Pediatrix Medical Group Inc (MD) 2004 Q4 法說會逐字稿

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

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

Matters discussed include 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 an 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'd like to remind you that following remarks by Dr. Roger Medel Pediatrix's chief executive officer and Carl Wagner management will host a brief question and answer session.

I would not like to turn the conference over to Dr. Medel.

Please go ahead, sir

Thank you.

Good morning and thank you for joining our conference call.

Pediatrix reported another strong quarter this morning with a record quarterly revenue and strong cash flow from operations.

In a few minutes, we're going to provide some of the detail behind those numbers as well as a discussion of our quarterly earnings guidance for 2005.

I also want to spend a few minutes going over two issues of interest to many investors, our recent acquisition activity and an update on the Pediatrix shift that occurred during the 2004 third quarter.

Our results for 2004 are on going evidence of the durability of our business model.

A model that has successfully built the national group practice that has managed for more efficiency than smaller groups.

One that is able to invest in research, education and clinical quality programs to improve care, while at the same time generating strong financial results for our shareholders.

This is a model that continues to be very attractive to physicians within our key subspecialties.

During 2004, we completed 12 physician group practice acquisitions.

These were in each of our four physician subspecialties, neonatal, maternal-fetal, pediatric intensive, and pediatric cardiology care, but the overwhelming majority of transactions and required revenue and earnings continues to be within the neonatal physician services area.

Last year eight of the acquired practices were neonatal physician groups, which provided 77,000 combined annualized neonatal intensive care unit patient days to our operations.

We're off to a strong start for 2005 as well.

With the completion of three neonatal physician group practice acquisitions during January.

Since we embarked on our acquisitions program almost ten years ago, we've acquired and integrated more than 90 physician group practices into our group.

That do not include the 15 practices that were part of Magella Health care, our largest acquisition which was integrated almost four years ago now.

Through all of this, we have maintained a disciplined approach to executing our growth strategy.

Our guidance for 2005 assumes that we'll invest another $50 to $60 million of our cash in group practice acquisitions.

This is a number that reflects our comfort in the pipeline of potential transactions.

With the combination of our significant cash flow generation and availability on our revolving credit facility, we believe we have the available capital resources to more than meet our acquisition goals.

We're excited about our ability to continue our efforts to grow our core business.

Last quarter I provided an overview of how macroeconomics changes in the design of employer sponsored health plan and state fiscal policy, all combined to affect our payer mix.

As you might recall, we experienced an increase in the number of patients participating in government health plans, medicaid and the state children's health insurance programs, and a decrease in the number of patients participating in commercial health care plans.

The result was the reduction in average reimbursement per patient.

Our results today are the first full quarter with this new payer mix.

I'm pleased to say that throughout the fourth quarter , our payer mix remains virtually unchanged from the latter part of the third quarter.

We're watching this data closely, monitoring enrollment trends and state medicaid and state children's health insurance programs.

Our budget for 2005, as reflected in our earnings guidance, assumes a stable payer mix, and based upon our experience in the 2004 fourth quarter, we remain comfortable with that assumption.

In fact, this is probably a good point for me to ask Karl Wagner our Chief Financial Officer to present the detailed discussion of our financial results and to provide some additional insight into our earnings' guidance.

Karl?

Thanks, Roger.

Good morning, everyone.

Our results for the 2004 fourth quarter demonstrate excellent progress as we continue our strategy of building our national group practice.

I'm going to spend a few minutes providing some detailed information of the results we reported this morning , and then I'll discuss our 2005 earnings guidance including the introduction of quarterly guidance that was contained in our press release this morning.

Revenue for the fourth quarter was a record $161 million, an increase by more than 10 percent from 145.8 million for the 2003 fourth quarter.

Year over year revenue growth for the fourth quarter was the result of several factors including acquisitions completed throughout all of 2004, and overall same unit revenue growth of 4.9 percent.

Same unit revenue was impacted by the payer mix shift that we experienced during the 2004 fourth quarter.

Same unit patient volume was very strong, however, increasing by 8.2 percent for the fourth quarter, when compared to the 2003 fourth quarter.

Profit after practice expenses was 62.5 million for the 2004 fourth quarter up 4 percent year over year from 60.4 million for the 2003 fourth quarter.

Margin after practice expenses was 38.8 percent for the 2004 fourth quarter, which was down 261 basis points from 41.5 percent for the same period in '03.

The margin decline can be contributed to the payer mix shift , which has resulted in lower average reimbursement for our physician services.

Our expenses are largely fixed salaries and benefits and staffing levels are tied to patient volume which continues to grow.

