Pediatrix Medical Group Inc (MD) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Pediatrix Medical Group 2005 second quarter earnings conference call.

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

As a reminder, today's conference call is being recorded.

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

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

All statements, other than statements of historical fact that address activities, 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 risk and uncertainties that could cause actual results, developments, and business decisions 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 statement made during this call, whether as a result of new information, future events, or otherwise.

At this point, I would like to remind you that following remarks by Dr. Roger Medel, Pediatrix's Chief Executive Officer; and Mr. Karl Wagner, Pediatrix's Chief Financial Officer, management will host a brief question-and-answer session.

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

Please go ahead, sir.

Good morning, and thanks for joining our conference call today.

We reported very strong financial results for the 2005 second quarter, as we exceeded our own earnings guidance, largely as a result of strong same-unit revenue growth and acquisition activity.

Over the next few minutes, Karl Wagner and I look forward to providing you with an overview of these results in the context of our ongoing success in executing our long-term growth plan.

First, though, I want to update you on some of the external issues surrounding Pediatrix and a brief discussion of our growth strategy.

I'm going to start by updating you on the outstanding Medicaid and FTC matters.

As most investors know, in early April we made an offer to the Government to settle a national investigation that has been opened for more than two years now.

At this time, the Government has not accepted or rejected that offer, so it's difficult to predict the timing or magnitude of any resolution.

We continue to have a dialogue with the Government on the issue surrounding this investigation.

As we have discussed in the past, this inquiry has been, and continues to be, a review of coding and billing practices.

In recent conversations with the officials conducting the Medicaid investigation, with have learned that the origin of this investigation is a complaint from what's referred to as a qui tam relator, someone who brought this to Government officials.

We have also been informed by the U.S.

Attorney that the ongoing investigation does encompass all matters raised by the complaint, which is to say that, knowing how this matter was started does not have any effect on the specifics of the investigation.

There's probably not much more to say about this, only because we don't know more.

We've avoided speculating on any description of the identity of that qui tam relator, and other than providing us with more color on the origin of this investigation, this news doesn't change the nature of the investigation.

Meanwhile, we continue to cooperate with Government officials.

In this morning's press release, we also announced that the State of Nevada's investigation into our maternal-fetal medicine practice in Las Vegas has concluded.

As we said in the press release, we made a nominal payment to the state.

As I'm sure you'll ask, the world -- the word nominal in this case is $9,000, which includes some of the State's costs.

The settlement agreement releases us from all claims relating to this matter.

While I'm on the subject of Government matters there's a little new to report on the Federal Trade Commission investigation, an inquiry that is now more than three years old.

We continue to have an active dialogue with the FTC staff, but we are also unable to predict either the outcome or timing of this matter.

I hope this helps to bring you current on these issues.

I'd like to get back to the purpose of this call, which is a discussion of our very strong second quarter results, and how we continue to successfully execute our growth strategy.

As we announced several weeks ago, and again in this morning's press release, earnings per share were $1.14 for the 2005 second quarter, which is a quarterly record.

These earnings, driven largely by strong same-unit revenue growth, as well as contributions from acquisitions made over the past year, exceeded our guidance for the period.

Cash flow from operations was also a record, at 53.2 million for the quarter.

And during the quarter we used our cash to reduce debt and fund our acquisitions program.

We are extremely pleased with the acquisitions program in place at Pediatrix.

During the quarter we added four physician groups, plus another one in July.

At this point, we have added 10 practices to Pediatrix's national group this year, through the cumulative cash investment of more than $70 million.

We continue to successfully execute on acquisitions program that was launched 10 years ago, and as we add new groups, we're encouraged by the reason given for physicians who choose to practice as part of Pediatrix.

Many of the physicians who have joined us in recent months have collaborated with Pediatrix while they were managing their practice.

They participated in clinical research and co-authored peer-reviewed literature.

They have seen that we are contributing to our specific subspecialty, improving care through research, clinical quality initiatives, and our robust online education program.

