Pediatrix Medical Group Inc (MD) 2006 Q4 法說會逐字稿

Good morning.

Welcome to the Pediatrix Medical Group fourth quarter revenue conference call.

At this time, we do have all of your phone lines muted or in a listen-only mode.

And as a reminder, today's conference call is being recorded for replay purposes.

That information will be announced at the conclusion of our call.

Before I open up the conference today to Pediatrix management team, I want to read a forward-looking advisory statement, if I may have your full attention.

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.

Additional factors include, but are not limited to, uncertainties related to the time needed to complete an audit committee's inquiry and historic stock option grant practices, whether or not the audit committee's inquiry will require the restatement of Pediatrix' financial statements, the financial reporting impact of improperly dated stock options, the tax effects of improperly dated stock options, the potential discovery of accounting errors or other adverse facts and possible litigation or regulatory action resulting from the SEC's informal investigation, or the United States Attorney's investigation of Pediatrix' stock option granting practices.

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.

With that being said, at this point I would like to remind you that the following remarks by Dr. Roger Medel, Pediatrix' Chief Executive Officer, and Mr. Karl Wagner, Pediatrix Chief Financial Officer, management will host a brief question and answer session. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Dr. Medel.

Good morning, sir, and please, go ahead.

Good morning.

And thank you for joining our call today to discuss selected financial information for the 2006 fourth quarter.

Our business continues to grow and I'm very encouraged by the performance of our existing practices.

As we announced, revenue increased by 19% for the 2006 fourth quarter when compared to the 2005 fourth quarter, driven largely by another period of strong same-unit revenue growth.

We reported limited financial information this morning, as the audit committee of our board of directors continues to work towards the completion of the review of our historical stock option practices.

I fully understand the frustration of not being able to report complete financial results at this time, and please be assured that I share your frustration.

We [inaudible] that the audit committee is working hard to complete this review and they are working in the best interest of all of our shareholders.

I hope you'll appreciate that as we open up the call for questions, there won't be too much color that I'll be able to add on this subject.

Even with the limited financial information that we have released this morning, though, it should be clear that we remain focused on growing our business.

Our revenue growth is balanced, coming from a blend of acquisitions, same-unit volume increases from all of our positions of specialty, same-unit reimbursement increases, primarily from commercial players and the contributions from the new Neonatal Code, which effectively established a new base for our Neonatal Intensive Care Services in 2006.

During 2006 we invested just under $92 million of our cash in practice acquisitions, bringing 8 additional physician groups into our national group practice.

So far this year we've completed one acquisition, a neonatal group practice based in San Francisco.

This is a solid practice that is now focused on opportunities to grow within their market.

We are encouraged that our pipeline for core acquisitions remains full and will continue to execute our growth strategy by focusing on acquisitions within these core subspecialties.

Of course, as you know, we've spent a great deal of time preparing investors for an expected expansion of our model to include anesthesia physician practices.

We continue to be encouraged that many of the things we do well in managing hospital-based physicians will transfer to this specialty.

Specifically, we think that our processes and our investments in administrative infrastructure will lead to better results than these practices currently generate.

I realize that many of you are anxious for us to complete the first acquisition in this specialty, as are we.

Although as cautiously as we've been in talking with you about this, we're equally cautious in applying the same rigorous due diligence standards to anesthesia that we have used over the past decade with our successful acquisitions program.

Specifically that means we are placing a priority on doing this right rather than doing it quickly.

Our business development team has identified several attractive anesthesiology practices and we are in various stages of the process, from confidentiality agreements to term sheets to due diligence, with each of these.

As I have said, we will be very deliberate in how we move into anesthesia, making certain that we're comfortable with the acquisition terms, integration and operations before we expand significantly into this new platform.

As we explore the anesthesiology opportunity, we will maintain our focus on our core business.

Last week we hosted two events consecutively that helped to reinforce the mission of Pediatrix, both internally and across our subspecialties.

About 250 of our medical directors convened for a three-day meeting that was built around various continuous quality initiatives, some that we have in place, and many that are being developed as part of the overriding trend towards evidence-based medicine.

Immediately following our medical director's meeting, more than 900 neonatologists and neonatal advanced practicers from around the world participated in our first ever Neo Conference, the conference for neonatology.

Even in it's inaugural year, this conference became one of the largest gathering for neonatologists anywhere.

In many ways, the Neo Conference is the combination of years of work that demonstrates for our neonatal subspecialty that we are focused on patient care.

I mentioned these recent activities because they are a large part of the value proposition of Pediatrix.

In the past week, our contributions towards advancing the quality of medicine for our subspecialties were on full display.

These are reasons why physicians join Pediatrix, and as important, they are reasons that they stay as part of our national group.

We have built a large, successful business out of a very simple creed, taking great care of the patients, and it's refreshing to see that still today it really is about the patients.

Finally during the 2006 fourth quarter, there was some important regulatory news that managed to get lost in the stock options review issues.

That's the decision by the Federal Trade Commission to close its 4.5-year-old review of our 2001 Magella Healthcare acquisition, taking no action.

We cooperated fully with the FTC in this matter and obviously were pleased that the agency chose to close it after reviewing all of the relevant facts.

At this point, I'll turn the call over to Karl Wagner, our CFO, who will provide a greater detail on fourth quarter revenue results and our financial position at December 31, 2006.