Our continued success in managing general and administration expenses offset some of the impact of the payer mix shift.

General and administrative expenses grew by 3 percent during the 2004 fourth quarter, when compared to the same period in 2003.

As a percent of revenue, G&A expenses declined to 12.4 percent in the fourth quarter from 13.3 percent a year ago.

Our strong G&A expense management resulted in our ability to absorb some of the impact of the payer your mix shift, while margin after practice was down 260 basis points operating margin declined by only 157 basis points, when compared with last year.

In addition, operating margin remained very strong at 25 percent.

Operating income for the fourth quarter was 40.2 million up 4 percent from 38.7 million for the 2003 fourth quarter.

During the 2004 fourth quarter, we received a tax refund from one state and settlement of a disputed tax payments made in prior years.

As a result of the refund, our tax rate for the quarter is reduced to 36 percent for 125 basis points below our tax rate through the first nine months of 2004.

In addition, accrued interest related to that refund was recorded as interest income in the fourth quarter.

Excluding this nonrecurring item, our effective tax rate for the fourth quarter was 37.25 percent, and we don't expect that we will realize any continuing impact on our effective tax rate due to this settlement.

Quarterly net income was 25.8 million for the fourth quarter, an increase of 8 percent from the comparable period in '03 and was due to the growth in the business, as well as the benefits from the lower tax rates in effect for all of 2004.

Net margin was 16 percent down 42 basis points from the same period in 2003.

As a result of the growth in Pediatrix's business , as well as the impact made in 2004 earnings per share grew by 13 percent to $1.10 based on 23.5 million fully diluted shares outstanding for the 2004 fourth quarter.

This compares to earnings per share of 97 cents based on 27.4 shares outstanding for the 2003 fourth quarter.

The state tax refund and recognition of accrued interest had a net effect of increase in earnings per share by 3 cents for the 2004 fourth quarter.

Moving on to an overview of the balance sheet, we ended 2004 with cash and cash equivalents of approximately $17 million and total debt of 55.3 million of which 54 million was outstanding on our credit facility.

Accounts receivables were 107.9 million down slightly from September 30th, as we received payments that had been delayed during the third quarter as a result of disruptions in our Florida and Virginia operations due to a busy hurricane season.

At 61.6 days for the fourth quarter are down about 1.3 days from the third quarter.

On the liability side, accounts payable and accrued expenses increased to $129 million, largely the result of accruals that built throughout the year for physicians and other bonuses 401K matching contributions that will be paid out during the first quarter of this year.

Cash flow from operations for the 2004 fourth quarter was 43.4 million, which included the accruals for incentive bonus payments and 401K matching contributions.

During the fourth quarter, we completed our authorized share repurchase program spending $92.7 million to acquire our stock on the open market, mostly during the month of October.

We used approximately 23.2 million of our cash for acquisitions and 1.8 million for maintenance and capital expenditures.

Our fourth quarter results are part of a very strong financial operational result for all of 2004.

Revenues of 619.6 million for the year were up by 12 percent over 2003.

Operating income was up 14 percent to $156.2 million in 2004 versus 2003.

As we saw benefit from our G&A management throughout the year and net income for the year was up 17 percent to $98.3 million when compared with 2003.

Earnings per share of $3.97 for '04 was a record and up 16 percent from 2003.

Cash flow from operations for all of 2004 was $123.8 million.

We repurchased more than 2.5 million shares of our common stock last year spending a total after $150 million for an average of about $58.90 per share.

In addition, we had a strong year for acquisitions investing 64.9 million for group practices, capital expenditures remained modest with spending of about $7.1 million for all of 2004.

I'd like to shift direction now to provide discussion of our 2005 earnings guidance, including the introduction of quarterly earnings and annual cash flow guidance contained in this morning's press release.

As I discussed some of the assumptions behind the numbers, I also want to remind you that this review is a forward-looking discussion.

We believe we'll earn between $4.50 and $4.60 per share for 2005.

This guidance assumes that payer mix will remain stable at current levels.

We expect continued same unit revenue growth attributable to NICU patient volume of 3 to 5 percent, which is no change from our historical guidance.

We do expect the same unit revenue growth for the first half of 2005 will be constrained by the payer mix shift that occurred during the 2004 third quarter, but will partially offset by modest on-going improvements we are experiencing in managed care contracting.

Finally, our assumptions include estimated contributions from acquisitions that we expect to make during the year.

We expect to invest between $50 to $60 million of capital to make acquisitions a physician group practices throughout the year, which are anticipated to be accretive.

