Pediatrix Medical Group Inc (MD) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Pediatrix Medical Group 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 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 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 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 the section entitled Risk Factors in its most recent annual report on Form 10-K, filed with the US Securities and Exchange Commission, and also in its other reports files from time to time with the SEC. 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'd 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 our call. As you've no doubt seen in our press release this morning, we reported limited results for the three months and six months ended June 30th, 2006, as the audit committee of our Board of Directors conducts an internal review of our historic stock option grant. This voluntary review was initiated following a shareholder inquiry and in light of recent reports in the financial media regarding stock option practices. The review is being conducted with the assistance of the audit committee independent outside legal counsel.

As a result of this step, we will file our quarterly report on Form 10-Q for the third quarter ended June 30th, 2006, after the audit committee completes its review. Based on the status of their review to-date, we believe that we will not be able to report full results for the second quarter of 2006 and file our Form 10-Q for the second quarter by the filing deadline. We will provide a public statement on this matter after the review is completed.

I hope that you can appreciate that we are extremely limited in terms of what we can say about this matter at this time. We need to let this process work its way through, and I look forward to returning to a form like this to present our full results for the 2006 second quarter. In that same vein, while we will be able to respond to your questions about information contained in this morning's press release and on this call, there is really little more that we'll be able to say about the stock option grant review or about the results of operations for this quarter.

I do believe that the revenue numbers that we reported this morning should reflect that we continue to have an opportunity for growth within our course subspecialties and we continue to pursue those opportunities. Within the past few weeks, we've announced the acquisition of the physician group practices in Southern California and Central Florida, bringing to six, the number of practices acquired so far this year.

We've invested almost $73 million of capital year-to-date on a significant part of what we expected to accomplish when we first presented our 2006 financial guidance. While I can't talk to the specific financial metrics, our business is running smoothly and the outlook for continued growth is favorable, which is exactly why we believe that this is the right time for us to move forward with our anesthesiology initiatives.

As a quick update, we are on track with our timetable for entering the anesthesiology physician practice specialty. As I said three months ago, we're working toward completing one acquisition during 2006, and we are engaged in discussions with groups that meet our criteria. I also said during our first quarter call that we expect our first acquisition to be a relatively small practice. Please remember that in anesthesiology, a small practice is about the size of a large neonatal group practice. So the number of doctors will be higher than we normally experience.

Upon completion of our first anesthesiology transaction and before we acquire other practices within this area, we expect to take some time to manage that practice, learn from what they do now, and apply some of our experiences learned from more than a quarter century of managing hospital-based physician group practices.

While we like what we've seen in our efforts thus far, investors have expressed concern over two important financial metrics within anesthesiology: Purchase price multiple and ongoing operating margins. Historically, the purchase price multiple that we set within our core practice is based on the contributions we expect from managing those practices using our process.

We can have a relatively high degree of physician in building a neonatal model because we have years of experience in this subspecialty and those systems are relatively mature. We don't have that experience in anesthesiology. As a result, we will be very conservative in modeling practices in that specialty until we get some experience. That isn't to say that the multiples can't be driven lower by and through. We believe it will. We just can't say by how much those multiples will be driven down. Since we can't quantify that unknown, we'd rather give a more conservative estimate. Having said that, our limited review of anesthesiology practices points to our ability to deliver administrative value-add, particularly in contracting and collections.

The other concern expressed by investors is related to operating margin. Pediatrix's model has succeeded, because we invest in administrative infrastructure. The operating margins that we achieve in our core business is a product of spending wisely in systems and leveraging those investments across a large national group practice. As we move into anesthesiology, we will need to make infrastructure investments that we believe will generate attractive returns, possibly similar to our neonatal practices over time.

Realizing those potential returns will come only as we acquire more practices and gain more experience managing those practices. We haven't seen anything that says we can't get to the kind of efficiencies in anesthesiology that we see in neonatology. But we do know that we won't get there if we do not make those investments. And therefore, we won't see those kinds of margin with the first few transactions in this practice area.

In the meantime, we will remain focused on the opportunities that exist within our core physician specialty. We are very excited about the growth opportunities both in the short-term and the long-term that are available to us.

With that, let me turn the call over to Karl Wagner for a discussion of second quarter revenue.

