Pediatrix Medical Group Inc (MD) 2005 Q3 法說會逐字稿

And good morning, welcome to the Pediatrix Medical Group's 2005 third quarter earnings conference call. [OPERATOR INSTRUCTIONS].

And before I open up today's conference to the Pediatrix management team I would like to read a forward-looking advisory statement so please note that 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 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.

So with that being said, let's get right to this third quarter agenda.

At this point I'd like to remained that you following the remarks by Dr. Roger Medel, Pediatrix Chief Executive Officer, and Mr. Carl Wagner, Pediatrix Chief Financial Officer, management will host a brief question-and-answer session.

We encourage your participation that.

With that said I would like to turn the conference over to Dr. Medel.

Thanks for joining our conference call today.

This morning we reported another great period of strong quarterly financial results, including growth from acquisitions, solid same unit growth and excellent margin improvement when comparing our results by eliminating the impact of equity-based compensation for this quarter.

I'm pleased to report that earnings per share of $1.29, excluding those equity-based compensation expenses, were at the high end of our guided range, a range that had been increased after the second quarter of this year.

We also remain comfortable with our existing guidance for the 2005 fourth quarter.

Our operating cash flow for the quarter was a record $60.7 million, and we've used our cash to retire the outstanding balance on our credit facility and to continue to make acquisitions.

Through nine months of this year, we've invested $85.7 million to complete 13 group practice acquisitions, including approximately $20 million to buy three practices in the 2005 third quarter.

Also, as you've seen in this morning's press release, our Board of Directors has authorized a repurchase of up to $50 million of our common stock.

Our decision to repurchase shares at this time is based on a number of factors.

We're extremely pleased with the cash generation characteristics of our business, not just for this quarter, but for the foreseeable future.

Thanks to that strong cash generating capability, we have a zero balance on our $225 million revolving credit facility at September 30th.

Therefore, we're very comfortable that we'll continue to be able to fund our growth strategy and simultaneously complete share repurchases as we've done for the past three years.

The results we reported this morning were accomplished at a tame that was very difficult for most healthcare providers and particularly for those with operations in and around the Gulf Coast of the United States that were affected by hurricanes Katrina and Rita.

In a moment, Carl Wagner will discuss the details of our quarter, but first I want to discuss with you some of the things that were going on behind the scenes at Pediatrix during these hurricanes that speak to the true strength of a national group of physicians.

In responding to the crisis following Hurricane Katrina, we worked closely with our hospital partners to coordinate the inbound transport of more than 50 babies evacuated from non-Pediatrix New Orleans hospitals to neonatal intensive care units staffed by our physicians in Texas as well as in other parts of Louisiana that were spared the worst of that storm.

We worked with our physician network across the nation to ensure coverage at units that were suddenly pushed to their capacity.

Doctors and nurse practitioners based in Texas and doctors from as far away as Seattle were flown to our Louisiana units to care for babies transported from New Orleans following Hurricane Katrina.

Through our network of physicians and nurse practitioners the response to provide much needed services to babies and families displaced by the storm was overwhelming.

During that time, the first few days following the storm, our administrative employees were also making certain that our clinical professionals were credentialed at those hospitals and worked with our malpractice carriers to insure that they had malpractice coverage.

A few weeks later the drill was repeated when, in anticipation of Hurricane Rita, more than 80 babies were transported from neonatal intensive care units along the coast of Texas to our facilities in other parts of the state.

Those transports were both from Pediatrix facilities and other units along the Texas coast.

For many of these babies, those who were being relocated from Pediatrix facilities, our physicians were able to quickly access our comprehensive electronic medical notes system and provide a seamless transition of coverage.

None of this could have been accomplished in as timely a manner without our national network of clinicians and the infrastructure we have in place to support them.

More recently, just last week, to be precise, our systems were again tested by the impact of Hurricane Wilma on south Florida, particularly the communities in this tri-county area where our corporate headquarters and the Atlantic regional office are based.

Communities are home to the employees whose [have those offices], and as of today we're because to full speed at work but we did lose several days of productivity last week.

I want to emphasize that the disruption last week was to our administrative activities.

There was no major damage at any of the hospitals we staff in south Florida, and there were no patients evacuations out of our units in the region.

Babies who were in the units continued to be seen by our clinical team and babies born in need of our physician services have had access to and continue to have access to those services.

So most important, our clinical operations have remained intact, and any disruptions that have occurred are related to back-office functions, including claims processing.

