Pediatrix Medical Group Inc (MD) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Pediatrix Medical Group 2006 first quarter earnings conference call. [OPERATOR INSTRUCTIONS].

Before I open up the call to the Pediatrix manage team I want 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 at Pediatrix believes, anticipates, intends, expects, or projects or similar expressions are forward-looking statements.

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

Forward-looking statements are subject to risks and uncertainties that could cause actual results, developments, and business decisions to differ materially from those contemplated by these statements.

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

Securities and Exchange Commission.

Please see the section entitled risk factors in that report.

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

At this point, I would like to remind you that the 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.

Thank you.

Good morning.

And thank you for joining us our first quarter earnings conference call.

This morning's press release details our results of the 2006 first quarter.

Another strong period for Pediatrix that shows balanced contribution from both acquisitions and sustained unit growth of volume to increase revenue by 14%.

I want to discuss some of the operating highlights of the quarter and place these in the context of our ongoing growth strategy.

Later in this call, Carl Wagner will provide a more detailed discussion of our financial results for the quarter.

For the 2006 first quarter, we completed the largest single group practice acquisition in our history, our group of 30 neonatal and pediatric critical care physicians practicing in Atlanta.

We also bought a pediatric cardiology group practice in Springfield, Missouri.

In total we used more than $63 million of our cash and revolving credit facility for practice acquisitions during the period.

Same unit revenue growth for the quarter was 6.9%, and includes 4.3% neonatal unit patient volume growth, as well as expansion of other physician services, newborn screenings, and some positive impacts from the reimbursements.

Even more impressive than our top line growth is the efficiency with which we manage our national group practice.

When adjusted to exclude equity-based compensation expense for the first quarter of 2006, and the impact of the increase or our Medicaid reserves in the first quarter of 2005, operating income increased by 21%.

We continue to see income statement leverage from the management of our general and administrative expenses.

Our results to date speak directly to the power of our business model.

Our process of contracting billing and collecting for our physician services are the product of infrastructure investment that continue to yield strong returns.

Over the past year, we spent a lot of time talking with investors about our long-term growth opportunities, and specifically about our efforts to develop a new growth platform, a new national group, built around hospital based physicians practicing outside of our existing clinical continuum.

Our results for the 2006 first quarter call attention to the strengths of one of our core competencies which is the management of the administrator functions of physician group practices, and particularly, hospital-based physician services.

Investors who are familiar with Pediatrix's model realize that the groups that we acquire have very lean back offices.

Our administrative value add is our ability to commit resources contracting with commercial payors to ensure that bills are accurate and to collecting what is due to us under the terms of our numerous payer contracts.

These investments are viewed by our physicians as providing value they could not accomplish in a traditional group practice, and our numbers consistently point to the returns we are able to generate from this infrastructure.

Our ability to manage these services for our existing 850 physicians is a harbinger for what we expect to provide to other groups.

We are confident that many of the administrative components of our models are transportable to other physician spectrums and we remain focused on an anesthesiology as an attractive platform.

As we move toward building a national group practice around anesthesiology, investors should expect to see a building some of the infrastructure for a new group practice that exists for our current specialties.

In fact, this infrastructure built has already begun prior to us closing our first anesthesiology practice acquisition.

I do want to emphasize that as we move forward with anesthesiology, we will not layer this new group practice on to our existing structure, including our regional network.

As much as there are similarities in managing the administrative functions of both neonatal physicians and anesthesiologists at a macro level, there are differences at micro levels, and that's where future operating efficiencies will be realized.

We have a track record of more than 25 years in the successful management of our core practices.

We won't assume that every component of what we do well within our existing sub-specialties is automatically transferable to other clinical specialties.

So as we talk about increased efficiencies in our core business, as demonstrated in today's numbers, I hope you understand that we do not expect a parallel infrastructure supporting a new practice area to be as efficient initially as our current practice administration.

In time, we believe there will be opportunities to leverage our existing operations and to gain efficiencies.

But as we've said in many forums, we will serve, learn and implement within anesthesiology before we ramp up this platform to achieve economies of scale.