While we talk with investors about the financial efficiencies that come from our national group practice model, physicians are joining Pediatrix because of our outstanding clinical infrastructure that is focused on constantly improving patient outcomes.

Our financial results this morning reinforce some of our recent comments about our long-term strategy of applying our core competency, clinical and administrative, to other physician groups.

The physicians services world remains extremely fragmented, and we continue to explore opportunities to build our network beyond our current clinical subspecialties of neonatal, maternal-fetal, pediatric intensive, and pediatric cardiology services.

The opportunity to extend our national group practice to other subspecialties, particularly hospital-based physicians, continues to be very effective.

We continue to believe that our core competencies, of value-added clinical and administrative support, can be extended beyond our current subspecialties, and we are exploring those opportunities.

At the same time, today's results demonstrate that our management team remains focused on running our core business.

With that, I'd like to turn the call over to Karl Wagner for our review of the financial results, as well as an update of our second half guidance.

Karl?

Thanks, Roger.

Good morning, everyone.

As Roger said, the results we issued this morning reflect another very strong quarter for Pediatrix.

We had a lot of moving parts that seemed to work in our favor over the past few months, and I'll take a few minutes to provide some detail.

Our net patient service revenue for the three months ended June 30, 2005, was 173.8 million, up 14% from last year's second quarter.

Same-unit growth of 8.3% drove most of the revenue increase, and we're seeing contributions from several factors, including -- First, patient volume at neonatal intensive care units increased by 5.6%, or slightly higher than our historical range; second, growth of other services, including maternal-fetal, pediatric cardiology, and pediatric intensive physician services, as well as our newborn screening services, was strong; and, finally, same-unit revenue for this period was positively impacted by growth in hospital contract administrative fees.

The growth of these fees is related to expansion of services at several of our existing practices.

As a reminder, hospital contract fees have historically been about 5% of our revenue.

Same-unit revenue from pricing was essentially unchanged from the 2005 second quarter, as compared to the prior-year period.

We saw the anticipated decline in revenue from the payor mix shift that occurred in the 2004 third quarter, and it was offset by improved contractual rates from managed care programs.

The payor mix remains essentially unchanged since the 2004 third quarter.

Clearly, the same unit revenue growth exceeded our expectations and is the greatest reasons for our earnings per share surpassing our guidance for the 2005 second quarter.

In addition, we're seeing excellent revenue contribution from practices acquired during the past year.

Profit after practice expense increased by 10%, to 68.8 million for the 2005 second quarter, from 62.3 million for the same period in 2004.

Margin of 39.6% was down 140 basis points from the prior period, as our results were affected by payor mix shift of commercial Government payors that occurred in 2004, as well as higher practice salary and benefit expense -- primarily bonus accruals -- as a result of strong same-unit revenue growth.

Operating income of 43.9 million for the second quarter was up 9% from the same period in 2004, as Pediatrix continues to be effective at managing our administrative functions.

G&A expenses remained constant, at 12.9% of revenue for the second quarter, compared to last year.

Net income for the second quarter was 27.1 million, a quarterly record, which is up 7% from 25.2 million for the same period of '04.

Earnings per share of $1.14 is based on a weighted average 23.8 million shares outstanding, and increased by 15% from the prior year, largely as a result of growth in the business and the impact of share repurchases during the past year.

Our historically strong balance sheet became even stronger during the 2005 second quarter.

Even with mid-teens revenue growth, our accounts receivable are up only 5% from this time last year.

At 105.9 million, days sales outstanding continued to decline in the second quarter as compared to the 2005 first quarter, and remained below our long-term levels of 60 days outstanding.

On the liability side our outstanding balance under our $225 million credit facility was reduced to 45.2 million at the end of the quarter, from 82 million at March 31st.

Total debt, which includes the line of credit from capital leases and other obligations, is approximately $46.5 million.

Cash flow from operations for the second quarter was very strong and a record, at $53.2 million.