Since I think it's safe to say that there were similar disruptions of operations at those payers whose offices and employees are based here in south Florida it would not be unreasonable to expect that our days sales outstanding for the fourth quarter might increase slightly.

That's would we saw in the third quarter of 2004 when our operations were impacted by hurricanes along the East Coast.

However, we do not believe that hurricane Wilma would have a material impact on our results of operation.

As I said earlier, we remain comfortable with our earnings guidance for the 2005 fourth quarter.

So the impact of Wilma on Pediatrix is tied to the time it's going to take to process claims and not on patient volume.

However, there is another impact that goes directly to the investment community, and that is the timing of announcing our 2006 guidance.

Wilma hit as we were working through the final stages of our forecast.

We lost considerable time last week, and we need to spend more time completing this forecast so that we may provide you with an outlook for 2006.

We remain very comfortable with the long-term assumptions of Pediatrix's business.

We believe that we'll continue to see 3 to 5% NICU patient volume growth.

That's something we've seen for more than a decade now as a public company.

We will continue to use our strong cash generating capabilities to invest in physician group practices that are interested in joining Pediatrix.

We will provide more specific and detailed estimates on what we think those activities will mean for 2006 as soon as we're able to complete those processes associated with giving earnings guidance.

Finally I want to bring you up to date on two outstanding matters.

The Federal Trade Commission review of the 2001 [Medela] acquisition and the U.S.

Attorney's Office national review of our Medicaid billings.

We would characterize both of that's matters as active and ongoing with a dialogue, but there has been no substantive change in the direction of these matters.

As a result we're not in a position to predict the nature or timing of any event or resolution.

As I said at the start of this call we remain comfortable with our previously issued guidance for the 2005 fourth quarter.

We expect GAAP earnings per share of $1.12 to $1.14 for the 2005 fourth quarter, or $1.27 to $1.29 when excluding the after-tax impact of the equity-based compensation expense.

As you know, we did make an offer to settle the national review of our Medicaid billing in the first quarter of this year, resulting in us increasing free existing reserves.

A couple of caveats: As we said in the past, our guidance for the for the 2005 fourth quarter does not include any potential changes to those reserves as the settlement process proceeds.

Also, since we can't predict the timing of share repurchases, there are no assumptions for today's announced authorization on our fourth quarter EPS guidance.

With that I'd like to turn the call over to Karl Wagner for a review of our financial results for the 2005 third quarter.

Karl?

Thanks, Roger.

Good morning, everyone.

As Roger said, this is another very strong quarter for Pediatrix.

Our earnings per share after adjusting for equity-based compensation were at the high of our guided range.

A range had been raised during the year as we've seen contributions from acquired practices as well as from our same unit.

As important, our growth continues to be driven by our strong ongoing management of expenses, including general and administrative expenses.

As I review our financial results for the quarter, I will be discussing adjusted or non-GAAP results that reflect the exclusion of equity-based compensation expense.

I refer you to this morning's press release available on our website for a detailed reconciliation of GAAP and non-GAAP financial information.

As many of you know, during the 2005 third quarter, we incurred a $4.7 million pretax non-cash charge for equity-based compensation.

This was the result of restricted stock that was issued in mid-July of this year.

This expense runs through our income statement at two points.

Approximately $1 million at the cost of service level, for practice, salaries, and benefits line, and $3.7 million attributed to general and administrative expenses.

As is our pattern, I'd now like to discuss the highlights of the results that were reported this morning.

As I said, during my comments, I'll be focusing on our adjusted results to provide a more useful comparison to prior periods.

For the three months ended September 30, 2005, our revenues of $178.1 million were up 12.5%, largely as a result of the contributions from acquisitions and continued same unit growth.

As is our history, we've completed a significant number of accretive acquisitions over the last 12 months.

Same-unit revenue grew by 4.9%, which included contributions from same unit patient volume at our neonatal intensive care units of 4%, as well as same unit revenue contributions from other physician subspecialties.

During the quarter, we did see a slight increase in the percentage of our patients covered under government-sponsored programs, principally Medicaid and S-chip program.

As a result, same-unit revenue from reimbursement related factors was essentially flat.

We continue, to see improved reimbursements from our commercial payers but for this quarter those improvements were offset by a higher patient volume from government payers.

Profit after practice expense for the 2005 third quarter was $73 million when excluding equity-based compensation, our growth rate of 14.4% when compared to the 2004 third quarter.

Practice salaries, and benefits grew by 10.7% year-over-year and practice supplies and other expense grew at a rate of 19% when compared to the 2004 third quarter.