Finally, I want to emphasize that we spent considerable time reviewing our strategic options and we've been very deliberate throughout this process.

We're developing this platform at this time because there is continued opportunity to grow our core business.

In the context of managing this transition, this is exactly the right time for us to be exploring this new platform.

At the same time, today's numbers should provide evidence that we remain focused on growing our core national group practice, and our other complementary practices such as pediatric cardiology.

As I said earlier, during the 2006 first quarter, we completed acquisitions, including a very large practice in Atlanta.

We remain confident in our outlook for acquisitions and we're working through a healthy pipeline.

Those who are familiar with Pediatrix know that the timing of acquisitions can vary.

But we're confident that we will continue to grow by completing additional acquisitions within our existing clinical sub-specialties.

All-in, our team directed a very solid quarter in managing the core operations of Pediatrix, our national physician group practice, built around maternal-fetal, neonatal, pediatric cardiology and pediatric critical care services.

At this point, let me turn the call over to Karl for a review of our first quarter results.

Thanks, Roger.

Good morning, everyone.

As Roger said, the results released this morning demonstrate that we continue to make excellent progress in growing our core business and managing it efficiently.

Like many companies reporting results for the 2006 first quarter, our press release this morning contains both GAAP and adjusted or non-GAAP information.

We believe this information makes it possible for investors to look closely at and compare our operating performance with prior periods.

For this morning's call, any comparisons that I make to 2005 results will be based on adjusted or non-GAAP information.

Because we believe this gives us the best snapshot of operating performance.

The significant items to reconcile GAAP to adjusted numbers or equity compensation expense of $5 million, before taxes, for the 2006 first quarter.

During last year's first quarter, we also recorded a $6 million pre-tax charge to increase reserves related to the TRICARE and Medicaid investigation.

As we announced earlier this year, we reached the financial agreement in principal for the U.S.

Department of Justice, we are working toward a definitive settlement agreement.

As I mentioned, both the equity-based compensation expense for 2006, and the charge related reserves in 2005, are eliminated from this discussion.

I refer to you this morning's press release, which is available on our Web site for a detailed reconciliation of this GAAP and non-GAAP information.

For the three months ended March 31, 2006, our net patient service revenue was a record $187.7 million, which was up 14% from last year's first quarter.

This increase is a result of both acquisitions completed during the past year, as well as solid same unit revenue growth of 6.9%.

Same unit revenue contributions include neonatal intensive care unit patient volume growth of 4.3%.

Growth of our other services, including maternal fetal and pediatric cardiology physician services, and our newborn screening program, as well as modest improvements in reimbursement-related factors.

We continue to see improvements in reimbursement from better contracts with commercial payors.

The impact that a slight fee increase had in our payer contract and a slight impact of the introduction of a new neonatal code at the start of the year.

These reimbursement improvements have been partially offset by higher percentage of our services reimbursed by government payors compares to the first quarter of 2005.

Adjusted profit after practice expense of 68.5 million for the 2006 first quarter grew by 14% from 60.1 million in the comparable 2005 period, generally in line with revenue growth.

As Roger pointed out, the leverage point in our income statement has been, and continues to be our management of general and administrative expenses.

The 2006 first quarter adjusted operating margin increased by 130 basis points to 22.8%, from 21.5% for the same period last year.

Operating margins are expanding because of better management of our G&A expense which declined to 12.4% of revenue in the 2006 first quarter from 13.5% from the same period a year earlier.

G&A expenses for the first quarter grew only 5% over the 2005 first quarter.

Adjusted operating income of 42.8 million for the 2006 first quarter was up 21.2%, from 35.3 million for the comparable 2005 period.

Interest expense was significantly lower for the first quarter of 2006, as a result of lower amounts outstanding under our revolving credit facility.

Our effective tax rate remains at 37.25%.

Net income for the first quarter of 26.9 million was up 24% from 21.7 million from the 2005 first quarter.

On a per share basis adjusted earnings of $0.55 for the 2006 first quarter were up 20% from adjusted EPS of $0.46 from the 2005 first quarter.