Clearly with three transactions done this far, we feel comfortable with these numbers.

Those that have followed us for a long time know that we can't control acquisition timing, so it would not be reasonable to take a calculation on January's activity and conduct straight line projections for the rest of the year.

The fact that these deals closed early in the year gives us comfort in our ability to meet our guidance.

The progression of our quarter earnings also reflect the seasonality of our business.

Neonatal physician services are built as bundle day charges and there are fewer days in each of the first and second quarters than the third and fourth quarters.

In addition, when we compare results to last year, a leap year, there's one fewer billing day in 2005 than in 2004.

That's the revenue impact of the calendar.

On the expense side, our employer matching contribution for Social Security or FICA taxes is reset with each new year , and this is a pronounced effect on the first half and particularly the first quarter results.

As we outlined in our press release, we expect first quarter earnings per share to be in the range of 93 -- 91 to 93 cents.

Second quarter of $1.10 to $1.12.

Third quarter $1.25 to $1.28 and fourth quarter $1.24 to $1.27 for a total of $4.50 to $4.60 for the whole year of 2005.

One more timing issue to discuss and that's our cash flow from operations.

We expect that the first quarter cash flow from operations will be negative as we use our cash to pay a number of items that accrue throughout the year.

The most significant payout will be the incentive bonus program for physicians and managers, which is almost $58 million plus the 401K plan matching contributions.

In addition, to the extent that our higher payroll tax expenses through the first quarter has a direct impact on cash flow from operations.

This cash flow timing is normal to our business but it's always worth a reminder.

Cash flow will continue to be strong, and we currently expect to have cash flow from operations of $135 million for all of 2005.

One final note, our 2005 earnings guidance does not make any estimate for the impact of expenses stock options, a change that we will implement during the second half of this year.

We're analyzing the impact of expensing stock options, and we're considering the different methods available to us to calculate that expense.

And we will update our guidance as we have more definitive information to share with you.

I want to thank you for listening to this overview and let me turn it back to Roger before we take your questions.

Thanks, Karl.

As you can see, this was another strong quarter with contributions coming from acquisitions and same unit patient volume.

In anticipations of questions, I want to provide a brief update on both the on going Federal Trade Commission and Medicaid investigations.

We remain committed to cooperate in these investigations, and we continue to have a dialog with the obvious goal of reaching some resolution to these matters.

Unfortunately, we're still not in a position to predict the timing or nature of any eventful resolution.

While we would like to be able to put these matters to rest, our results for all of 2004 reflect our on going success in growing our business and managing it more effectively.

This includes the expansion of our national group practice into five new metropolitan areas last year.

Already this year we've expanded our footprint to two additional areas, Nathan, Georgia and Fresno, California, and we expect that Pediatrix will continue its expansion throughout the year.

As we continue to grow, we're also becoming much more efficient managers of our business.

Our investments in contracting, billing and collections infrastructure, continue to pay dividends.

The spiking impact of the payer mix shift during the second half of last year we reported overall operating margin expansion of about 40 basis points during 2004.

And this is the year when we used our financial resources to improve shareholder returns by buying back stock through open market purchases.

All in this was a very strong year, and more importantly we're excited about the opportunities that remain available to us to grow our practice and to contribute to improving care around the maternal-fetal newborn experience.

While we continue to report strong financial results, let me ensure you that we're also investing into the enhancements to the clinical infrastructure at Pediatrix with the goal of helping our physicians and nurse practioners make better, more informed decisions that lead to improved patient care.

As we've learned over the past several years our investment in clinical information systems, first with our research data system, and now with the second generation Baby Steps software for neonatal care is making it possible for our physicians to positively affect the quality of care at those hospitals where they are practicing.

Our neonatal physicians cared for an average of 3,356 newborns each someday in intensive care units at those hospitals last year.

In recent years, we have honored our obligation to conduct research and engage in clinical quality initiatives and share our findings across our subspecialties.

During 2005, we expect to extend this commitment with the continuation of a rollout of an electronic medical record for our office based physician practices that will allow us to better track outcomes through the continue from prenatal, neonatal and pediatric subspecialty care.

We also see that our investments in that clinic will continue and leading to a conversion of several exciting opportunities.

Public awareness of the benefits of early detachment through newborn screening both metabolic disorders and possible hearing loss have never been greater.

The nation's largest hearing street program and the nation's largest private laboratory for newborn metabolic screening are all a part of pediatrics.

Those businesses have shown strong growth in recent years including 2004.

Looking forward, we expect that the expansion of the standard of care to screen for more disorders will create new opportunities for us.