This growth is due to a reduction of expenses in the 2004 period, and the continued growth of our office-based practices.

As we have discussed in the past, the nature of these practices is they require us to provide a higher level of supplies than our neonatal practices.

Our expectations for the long term trend of these expenses is to show growth in lune with the rate of revenue growth.

We continue to be extremely efficient managers of our administrative functions, general and administrative expenses for the 2005 third quarter, excluding equity compensation, increased by only 5.8% from the third quarter and when measured as a percent of revenue, they declined by 75 basis points to 11.9%.

The hallmark of our business model has been and remains the successful management of the administrative or back-office functions of physician practices.

And these results reflect our ongoing ability to leverage our infrastructure investment as more practices join us.

Income from operations for the 2005 third quarter was $49.5 million when excluding equity-based compensation expense.

Operating income grew by 19.2% from the comparable period in 2004, and adjusted operating margin was 27.8% for three months ended September 30th, up 158 basis points from a year earlier.

We significantly reduced our net interest expense as we increased interest income from short-term investments during the third quarter.

Our effective tax rate remained at 37.25%.

When excluding the after-tax impact of equity-based compensation expense, the 2005 third quarter net income was up 19.6% year-over-year to $31 million.

Earnings per share for the 2005 third quarter grew by 24% to $1.29 based on 24.1 million shares outstanding, as a result of Pediatrix growth, more efficient management of our business, and the impact of a share repurchase program completed last year.

Our balance sheet remains extremely strong.

Accounts receivable balance of approximately 110 million at September 30th is up slightly from a year ago.

The increase was expected due to the growth of our business as our days sales remain at less than 60 days.

As I said earlier, we have no outstanding balance in our revolving credit facility at the end of September, leaving us with debt of less than $2 million, which consists largely of capital lease obligations.

Accounts payable and accrued expenses are increasing as they historically do, primarily a reflection of the accrual for bonuses that will be paid out in early 2006, largely to our physicians.

Cash flow from operations was a record $60.7 million for the 2005 third quarter.

We used our cash to pay down the $45.2 million balance that was outstanding under our revolver at June 30, and we invested approximately 19.9 million to complete physician group practice acquisitions.

Through nine months of this year, we've generated cash flow from operations of 114.6 million and invested 85.7 million in group practice acquisition.

For the 2005 fourth quarter, we expect cash flow from operations will be slightly less than the third quarter as a result of some issues related to timing of tax payments.

Maintenance capital expenditures continue to be relatively small at 1.4 million for the third quarter, and 5.6 million on a year-to-date basis.

Overall this was a very strong quarter with contributions coming from the combination of our ongoing business development efforts and a strong management of our national group practice from both our regional and corporate management teams.

To provide a quick summary of our results through nine months of this year, Pediatrix has generated $516 million of revenue, up 13% from the prior year period.

Operating income of 118 million is up 2% from the comparable prior year period and includes both equity-based compensation expense that began this quarter, and the non-cash charge related to the Medicaid settlement offer in the first quarter.

Net income of 73.2 million for the first nine months of this year subpoena is up 1% when compared to last year's period, and earnings per share is up 7%, $3.07, based on weighted average 23.8 million shares outstanding from $2.88, based on 25.2 million shares outstanding, to the comparable 2004 period.

The reduction in shares outstanding is a result of the share repurchase during the second half of 2004.

Overall, Pediatrix is reporting very strong results for the three and nine months ended September 30th.

As Roger said, we remain comfortable with our previously issued guidance for the 2005 fourth quarter.

Our physicians continue to staff units and care for babies throughout the disruptions caused by Hurricane Wilma, and any costs we've incurred as a result of the storm will not be material.

We feel very confident that with both our $225 million revolving credit facility, as well as ongoing cash flows, we have the available capital to continue our growth and complete the share repurchase program we announced this morning.

We will provide 2006 earnings guidance within the next month.

As Roger said, we lost some critical days in our process, and we are working to complete our 2006 forecast.

Unfortunately, with a disruption we experienced last week, we will need to reschedule several trips related to budget discussions.

The completion of this process is a very high priority for us.

We will work to complete it as soon as possible while at the same time ensuring that we meet the commitments previously made to our customers.

As anyone who has unexpectedly lost a weak of work for any reason can attest, it takes awhile to clear the backlog created when dealing with all the ongoing daily issues as well as prior commitments.

Once again, I want to assure you that our clinical services continued throughout the country during this period and all of our regions were able to provide administrative functions for all but one day last week as we were able to keep our systems up during most of this period that Wilma impacted our office.