EPS calculations are based on a split-adjusted weighted average 48.8 million shares outstanding at March 31, 2006, compared with a weighted average of 46.9 million at this point -- at that point last year.

Moving to our balance sheet, we had cash and cash equivalents of approximately 4.5 million, at March 31, accounts referrible was 115.8 million, and we maintained day sales outstanding levels at less than 60.

Cash collections for the 2006 first quarter were strong.

While revenue grew 5.6% sequentially in the 2005 fourth quarter, to the 2006 first quarter, accounts receivable balance grew only 3.6%.

Our accounts payable and accrued expenses are down significantly at March 31, when compared to the end of 2005, as a result of payments we made for bonuses, and 401(k) plan matching contributions that accrued during last year.

Bonus payments were approximately $64 million, and they were made primarily to our physicians based on productivity at the practice level.

During the first quarter, we did draw down on our line of credit and ended the quarter with an outstanding balance of $41 million.

Total debt at March 31 was slightly higher than that at $42.2 million.

As you can see, we continue to maintain a strong balance sheet with a low level of debt.

This gives us flexibility in completing the acquisitions as we grow our business.

Cash used in operating activities during the first quarter was $11.2 million.

We typically have negative cash flow in the first quarter of each year as we made bonus payments, 401(k) matching contributions and a higher level of FICA tax payments during this period.

The 2006 first quarter, we invested $63.3 million in physician group practices and maintenance capital expenditures remained fairly modest at $1.6 million.

Overall, this is a very solid quarter.

One that comes in at the high end of our guidance, and we continue to grow our operations and manage them with greater efficiency.

I want to thank you for listening to this overview.

Let me turn the call back to Roger before we take your questions.

Thanks, Carl.

That concludes our formal comments.

So let's open up the call to questions at this point.

[OPERATOR INSTRUCTIONS].

Our first question comes from the line of Dawn Brock with J.P. Morgan.

Please go ahead.

Good morning.

Just wanted to ask a little bit, or for a little bit more color maybe on the anesthesiologist front.

It sounds as though you guys have definitely have decided to go forward with this.

Timing, when should we expect to hear something on this?

And I guess anything else or any other details that you could give us on where this has gone since the last Thomson call.

Okay, well, we have definitely decided that we're going to be in the anesthesiology business.

We, as I said, started to build the infrastructure towards that end.

We will not structure the anesthesiology practices under our existing structure.

We will form a separate structure for the anesthesiology practices.

We're in the process of -- we have identified about three groups that we're interested in bringing in, as the first group, and we're in the process of doing some final evaluations as to which one of those groups we want to start negotiations with of.

And my goal, as I've stated in the past, is to have our first group of anesthesiologists before the end of this year, probably after the summer at some point after -- during either the late third or early fourth quarter.

Also we -- our plan is to acquire one group, and to then sit back and learn from the group, so do not expect that we're going to go out and acquire four or five groups.

We're not going to do that.

We're going to acquire one group.

We're going to learn from it.

We're going to take in as much as we can.

We will make some decisions as to what areas it makes sense for us to make investments in, et cetera.

And then we will see how that works.

So that I expect that realistically it will take eight months to a year before we would make a second acquisition.

Our plan is to be very thoughtful and careful about what we do and I hope I've answered your question.

You have.

I mean the second part of that, or just to add on to that, would be I think originally, what we had thought was that you would either go with maybe something smaller, that you could kind of work with and get your feet wet with, or something a little bit larger that maybe even came with its own management team, that you could bring in-house, and that would almost serve as your first entree into the management of a different type of practice.

Do you have any idea which way you're headed right now?

What we're leaning towards, the smaller practice.

Now, remember, smaller in anesthesia is not the same thing as smaller in neonatalogy.

Smaller in anesthesia is 30 to 50.

I mean there are some large groups of anesthesiologists.

But we are definitely going to start out by acquiring a smaller group that will lend itself to us learning from them.

We look at all the management teams out there, and there are some large groups with good management teams, but we believe that the safer way for us to go is to acquire a smaller group.