Thanks, Roger. Good morning, everyone. This morning, I will provide a discussion of our revenue results for the 2006 second quarter. We had strong revenue growth for the three months ended June 30, 2006. Net patient service revenue was up 17%, which includes same-unit growth of 10% as well as contributions from acquisitions. Clearly our same-unit revenue is ahead of expectations. And as we have been looking at the numbers, there are several reasons for that.

On a volume basis, same-unit revenue growth related to our neonatal intensive care units was up by 2.9% for the second quarter. Well, that's just a tick under our guidance range of 3% to 5%. For the first half of the year, our NICU volume has grown by 3.8% or well within that range. And we are comfortable with the volume growth in the NICU business. Volumes in our maternal-fetal and pediatric cardiology practices are growing nicely and continue to contribute to our overall same-unit revenue growth.

We were very happy with the growth on the reimbursement front. Our same-unit revenue growth was impacted this quarter by the introduction of a new neonatal code for physician services, 99300. That code is used for babies in the NICU who are receiving intensive care services and who weigh between 2,501 grams to 5,000 grams or roughly between 5.5 and 11 pounds.

Prior to the introduction of that code, our physicians used E&M or Evaluation And Management codes to bill for services provided to those babies. E&M codes really don't reflect the complexity of care provided to those babies in the NICU. While this code was introduced in January, it took some time for us to see its impact. We weren't certain how long it would take payors to update their systems, and we couldn't certain of the contractual allowances for that code.

While we made projections for positive contributions from this code throughout the year, our results for the second quarter reflect that those contributions are both better than expected and are occurring sooner than we had anticipated. We also continue to see benefits from ongoing contract and strategies, which dedicates contracting professionals have to work with commercial payors to obtain reasonable rates for the services are -- physicians provide.

We're also seeing some flow through a as a result of negotiating multi-year payer contracts that include automatic escalators. Payors are recognizing that this is a reasonable approach to provide a contract. Our most reimburse related factors were positive, we did see a slightly higher percentage of our patient care reimbursed by government payors in a year ago. This was not a surprise based upon our payor mix at the end of 2005.

On a sequential basis, our payor mix actually improved. We don't expect it will be -- we do expect there will be a continue variability in our payer mix drive largely by economic factors. Our balance sheet is clean and strong. During the 2006 second quarter, we paid down a $41 million outstanding balance on a line of credit and we ended the quarter with cash and cash equivalent of $28.8 million.

Accounts receivable at 113.8 million at June 30, 2006, are up by about 7.94 a year ago. We're virtually debt-free with about $1 million in obligations devoted to acquisitions and capital leasing.

During the second quarter we completed one acquisition of pediatric cardiology practices, which we paid $3.5 million. At June 30 we had spent $66.7 million and this far in the third quarter we've invested another $6.2 million to acquire practices in central Florida and Southern California.

Maintenance capital expenditures for 2006 second quarter were $2 million in line with our historical experience. During the first half of 2006, net patient service revenue of $391.5 million, up 16% compared to the same time in 2005. Clearly our revenue results for the three months and six months ended June 30, 2006, demonstrate our management team's ability to remain focused on growing our core business.

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

Thank Karl. Let's open up the call for questions now, operator, please.

[OPERATOR INSTRUCTION]

And our first question will come from the line of Bill Bonello of Wachovia. Please go ahead.

Good morning. I appreciate that there is not a lot of color you can give us on the options review in terms of the expected outcome and timing, etc., but there area couple of questions that I was hoping that you might be able to address that aren't predicting the outcome and one, prior to mortality of this, I am just wondering if you can tell us whether there has been any backdating of options?

We won't be able to answer that question until it's answered. It's one of the questions, obviously that's being asked and being looked at by the audit committee.

Is that I apologize for my naiveté, but is that a complicated question? I mean it seems like it would be just an extremely simple thing to be able to know.

Well, Bill this is Karl. I appreciate your question, but at this point we're not going to comment on any components of the options, as we have been instructed that at this point not to talk about the investigation and any components thereof. So based upon what's going on in the review, we really can't speak to that.

Okay. Can you tell us when you started to review?

As I said, we really can't comment any more on the review.