Our cash flow was helped by better-than-expected net income; accruals for compensation expenses, mostly position bonuses that will be paid in the 2006 first quarter; and improved accounts receivable collections.

The reductions in our DSO has had a positive effect on our cash flow from operations.

We believe DSOs are stable.

We would not expect this to be a significant source of cash flow from this point forward.

During the second quarter, we spent just under $29 million to acquire four physician group practices, and as I said, reduced amounts outstanding in our credit facility by 36.8 million during the period.

Maintenance capital expenditures for the second quarter were approximately $2.6 million.

To provide a quick summary of the first half of the year, Pediatrix has generated revenue of 337.9 million, up 13% from the first half of '04.

Operating income of 73.2 million, through six months ended June 30, is down 2% from the comparable period in '04, after including the non-cash charge related to the Medicaid settlement.

First half net income of 45.1 million is down 3% from the same period in '04.

And earnings per share of $1.91, which includes the impact of the charge related to the Medicaid reserve is up 4%, from $1.84 a year ago.

Earnings per share increased as a result of a 7% reduction in the number of fully-diluted shares outstanding for the first half of '05, compared with the same period in '04.

So far in the quarter we have acquired a neonatal physician group in Brandon, Florida, bringing our year-to-date acquisition spend to more than $70 million.

Overall, Pediatrix is reporting very strong results for the three months and six months ended June 30, which leads me to the next subject, an update of our earnings guidance.

Just as a reminder, this part of my comments should be considered forward looking.

During our investor conference call for the 2005 first quarter, I mentioned that our Board of Directors was contemplating restructuring our equity compensation program to include restricted stock.

Last month we announced our restricted stock grant, and as I discussed, our guidance for the second half of 2005, the impact of that grant is not included.

The discussion of estimated earnings per share includes some non-GAAP information, and I refer you to this morning's press release as well as our press release for the 2005 first quarter, which are available on our website, for a detailed reconciliation of GAAP and non-GAAP information that we will discuss this morning.

As we stated in the press release, we've increased our earnings guidance for the 2005 third and fourth quarters to reflect the positive contributions from acquisitions completed earlier than had been anticipated.

In essence, we hit our estimated acquisition goals for the year during the second quarter, and that provides us with comfort that these practices will contribute to the second half results.

Our business development team continues to work on a number of transactions at every stage of our pipeline, and we expect that we'll continue to complete more acquisitions during 2005.

For the third quarter, we now expect non-GAAP earnings per share of a range of $1.27 to $1.29, which is revised upward from our previous guidance of $1.25 to $1.28.

For the fourth quarter, we expect the non-GAAP earnings per share will also be within a range of $1.27 to $1.29 at this time, which is up from $1.24 to $1.27.

This earnings guidance does not include the impact of equity-based compensation of approximately 4.7 and $5.5 million before tax for the third and fourth quarters, respectively, as the grant of restricted shares to key employees.

For the full year, when excluding the 2005 first quarter charge related to the Medicaid settlement offer and the equity-based compensation expense, we now expect earnings per share of $4.61 to $4.65, clearly, those are non-GAAP numbers.

As a reminder, the low end of this revised range, $4.61, now exceeds the high end of the guidance that was -- we gave when we first issued it earlier this year.

As I said, this guidance assumes continued contributions from acquisitions already completed, as well as modest contributions from additional acquisitions that we expect to close during the remainder of the year.

It also assumes that we will continue same-unit patient volume, and the NICU will grow at a rate of 3 to 5%.

As we've discussed throughout the call, we have established reserves related to an outstanding settlement offer with the Medicaid program.

Obviously, our guidance does not include any potential changes to those reserves as the settlement process proceeds.

In addition, our guidance assumes that our same-unit payor mix will remain stable.

While we see some fluctuation in payor mix when looking at this month-to-month, the number has remained relatively constant since the 2004 third quarter.

We'll continue to monitor this closely, since any significant change in our mix will impact our results.