That's great.

I think that you've prepped everyone well for it so we will be excited when the acquisition announcement comes out.

Thank you, Dawn.

An our next question comes from the line of Rob Mains with Ryan Beck.

Your line is open.

Here we go.

Sorry.

Good morning.

I had a question on G&A.

I do understand that it is down pretty substantially year-over-year.

However, it is up sequentially.

Just sort of in terms of a run rate you were below 12% toward the second half of the year, where should we be looking for this year, do you think?

I would expect that we will continue when you look year-over-year, and we need to improve our margin on G&A, so I would expect that we would -- as compared to the prior year, continue to improve our margin.

It will move forward.

Typically, we do see a little higher cost in the first quarter of the year in our G&A from an expense standpoint as we have some of the same issues as the practice, not clearly to the extent the practices have on the costs starting up again that ended in the year.

But I would expect to see those as a percent of revenue trend down throughout the year.

Okay.

Fair enough.

And then I want to dig a little bit on the quote-unquote pricing, component of the same store growth.

You mentioned that you benefited from some contractual rate increases, and also from a new billing code, could you elaborate on those, please?

Well we're continually renewing contracts, whether that be in receiving increases, whether that be an actual renegotiated contract, or an increase in the multi-year deal that we've had negotiated with the payer that will improve our reimbursement, so we are continuing to see increases from a reimbursement standpoint coming from that on a year-over-year basis.

And we've been very successful at continuing our negotiation process.

As far as a new code, there was a new code introduced earlier in the year, January 1st for all neonatal services, that all neonatal physicians will use, which is is a weight-based code, and we have adopted that, and there is a slight impact from that, including reimbursement.

Weight base is like an RBIS type thing?

There were some weight-based codes out for neonatal services, but they ended at babies less than 2500 grams so this captures babies at maybe over 2500 grams up to 5,000-grams, so it is a new classification.

Oh, okay.

Got you.

I understand that.

And then on the Medicaid front, I understand that you've got kind of higher mix there.

Any movement on rates there to speak of?

In general, the different states are all over the place of what they talk about.

There is nothing that we're seeing that would represent any significant decreases in reimbursement from the state Medicaid programs at this point. we have seen some states that have improved their reimbursement as their budgets have been better, but until we actually start seeing it, we don't believe it because we've seen them fold in the past as well.

So I think if anything, there is a slight positive there, but we cannot see anything significant coming out of those.

And currently where are you running on rates versus last year?

I'm sorry?

On Medicaid.

Are those rates kind of flat versus last year, up, down?

Compared to a year ago, we're at a higher rate in our Medicaid mix as compared -- towards the end of last year, it is really not continuing to fluctuate any more, it does fluctuate quarter to quarter and it is down a touch from the end of the year, but not significantly, so that we would expect that to be a trend.

Now, I was thinking about the actual rate you received for the services.

The amount of billing.

I mean for same services, are you getting a little bit more now or a little bit less than last year.

Is it flat?

I would say it is pretty much flat.

All right.

That's what I have.

Thank you very much.

And our next question comes from the line of Bill Bonello with Wachovia.

Please go ahead.

Yes, my questions all related to the positive expansion in the anesthesiology.

I'm just wondering, and Roger, you maybe touched on this in the past, but given that you're definitely moving in this direction, if you can just expand a little bit on what the characteristics of the anesthesiology market are, that make it attractive to you, beyond the fact that it is a hospital-based specialty.

Well, that is one of the big attractions of course.

But as the margins are better in hospital-based practices.

And our experience and our relationships with hospitals and hospital administrators make it also be attractive.

And as I've said many times in the past, the fact that the referral of patients works in a different way than it does in office-based practices.

But beyond that, there are some significant opportunities there for same store, same unit growth, outside the hospital, we believe, of course neonatology as can only be practiced in the hospital.

Anesthesiology is practiced outside the hospital whether in ambulatory surgical centers, or in physician's offices.