Okay. I think that is self- explanatory. So that's all.

Thank you. And our next question will come from the line of Ernie Pinner, Ryan Beck and Company.

Thanks. Good morning. Just a different type of question regarding the review that is going on. Can you say the shareholder that made the inquiry, was that an institutional or individual shareholder?

We're actually not speaking about anything along the lines of the review that's going on at this point. So we can't give you that information at this point.

Okay. Thank you.

Thank you. And our next question will come from line of Kevin Ellich of Miller Johnson. Please go ahead.

I think this may be a futile question, but can we get any color on the timing or timeframe that the audit committee is going back and looking at the option grants?

We cannot comment on that. Sorry Kevin.

Okay. Then is it still just internal at this point? No one else has moved in from external sources like the SEC or anybody?

That is correct.

Okay. And the regarding the 10% same unit revenue growth, do you expect it to go back to historical levels, that 3% to 5% range that's typically been guided to?

Sorry. Just to be clear on that, 3% to 5% range we talked about is for volume growth in the NICU.

Great.

And we see that year basis. We say that is an annual number. So when you look at the range we're in for the year 3.8, we are right in the part of that. As far as reimbursement factors, we talked a lot about that this year as we waited to see how payor mix would shake out and like. So we will on a go forward basis expect to see the 3% to 5% for volume and we would expect to continue to see reimbursement improvement.

Okay. And then on the anesthesiology front, have you-- I know, I think last quarter you guys mentioned you were spending on the infrastructure to build out. Have you finished spending for building out the anesthesiology stuff?

We finished on spending on building infrastructure? No.

Yes.

We have quite a ways to go on that.

Okay.

And you think chunk of the infrastructure on that will be you know when we complete the first acquisition, we will probably have a significant amount on that.

Okay. And then thinking about the pipeline and obviously that the core acquisition business has been very good, and as you're moving to anesthesiology, that's kind of the next big question. I believe CMS is looking at a five-year review. Our review committee has recommended a 10% cut over the next four years to anesthesia providers. Has this been taken into consideration as you guys have been targeting your first acquisition?

It has been taken into consideration as far as our valuation and pricing and look at that we are well aware of the performance that CMS has out there on changing our review. And what impact that may have. So we've been following that closely and that certainly is a component of our thinking.

On the other side of that is, we think that may also be a driver for people to be interested in coming to a group like ours, the opportunity to be part of a bigger group and have a bigger impact.

Okay.

Improvements that we bring. So it's kind of a two-edge sword, but it is something, which is we are well aware and even considering as we go through the--

Excellent, and then jus one last question back on the option stuff. Obviously we can go back and look at the proxy so that CV Option Grant dates and prices. And I just took a quick look at the 2005 proxy. It appears that the grant came out on July 14 and now the footage asset price 30.26. If you guys are trying to price at the low point of year, it seems like you haven't done a good job. It doesn't seem like-- it's about 25% higher than the low from last year. So is that any indication, or can we get any sort of help in terms of what we should be looking at?

We can't comment on that. I was just directed to our prior filings. If you need some further direction, I would go to prior filings. I think you can find the [information there].

Okay. Thanks, Roger. That's it.

Thank you. And our next question will come from the line of Art Henderson of Jefferies & Company. Please go ahead.

Hi. I had a question on Medicaid HMO. I was just curious -- as far as contracted with them, is Medicaid HMO pricing getting tougher? Or we've seen some situations where NICU utilization has gone up. I was just curious what that might mean for you guys longer term.

As far as the Medicare HMOs, we really haven't had any issues on the contracting front of that we have -- get any tougher. And I know there are a lot of states that are actually pushing more towards that. When we see that-- but it really has not had an impact on our reimbursement. Typically the reimbursement is the same as Medicaid or actually in some places we've been able to get a touch higher but nothing significant. So we've visually seen no change on that.

And are there any -- I think I might have heard something about some Medicaid HMOs talking about maybe capping payments or doing -- is there any sort of emerging trends that maybe you haven't actually experienced just yet but you heard about?

There's nothing we've heard about. What they are looking to do on that as far as the Medicare HMOs. So I really can't comment on that.