As I said, we had a lot of factors working in our favor this quarter, that is reflected in our very strong results and the positive adjustments to our guidance.

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

Thanks, Karl.

I have no additional comments.

So let's open up the call for questions.

Very good. [OPERATOR INSTRUCTIONS.] And a question from the line of Bill Bonello from Wachovia Securities.

Please go ahead.

Hi, good morning.

Just a couple of questions.

Karl, you talked about some of the drivers on the cash flow.

Was there anything unusual in the timing of cash outflows this quarter, relative to this quarter a year ago?

Timing of tax payments or anything like that?

No, there wasn't anything unusual.

I mean, the items I spoke about, the days sales outstanding reducing during the quarter and during the year, has had an impact to improve the cash flow, but other than that, there's nothing really unusual as far as cash flow.

No timing issues.

Okay.

And then can you just talk about what you're seeing in terms of acquisition pricing?

Has there been any inflation on that at all?

This is Roger, Bill.

No, not really.

We remain within our historical multiples that we've -- we've always stayed within those boundaries.

So, while we may, for a specific group, go a little higher or a little lower, the average still is going to remain within the 4 to 5 times forward-looking multiples.

Typically, we're in the 3 to 4 times range of forward-looking EBITDA.

As Roger said, we do go outside that range from time to time for the group.

Last year we were much closer to the 4 range at the end of the year.

Our average was, I think, 3.7 times our expected contribution.

Just to make sure everyone understands that, that's what we expect the practice to earn when we've implemented our changes.

So day one we don't get it at that rate, but by the end of the first year, a significant component of our improvements are in that, so we should achieve those results in year two and forward and continue to improve that as they grow the practice.

Okay.

And just in terms of the incentive compensation, with -- would the expectation, then, be that when -- if and when you begin to expense options, that the impact would be less significant than it might otherwise have been had you not started to issue restricted stock?

When we start -- in total, I think the expense will be approximately the same as it would have been, including the expense for restricted stock and/or options.

Okay.

So it doesn't really -- the expense impact for restricted stock is similar to what it would have been?

That was not the motivation behind switching from options to restricted stock?

No, that was not.

Okay.

Thanks.

Thank you. [OPERATOR INSTRUCTIONS.] We have a question from the line of Anton Hie from Jefferies.

Please go ahead.

Thank you.

If I could ask a couple questions about your guidance?

You mentioned that it does include some continued acquisitions.

Am I assuming those are -- am I correct in assuming those are unannounced, kind of, continued NICU acquisitions, or are these some of the -- some of the additional specialties that you've been looking at, at getting into?

No, its our historical business that we continue to -- that we expect to continue to expand.

So, we'll do some neonatology, some pediatric cardiology.

Nothing new is in those -- in that guidance.

No new specialties.

Okay.

And as you -- as you evaluate some of these new specialties, where do you -- do you see the pricing, as far as acquisition multiples being similar to -- to your existing businesses?

That's a great question.

We do expect that we would stay within those historical multiples.

But, at this point, we're not far enough down that path to tell you.

I mean, we are looking -- we're doing a lot of due diligence.

We're -- we're spending a lot of time with potential groups, et cetera, but we're not even negotiating anything with anyone right now.

Okay.

And one more question about the guidance.

Obviously, you're going to lap the payor mix, the dramatic payor mix shift from last fall coming up in the second half.

And I wanted to see if the guidance assumes that pricing comps return to the positive growth that we saw in -- I guess, in the first half last year?

We would expect to see some pricing improvements.

To say it's at that level is going to be hard because, clearly, the bigger impact was part way through the third quarter, so we won't get the same impact in the third quarter that we would have expected.

But based upon what we've been seeing for contracting, I think we'll probably resume towards the end of the year, in that or close to the range that we had in the past.

Okay.

Thank you.

Thank you.

We have no further questions.

Thank you.

At this time, please continue.

Okay.

If there are no further questions, then we'll conclude the call, and thank you for participating this morning.

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