So we think that there is an opportunity to grow outside of the hospital without significant capital investment, which is one of the differences that we see between anesthesia and radiology, where those same opportunities exist, but significant -- beyond that there is a large number of anesthesiologists.

There is probably -- not probably, but there are between 30 to 40,000 anesthesiologists.

So we see that providing us with a platform for growth.

When you compare it with three to 4,000 neonatologists, it is 10 times the overall market, so we see that as leaning a significant benefit for us.

And then the other thing that worries me, as I compare it with the other major hospital-based specialties, which are radiology and pathology, as opposed to them, the anesthesiologists provide hands-on patient care, and so the opportunity for, or the possibility of something like your work being shifted overseas, and to have radiologists or pathologists reading the slides, it isn't there.

And that's a great advantage that they really can't replace you.

So from a business standpoint, it is different in some areas, from neonatology.

There is a lot of Medicare, which of course we have very little experience with and the billing for neonatology as is basically done on a per day basis, where anesthesiology is more of a time based billing model.

So there are some significant differences as well, which is why we're going to take it easy and acquire one practice and get to know it well before we continue.

Sure.

And just follow-up on that, in terms of market concentration, obviously within a local market, the neonatal market is fairly concentrated.

Not a lot of practices in any given market.

How would that compare for the anesthesiology market?

Well one of the things that anesthesiologists have done, which we like, is they have grown to be larger groups, so where a neonatology practice in Atlanta we said is in our single largest acquisition, a 30 anesthesiologist practice would be small practice.

So they have grown, and there are, as we talked in the past, even some regional groups that have developed up in the northeast, and in Texas, et cetera, so on a group by group basis, there are definitely more groups in each market, I would say, than there are for neonatologists but that's just a reflection of the fact that I think there are fewer neonatologists than there are anesthesiologists.

So you have to go into each different market, and analyze that on a market by market basis.

But I would say that where neonatology you go into a market, and there may be two or three groups they're likely to be more than that with anesthesiology.

Okay.

And just a final thing on that issue, are anesthesiologists, is it like neonatology, where OBs are going to want to deliver at a certain hospital because of the quality of the neonatal group?

Does it work that way with anesthesiology, that surgeons are going going to want to practice at a certain location because of the quality of the anesthesiology practice?

We believe that it is one of the similarities with neonatologists, which is that the referrals for neonatology really come from the obstetrician, so it is a single source of referral, an the same thing is true for for the anesthesiologists.

And it is definitely a fact that obstetricians prefer specific anesthesiologists, and work well with specific anesthesiologists.

So it is definitely a plus that surgeons prefer to come to a specific hospital because specific anesthesiologists are working there.

Okay.

And just two last questions on it.

The expansion, any -- it sounds like it is going to be so small that we don't need to think about any dilution to EPS.

Would that be accurate?

Well, yes, we don't do diluted deals.

Whatever deal we're going to do in anesthesia, is going to be accretive.

What about from the infrastructure build standpoint though?

There will definitely be some expenses there, but again, we're going to -- we've already started going down that path and we're going to manage our P&L to make sure that we don't surprise you.

And then finally, any sense of the capital expenditures that might be associated not with the practice purchase itself, but with the infrastructure build-up?

From a capital standpoint, I wouldn't expect that you will see anything dramatic, as we go through this, because the CapEx structure is not much different than what we have here.

As far as the system side, it is going to take some time for us to evaluate what the actual needs are in the anesthesia practices so there are not big system projects would very going on.

So I wouldn't expect much on the capital side.

Just going back to the question on dilution, I think our expectation is when we complete our first acquisition, that clearly, we should -- that the parameters won't be the accretion that we see in the neonatal side.

We would expect to be accretive deal but when you consider we won't be able to get the efficiencies we have initially out of those because we don't have -- understand the intricacies of those practices, we won't be able to get them as quickly, and we have infrastructure.

But I think in the end, we would expect it still to be accretive.

But clearly not what we see on our neonatal deal.

Great.

Thanks a lot.

And our next question comes from the line of [Kevin Eleck] with MJSK Investment Securities.

Please go ahead.

Thanks for taking the call.