I want to thank you for your time this morning.

During a very challenging time for healthcare providers we had a lot of factors working in our favor this quarter and that is reflected in our very strong results.

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

Thanks, Carl.

I have no additional comments, so let's go ahead and open up the call to questions.

Indeed, and thank you very much, gentlemen. [OPERATOR INSTRUCTIONS].

And representing Wachovia Securities our first question, we go to the line of Chad Fugere.

Couple of quick questions.

Karl, you mentioned that higher patient volumes from government payers offset increases in commercial pay.

Could you quantify that shift that you saw in the quarter?

It wasn't a significant shift, but we did see a slight increase.

We had been fairly consistent throughout this period.

We did want to mention that we saw a slight increase roughly in the range of a point over what we have seen from a year ago in that same quarter.

Great.

Now, are you guys seeing a shift in any specific geography, or was it just more widespread?

You know, it was all over the place.

We see shifts both up and down market-to-market, but across the country it was a net shift up.

There's not a specific market that we would say that we had it.

Okay.

Great.

Then the last question I have is when do you guys typically see the bulk of your changes in managed care contract pricing, and what are your thoughts on pricing going forward?

We see our increases throughout the year, we constantly see increasing managed care contracts.

There's no one specific time, like a September 30th time frame.

So it's throughout the year.

We're continuing to see on those contracts that we do, strong increases in our renewals, high single digits, low double digits, as we've said in the past.

We are continuing to do those, and it's part of our routine processes.

Thanks, Karl.

Next we go to the line of Anton Hie with Jefferies & Company.

I wonder if we can boil down a little more into the payer mix shift.

Given that you lapped the year-ago significant and violent change in the third quarter, is there anything going on with the actual pricing that's being paid by the -- by some of the government payers?

Nothing really specific in the payment of what we're getting from government payers.

As the states went through their budget process there was a lot of discussion on Medicaid reimbursement.

Some states we saw slight decreases, some states we saw slight increases, but overall we have a net -- we don't expect much of a change from a reimbursement standpoint from Medicaid during this period.

I know there's a lot of talk about a lot of states moving to managed Medicaid programs, and when we contract with managed Medicaid it's typically at Medicaid rates.

It's sometimes slightly higher but there's really no differential from managed Medicaid payers.

that was my next question, to see if you saw any potential opportunities there as states move into managed care Medicaid.

It really -- the dynamics of our business really don't change dramatically from a managed Medicaid program.

As I said, we may try to negotiate for a to percentage points higher than Medicaid, but that's hit or miss when we do those negotiations on what's going on.

But there's no significant increase from that or any detriment to us from doing that.

Okay.

But those are -- those are typically negotiated contracts, then?

Typically we have to have a contract with them and we negotiate that.

Okay.

We were surprised to see the actual SG&A dollars decline sequentially, excluding the equity comp.

Were there any extraordinary items going in or coming out of that line item?

Excuse me.

Last quarter we did have some expenses as, higher legal expenses during the quarter, which came down this quarter as we had more activity in the second quarter with some things going on with the Medicaid as we've continued that discussion, so we did see that come down during the period.

Nothing dramatic.

I would expect at the level we're at at this point is probably the level we'll see.

I would expect some increases in the fourth quarter as we do our merit increase cycle beginning October 1st for our G&A employees so we'll see some increases from that.

Okay.

And to the extent that activity might pick up on either those investigations, then we could see the legal expenses bump back up and SG&A?

Those fluctuate based upon what's going on in the legal department, as far as how accelerated the process is going and any of the issues going on.

Through your first nine months, you're obviously well ahead of your target acquisition spend for the full year.

Last week you got another one done in northern Virginia.

I wanted to see if there were any additional unannounced acquisitions that have been built into the fourth quarter guidance or if you can get there as is.

The guidance, you know, I don't want to step too far from the guidance we've given in the past.

It included some acquisition.

I don't expect we'll see a lot more activity.

It usually slows up at the end of the year as people may wait to defer tax payments until the next year so they can hold off on their tax payments.

But there's nothing significant that we expect in the latter part of this year that would have impact our results.

Okay.

Are there any states where you operate that may be eyeing a change in the Medicaid eligibility requirements as you saw in Texas last year?

There's nothing dramatic that we've seen anywhere out there talking about eligibility requirements that we expect will have an impact at this point.

on the buyback, are you just going to fund that through a combination of the cash flow and -- do you think you'll have to dip into the revolver on that?

We may.