That clinical continuum comes full circle as we continue to incorporate the benefits of our metabolic screening operations into management of our neonatal patients.

We are just beginning to explore ways to bring the basic scientific capabilities of our metabolic screening laboratories to develop treatments from pharmaceutical to nutritional that are tailored to the needs of an individual patient.

As you can tell, this is an exciting time at Pediatrix with a great deal of promise for the future.

We're very bullish on our outlook because of our successes, both clinical and administrative, that have been the product of maintaining our focus on our unique niche within health care.

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

Ladies and gentlemen, (Operator Instructions) We'll go first to the line of Bill Bonello with Wachovia.

Good morning, guys.

A couple of follow-up questions.

First of all, any thoughts on why the volume growth was so high?

I mean, I don't ever remember seeing a same unit volume growth unit this high, and I'm assuming you're not expecting it to stay anywhere near this level given what you said about guidance?

Well, we -- you you know, it's hard for us to predict.

You know, it's been a while since we've seen it this high.

Can't really pinpoint why -- why it was so for the quarter, but you know, we're comfortable with the -- with the classic 3 to 5 percent number.

So no fundamental change in your marketplaces or -- or in neonatology that are driving up that growth?

No, Bill.

When you look at our history, 8.2 is high on a volume standpoint but we have had quarters, you know, at 7.6 back in 2002 and 2003 we had a growth of 7 percent in one quarter from volume, but we also have the other side of quarters being lower than the range we've had.

As we said, our history has shown year after year we end up in that 3 to 5 percent range, and quarter to quarter it fluctuates in and out after that range.

I just wanted to make sure I wasn't missing some trend change.

Secondly, I heard Karl, what you said about same center volume growth, but if you said anything about expectations on pricing sort of beyond the first half of '05, I missed that, and I'm just curious if there's been any change in your thinking regard the long-term prospects for on going price improvement?

When we haven't really seen any changes in the prospects on what we're seeing with managed- care contracts when we renew those and our ability to renegotiate those and get price increases.

You know, we've already renewed some this year and they're in the range of what we would expect and it's on our plan for this year.

So not seeing any changes for that expectation.

And am I correct that excluding the impact of mix shift historically you always kind of looked for a 3 to 5 percent on the price side as well?

3 to 5 percent on the price side if you excluded the payer mix.

Okay.

Good.

And then on the margin side, is there anything impacting margins besides the change in pricing from mix shift on the negative side?

Well, when we have volume growth that we've had this year on the same unit side, especially in the fourth quarter, we do have more costs to cover on call and to -- to help with the physicians, and as we add new staffing as our practices are growing, we do have growth there.

But that's not a huge piece of it.

Most -- I mean, the biggest part of that was clearly the payer mix shift bringing a lower revenue base.

Okay.

And I assume you're not saying that there's this economies of scale, that the more volume you get the worse your margins are?

No.

No, that's not what I'm saying.

I'm just saying as we get better we're adding -- cost.

Okay.

So in addition, adding the cost and seeing revenue per day go down, you know, impacts our margin.

Perfect.

I have a few more questions but I'll pop back in the queue.

Thanks, Bill.

Our next question comes from the line of Anton High with Jefferies.

Please go ahead.

First, a quick housekeeping question.

I missed the total spend on share buybacks for the year.

$150 million.

We bought back about 2.5 million shares.

Okay.

The -- could you break down the number of physicians you have by subspecialty at year end?

Do you have that available?

Hold on a second.

We're looking.

And then why you're grabbing that, the -- if you have it the revenue mix by subspecialty or at least at the NICU level.

Yeah, we really don't break out our revenue mix by specialty.

We see them all working together as -- you know, in the markets that we're in we kind of encourage them working together as a group.

As far as a breakdown physician level, we had approximately 600 neonatologists.

We had about 680 total physicians at the end of the year. 86 maternal-fetal medicine specialists, 44 pediatrics intensivists, 28 pediatric cardiologists, and the we had a mix of a few other docs. 780, sorry.

Makes me a little nervous when my accountant confuses -- 680 with 780.

Sure.

That bonus starts to look a little high.

You've outlined the plan to -- again it's been 50 to 60 in acquisitions for '05.

How much have you done year to date on that -- on the three that you've already done?

I don't know that we -- we give that out at the end of the year.

We give it out as quarterly data and we'll update it when we do our filings.

Okay.

For the first quarter?

Okay.

We'll update again at the end of the first quarter.

Have you identified any kind of larger platform acquisitions, or do you continue to target the -- you know, 2 to 3 units in a single market?