Not to beat anesthesiology to death here, but have you guys taken into consideration or are considering when moving into or doing the first deal, going into a specialty practice that focuses on say pediatric anesthesiology or are you kind of looking at the wide gamut, more of a general practice?

We're considering everything, and it wouldn't be -- I wouldn't be opposed to doing something that is more specialty-related.

Pediatric anesthesiologists or obstetrical anesthesiologists, something like that, I wouldn't be opposed to that.

Is that because of the reimbursement differences between the two?

Or just because it is more of a good fit with the neonatology front?

It is a less risky way to get your feet in the water if you're dealing with people that you have some relationships with to begin with.

Sure.

I understand.

Can you -- can we get a little bit of color on the share count?

It seemed a little bit higher than I was expecting and I think some people might have been -- was there more stock option exercises this quarter than had been expected?

There are a mix of things related to share count.

One was there were more exercises than we had anticipated.

When we were looking at the guidance that we had put together, our projections, so that was one factor.

Also the stock price had good appreciation during the first quarter and that always affects the calculation on how the -- wanting people to make a decision to exercise but also the calculation the way it works as the share price goes higher, the number of shares in a fully diluted calculation could increase and that did have some impact as well.

And do all senior managers have 10B5 plans outstanding or is it just a couple?

Yes, all senior management has 10B5 plans.

Okay.

Thank you.

And then can you give any updates regarding the regulatory environment, the FTC investigation, the U.S.

Department of Justice, et cetera?

Yes, unfortunately, there is not much to report on the FTC side.

We continue to be in contact with them, but there is really nothing to report.

They have not told us which which way they're leaning towards.

So we continue to wait for them.

It is going to be five years here pretty soon, since our Medela acquisition and we do think time works in our favor but there is really nothing new to report there.

The Medicaid investigation, as we said in the past, we have reached an agreement, a financial agreement with them, and now it is a matter of working through the actual agreement, which will be a written agreement with them, and we're in the process of working our way through.

That but again, there is nothing there as we talk with them that makes us feel that we need to change anything.

And last question.

Going back to the anesthesiology piece, you stated that the payer mix, for example, for an anesthesiology practice has more Medicare in it.

What type of Medicare payer mix are you seeing in some of the anesthesiology practices you've been looking -- you've been speaking to?

Well it fluctuates all over the place but Medicare is a significant payer for anesthesiologists, no matter where you look, their percentages could be half of their business, could be Medicare.

Okay.

Sounds good.

Thank you.

[OPERATOR INSTRUCTIONS].

And our next question comes from the line of Anton Hie with Jefferies.

Please go ahead.

Thank you.

There was no mention made of the guidance in the press release or in your prepared remarks.

Is it safe to assume that we're all systems go on the guidance?

That's correct.

We made no changes in our guidance and we don't anticipate any changes.

So we expect to make the numbers that we put out there.

Okay.

Great.

Is there any way to quantify what sort of volume impact on the NICU patient days you might have had from the -- from extra operating day during the quarter with the late Easter?

I guess not an extra operating day but an extra day of the week.

Well, that doesn't really impact us because we're in the hospital, so most of our business coming from the neonatal units they're in there every day so that's not going to have an impact.

We didn't see anything dramatic that would change our office-based practices.

And what they did during the week, so we don't have any -- it would not have had an impact on our numbers.

Or in the last side, it seems like most of the tests would be done on Mondays?

We're testing all babies, so whether they get done on Mondays or Tuesdays, or it doesn't really make any difference.

It is true that babies get born on Sunday don't get tested until Monday but they still get tested, we just do a higher volume on Monday.

And the size of the lab compared to the total is pretty small.

So any impact that that might have, which I don't recall seeing anything from it, noticeable, would not be noticeable in the company as a whole.

Okay.

And then was there any update to the pricing on the med log screening business?

I don't know if you get annual updates on that?

No, from a pricing stand point, there has really been no change in that business.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS].

Okay.

If there are no further questions, then we thank you for listening this morning and we look forward to speaking with you next quarter.

Thank you, operator.

Thank you.

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