I mean, it's really just going to depend on the timing and ability to get it done.

If we have to we aren't afraid to do that.

We're not going to wait to have the cash in the bank to do the buyback.

We'll borrow if we have to.

Thank you, Mr. Hie. [OPERATOR INSTRUCTIONS].

Next in queue is Dawn Brock with JP Morgan.

Please go ahead.

Good morning.

Is there any way we can get you guys to break down the payer mix before the end of the year?

I don't think we're prepared to do that.

Okay.

All my other questions have been answered.

Thank you.

And thank you very much, Ms. Brock.

With that Dr. Medel, Mr. Wagner, I'll turn the call -- oh, excuse me, just queueing up now we have a follow-up question.

Let's go back to Anton Hie with Jefferies & Company. [OPERATOR INSTRUCTIONS].

Please go ahead, Mr. Hie.

The cash flow obviously was very strong despite a little uptick in the AR.

Wonder if there are any timing issues behind that strength.

You mentioned the cash tax payments in the fourth quarter may cause the CF ops to come in.

Wonder if that was similar in the strength behind the third quarter.

We had a little butt lower tax payments in the third quarter than we might have anticipated going into the quarter.

It wasn't a huge impact to the period.

We had very strong collection activities during the period.

They ticked up just a touch from last quarter.

But just with the continued growth of the company, we had very strong cash flow.

The fourth quarter, as our growth has continued to result in us having a bigger tax payment in the fourth quarter, and the fact that we were a little bit lower than we expected in the third quarter due to some offsets that we had will make that impact more noticeable in the fourth quarter but I expect a difference in payments probably in the $10 million range.

Okay.

And then as far as the collections go into the fourth quarter, I mean, obviously some of your payers may be a little later, so -- I wonder if you could, maybe drill down and identify how much you think the DSOs might go up in the fourth quarter, if that's going to be a day or two or something more substantial?

yeah, it it's really hard to say at this point.

Last year when we saw the increase in DSO, I believe it went up from the June quarter to the September quarter.

It went up by about three or four days during that period.

Now, there was probably some more widespread impact of that, but, you know, I wasn't expect to see more than that.

We really at this point are just getting back up and haven't seen it.

We don't know what that impact is going to be but we're just trying to be prepared that that may happen.

We expect it will be similar to last year where it will spike up due to this, then it will come back down as we are able to collect on those.

It's just a little bit delay, but not an effective change in our expectation of collections on those receivables.

Okay.

Thank you.

And thank you, Mr. Hie.

And we have a question now from the line of Jason Small with Chartwell Investment Partners.

Please go ahead.

Hello.

Thanks.

In the past you have talked about a mix shift to government payers specifically from 2001 to 2003 of about one percentage point per year.

Then last year the sudden shift, about three percentage points, July-August time frame.

Then from that point on, you were kind of stable and flat.

Now, does this percent shift you've seen in this quarter mark the first decline, and how does that compare to the trajectory of prior years?

Well, we've seen it in prior years, we've seen a 1% change, and a fair amount of that can be attributed to acquisitions that we've done.

And we're talking about our payer mix shift, it's really on a same-unit basis.

So from a same unit standpoint we're seeing a shift.

We may see additional shifts one way or another based upon acquisitions we complete.

We may do some acquisitions that have a much higher Medicaid mix or a much lower Medicaid mix and that will have an impact on the overall company.

Looking at it on a same-unit bays we did see an impact last year pretty significant then this year it's been fairly stable this quarter we did see an uptick.

During the quarter on a same-unit basis.

I wouldn't say that that's a resumption of the past.

I would just say it was an up-tick during this period.

On a year basis, compared towards the vend last year, we're going to be that up much because it didn't occur in the first couple of quarters.

Of course, when we acquire a practice, higher Medicaid patient load, that is built into our pricing, and it's built into our projections.

So that doesn't take us by surprise.

Okay.

Thank you.

And thank you very much, Mr. Small.

With that, Dr. Medel and Mr. Wagner, I will turn the call back to you.

There are no further questions.

Okay.

If there are no further questions, then I thank you for participating this morning and look forward to speaking with you early next year.

And, ladies and gentlemen, your host is making today's conference available for digitized replay for one week starting at 1:30 eastern standard time November 2nd through 11:59 November 9th.

To access AT&T's executive replay service dial 800-475-6701.

At the voice prompt Enter ID of 798454.

And that does conclude our earnings call for this third quarter.

Thank you very much for your participation, as well as for using AT&T's Executive TeleConference service.

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