Okay. And then as far as it states that you have a sizable presence that have cost concerns in the past on Medicaid or the states. Any developments on the state level as far as loosening eligibility requirements or anything we need to be taking note of?

There's nothing that we've noticed in what's going on. With any of the state's legislative sessions Medicaid or the life so I'm not, you know, there's nothing there that we're concerned about at this point, eligibility or from reimbursement factors.

Okay. Thank you.

Thank you. Our next question will come from the line of [Rob Helsi] of Black Rock. Please go ahead.

Thank you. Just a quick question on the anesthesiology. By your comments Roger, it sounds like the multiple of EBITDA you might pay, might be a little bit higher, but that would only be because you wouldn't expect much in the way of synergies or value-added in the short term. Can you comment on that?

Yes. Rob, when we talk about multiples that we're paying for our neonatology practices, it's really a pro forma. We will value a neonatology practice by saying, if we, Pediatrix was managing this practice, what kind of contribution could we expect from that practice, knowing the contract that we have the kind of efficiency that we bring to the table, etc.

And so we a multiple on that sort of pro forma or forward-looking contribution and that's what we talk about when we say it's 4.5 or 5 times, or whatever the multiple is. We can't do that in anesthesia. We haven't seen anything that says we won't get there, but we haven't done it yet.

So really, the multiples that we're going to be talking about, it's going more of a trailing mode to whatever their current operation costs are. And based on that model, it will necessarily be a higher multiple because we will not include any efficiencies that we might be able to bring to the table.

Okay. And then your comment about being able to bring value in the contracting and collections area, the practice as you looked at so far, have you found that you need a lot of help there or is it something that you think that could benefit in the first year?

Yes. We've looked at a lot of different practices. Obviously, there each one is managed differently. We have a pretty good idea of what's going on across the country. And we do believe, from everything that we have seen, that we will be able to bring some efficiencies. And we haven't seen anything that says we could not eventually get to, as I said before, some place similar to where we are with neonatology.

Thank you.

[OPERATOR INSTRUCTIONS]

And next we'll go to the line of Anton Hie of Jefferies. Please go ahead.

Yes. Thank you. Karl, you mentioned getting better than expected or earlier than expected contribution from the new CPT code in the second quarter. Do you feel like that's -- we are already getting the full effect of that, or do you there may be some additional impact from that in the second half?

I think we got a good effect in this quarter. I don't really want at this point to be talking about where we're -- what the next quarter's are going to be looking like from that. But it was better than we had expected. We had built in some expectations of that. Coming to year, but it was quicker than we had expected and more than we had expected.

Okay. And will there be a commensurate offset in terms of the position bonuses tied into this pricing?

Well, I mean with the improvement in the pricing, because a significant number of our physician practices are on a 50-50 bonus plan, where we share an upside. We have accounted or on an increasing the accrual of bonuses for the revenue component to that.

Of course, obviously we're not going into any detail whatsoever on the review, but maybe in just kind of broad and unspecific terms, can you talk about how this process would play out for anybody, not necessarily Pediatrix in general but anybody in general in this situation?

The audit committee is in charge of the process and it will have to tell us how they want to proceed. As we said in our press release, we've hired some -- they have hired their legal counsel. And that's how it's proceeding.

Okay. And maybe can you walk us through the decision to not issue the full number? Obviously, there is a good story to tell here fundamentally. And I think the street is thirsty to hear that story. And could you walk us through this and not to issue the full numbers?

At this point, we just disclose that comment any more on the process that went through on that. As we go through this review, we just can't really comment on all processes related to that.

Right. Thanks.

Thank you. And next we have a follow-up from the line of Bill Bonello of Wachovia. Please go ahead.

Hi. I don't know how this fits into not being able to comment on earnings, it seems separate from that -- can you comment at all on cash flow, which seems like it would be something that's unimpacted by options accounting?

At this point, we really can't comment on the options, what we've actually discussed in our prepared remarks earlier and what was in our press release. So unfortunately, we really can't go any further than that, on that Bill. I mean we did talk about what our cash balances are, but we really can't talk beyond that.

Okay. Thanks.

Thank you. And I'll turn it back to Dr. Medel. Please go ahead.

Okay. Well thank you for participating this morning. And I will look forward to speaking with you again after we file our Q. Thanks operator.

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