent a lot of times, we said in the past, on growing -- on putting the infrastructure in place at the lab and now we are adding the marketing resources and we are very excited about the growth in that.

I would say initially it hadn't grown at the rate we had anticipated when we first acquired it, but now we are real happy and look for strong growth in the lab side, in the screening business going forward.

Can you give us, I don't know if you're willing to do this.

But can you give us any kind of metrics, that would indicate sort of how big that business is and maybe where it could go?

When you look at the lab, as we said from the beginning, it's less than $15 million and its continued to be in that range.

I think we've had some positive things that give us the opportunity to see growth.

At this point we are trying to see how our marketing avenues payout over the next, probably 6 months, to kind of see what impact that's going to have.

But we've had some positive things, such as at the beginning of the year or the end of last year, a lot of you may have heard we were not performing services for the mandated screens for the State of Pennsylvania.

And subsequent to that there has been some legislative changes that allow us to do that.

And we've gotten a significant percentage of that business back.

I think now we are doing about 80% of the mandated screens and in Pennsylvania.

Plus we do a lot of screens for supplemental screening services over and above what's required by the State of Pennsylvania for almost all the hospitals there.

In addition, there's a lot of public relations going on in screening, metabolic screening for newborns, not primarily just by pediatric screening, but also the March of Dimes is very involved.

There's been a few articles in the Wall Street Journal as of late, so we see this as a very positive for this business going forward.

Okay, thanks.

And Bill, just to finish off.

We should try to come up with a metric for the percentage of newborns that we are screening or something like that.

I know we'll work on that this quarter and see if there's a metric that makes sense that gives you the right information so that you guys can have access to it.

Great.

Thank you.

Thanks.

And once again if anyone has a question please press the star, and then 1.

We are showing a follow-up question now from Andrew May's line with Jefferies and Company.

Please go ahead.

YTD have you lost any hospital contracts and do you anticipate any that you know you will lose in the balance of the year?

We haven't lost any hospital contracts.

There have been -- no, there's been 1 small hospital that we personally or we individually have walked away from as a result of them not being in the profit range that we would want it to be, but we haven't lost any hospitals.

Thank you very much.

Thanks.

And again if there are any questions please press the star, and then 1.

We are showing a question from the line now of Anton Hee or Highrather with Jefferies.

Please go ahead.

Hi.

If I could just touch back on the lab real quick.

Do you see -- as you look out at opportunities and that, do you see a growth on volume or requisitions per order or increased acuity or if you can give us an update on the growth line?

Well, at the -- hi, it's Roger.

You may have notice that there's been a big push in the media particularly, in the last quarter about metabolic screening -- the March of Dimes, has made metabolic screening one of their -- out -- their top priority, one of their top priorities.

There's been articles in the Wall Street Journal about it.

There's been programs on Good Morning America, and other programs based around this, and a number of other publications, et cetera.

We, you know, when we went into this business last year and before, we kind of predicted that this was going to happen.

We saw the demand starting to grow.

And we thought that this would be a good thing for us to be involved with.

So we see the lab business as something -- we did about 300,000 metabolic screens last year compared with 4 million babies born in the United States.

So we saw plenty of opportunity for growth, not only within the United States, but we think because of the technology, which is a drop of blood on a piece of filter paper, which allows it to be mailed overnight from anywhere in the world, that we see potential increases on an international basis as well.

So we see our market as being 4 million babies in the United States, 4 million babies in Western Europe born annually, and then the rest of the world, which is hard to know exactly what the number of births are.

But, so we see it as the opportunity to increase the volume, as well as to increase the number of tests performed for the number of diseases screened for in each test performed.

What we have done is we've brought the hearing screening and the metabolic screening together.

That's given us an opportunity to consolidate some expenses on the Management side, as well as the marketing side, et cetera.

We know that the website is up under Pediatrix Screening.

Parents now can individually order the kits that they can do their -- test their kids even if their hospital where the babies were being born at don't offer it.

So I mean, we are just starting to put the whole thing together.

But we expect to see growth not only in volume, but also number of tests performed per screen.

There will be other screens that we will be adding to the test -- the basic number of tests that we do.

Thank you.

(Operator's instructions) And at this time I'm showing no further questions in queue.

Okay.

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