Well, they're not on your real -- you know, like Magella, you know, with 20 practices or even multistate practices out there where they may have, you know, practices in more than one state.

There is --

But you've already done what's there.

Huh?

Well, there are are some large practices that we'd like to own, but they're all within the one state.

There is a one private competitor that we used to be public and they went -- they were taken private some years ago.

Their name is Sheridan and they're an anesthesiology group but they do own -- you know, -- I dont know -- 10 practices and they are multistate in -- in Virginia and Florida and Texas.

But that's the only other group that we're aware of out there that -- Right.

No real places you've identified or something like that

Right.

Did you experience any discernible growth in the screening business in '04?

I know you're trying to look at everything together but a you look at the -- at the screening , I know you've -- you're seeing opportunities in that in '05.

I'm wondering what kind of growth you factor into the guidance in the actual screening.

We thought significant growth in our hearing screen and in our -- and in our metabolic screen.

Now, you know, keep in mind that that -- that business, you know, the metabolic screen represents less than 2 percent of our business.

So it's not a homerun but we're seeing some very nice growth in both those weaknesses.

And one more quick question.

What is the debt at February 3rd, '05?

I don't want to be given monthly updates of you know -- our numbers and trying to back in acquisitions numbers --

We'll update that in the quarter.

Thank you, fair enough.

All right.

Ladies and gentlemen, (Operator instructions) and we'll go next to the line of John Fox with Panamore Asset Management.

Please go ahead.

My question was answered.

Thank you.

Mr. Fox did you have additional questions?

No, my question was answered.

Thank you.

My apologies.

I'll move to the next line of Bill Bonello with Wachovia.

Please go ahead.

I have a couple more questions then.

Just looking at your guidance, does it assume that operating margin will decrease year over year in 2005?

Is that a fair assumption?

I would -- we're pulling out our information.

I would expect that our operating margin will -- does not assume a reduction of our operating margin.

With the payer mix shift we don't expect to see expansion in it either.

Okay.

So basically flat?

Okay.

And then finally, what are your thoughts on the use of excess cash which by your own numbers looks like it should be about $65 million?

Well, you know, as usual, our first priority would be to put that to work by acquiring more practices and so, you know, our guidance is 50 to 60 because we're -- you know, we're comfortable, give you that number where we would be comfortable doing, you know, much more than that from -- we would be able to integrate those practices et cetera, et cetera.

We would be -- and so we're going to look to spend as much of that money as we can in -- in putting it to work acquiring physician practices.

Now, you know, if we don't -- if we're not able to grow more than that, then, you know, I'm sure our board during the second quarter will -- will start thinking about what to do with the excess cash and you know, as you know, in the past, the answer has been buy back some of our shares, so I wouldn't be surprised if that decision was made again.

But we're going to be cash flow negative during the first quarter so there's no point in even talking about that until the second quarter.

Got it.

Thank you.

Thanks.

And ladies and gentlemen, again I'd like to remind you if you would like to ask a question press star then one.

We'll go now to the line of Andrea Sernagal with J.P. Morgan.

Please go ahead.

Good morning.

Roger, I was wondering if you could just provide a little more detail in terms of perhaps a breakdown of your payer mix, either for the quarter itself or for the year.

We'll have a -- a detailed breakout on our 10-K on payer mix year to year comparison.

But at this point we have not put that out.

Okay.

And -- and again, so -- but from 3Q into 4Q it was virtually unchanged from that 3 percent shift we saw in the third quarter?

Yes.

It's remained stable.

Okay.

Great.

Thank you.

Our next question comes from the line of Matthew Cullen with Clovis capital.

Please go ahead.

Good morning.

Just one quick question which is, is there any scenario that you could foresee where that payer mix shift could sort of revert back to what you saw before the third quarter or should we just kind of, you know, count on stability at this point?

No, we -- you know, we certainly hope that we'll see a reversal of that.

We think that it -- you know, most of the factors that we're able to identify related to the payer mix were related to the economy, and we believe that the as the economy improve and people get more jobs and the jobs that provide health insurance that people will come off of medicaid and other health programs and participate in commercial insurance, so you know, yeah.

There is definitely a possibilities that that will reverse.

Okay.

Thank you.

Thanks, Matt.

Ladies and gentlemen, again if there are any addition until questions at this time press star then 1 on your touch tone phone.

Okay.

If there are no further questions,

We have no additional questions.

Thank you and appreciate everyone listening this morning and we'll have our next call after the end of the first quarter.

Ladies and gentlemen, today's conference will be available for replay beginning at 2:30 p.m. eastern time this afternoon.

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That does conclude our conference for today.

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