Thanks, Roger.

Good morning, everyone.

This morning I'll provide a discussion of the revenue results for 2006 fourth quarter based on the information that we've included in this morning's press release.

During the three months ended December 31, 2006 we continued to see very strong revenue growth coming from a number of factors.

The 2006 fourth quarter net patient service revenue of 211.3 million increased by 19% from 177.7 million for the same period in 2005.

Same unit revenue growth for the fourth quarter was 13.4% and additional revenue growth was the result of contributions from acquisitions completed during the last year.

Higher volume in contributions from the new Neonatal Code were approximately equal contributors to same unit revenue growth at roughly 4% each.

The increase in same unit volume was a result of 3% growth in NICU patient volume, as well as strong growth from our other physician specialties in newborn screening services.

The new weight-based intensive care code, 99300 that was introduced last year should be viewed as a one-time step-up for 2006 and beyond.

The remaining factors leading to our strong same-unit revenue growth are pricing related, including better reimbursement from managed care contracting and the flow-through from our annual fee schedule increase.

On a same-unit basis, payer mix remains relatively unchanged year-over-year.

For the entire company government payers as a percent of revenue was up for the 2006 fourth quarter when compared to the third quarter as we can see -- continue to see normal quarter to quarter fluctuations in payer mix.

On a sequential basis, we realized a decline in revenue in the fourth quarter as compared to the third quarter of approximately $4.4 million.

This decline is the result of higher government payer mix in the fourth quarter as compared to the third, one fewer clinical day for our office-based practices, and even though we realized increased volume year-over-year in the office-based practices, the quarter to quarter comparison was down.

We believe the payer mix change to be part of the routine quarterly fluctuations we continue to see.

For the year ended December 31, net patient service revenue of 818.6 million increased by 18% over the comparable period of 2005.

This includes same-unit revenue growth of 11.9%.

NICU patient volume growth was 3.6%, or within our annual historical range of 3 to 5%.

In addition, throughout 2006, we saw strong contributions from other physician services, including maternal fettle medicine and pediatric cardiology to take total same-unit volume growth to 5% for 2006 over 2005.

We continue to have a strong balance sheet, as we reported in our press release this morning, cash, cash equivalents and short-term investments at December 31 were $135.3 million.

This includes approximately 13.8 million of short-term investments that are part of our captive insurance subsidiary, leaving us with approximately 121.5 million available to fund our growth.

This amount compares to about 62.5 million at September 30th.

Accounts receivable were 125.6 million at December 31, and we have no amounts outstanding under our $225 million revolving credit facility.

During 2006, we invested almost $92 million in cash in physician group practice acquisitions, including almost $10 million during the fourth quarter.

So far in 2007, we've acquired one neonatal group practice, a practice based in San Francisco.

These acquisitions, coupled with our strong same-unit revenue performance, demonstrates that we continue to successfully execute our strategy for growth.

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

Thanks, Karl.

Let's just open up the call for questions now, operator.

Indeed, I would be happy to.

Thank you very much, Dr. Medel and Mr. Wagner for your time in that overview today.

We do appreciate that. [OPERATOR INSTRUCTIONS] Representing RBC Capital Markets, our first question, we go to the line of Kevin Ellich.

Please go ahead, sir.

Good morning, guys.

Good morning, Kevin.

Just a couple questions, starting off with given the resolution of the FTC investigation, does that open up the door for you to look at some larger practices that you may have shied away from while the investigation is ongoing?

We were advised by our attorneys during that FTC investigation that we should continue to run our business normally and that's what we did.

I don't think that we really withheld from approaching any practices based on the FTC investigation because the FTC never told us to stop doing anything that we were doing, so, the practices that we haven't approached, are large practices who are out there, we haven't approached for strategic reasons, but not for reasons that have to do with the FTC.

Excellent.

That makes sense.

Karl, I think you said 4% of the 13.4% same-store growth increase was due to the new CPT code change.

About that much, that's correct.

Now, when will that annualize?

Well, that code went in effect in, in January of '06, so from a code perspective, it flows through in there.

Okay.

As we said in the past, we were pretty conservative at the beginning of the year.

Right.

Can you give us the sense as to the other payer increases, the escalator contracts you have built in, how much that contributed to same-store growth?

Well, a big part of the remainder, so probably a little more than another third was related to other pricing factors, and a big piece of that is that it's managed care contracting.

We always get a little bit from our price increase, but the price increase we put in doesn't yield the biggest component of our growth in pricing.

It's really from renegotiating payer contracts or those escalators that we have built in in multi-year contracts.

Right.

Is it safe to assume that you have escalators coming up this year, too, so same-store growth should be benefited in a similar fashion?

Every year, over the last several years that's kind of been an initiative of ours when we renegotiate contracts to try to get multi-year contracts with some level of escalators in it, so, yes, we would expect 2007 we would have contracts with escalators in them.

Looking at the cash balance, it looks like it went up about 73 million sequentially.

It appears that operating cash flow for the quarter, assuming that that's where all of the increase came from, it appears that operating cash flow for the quarter was strong.

Is there anything that contributed specifically to that strength?

I really can't comment specifically on operating cash flow, as we haven't put that out at this point.

But, as we'd expect growth during the period there's flow in the cash.

Okay, and then just one last question.

Regarding the moving to anesthesiology, Roger, do we have any sense as to how close we are in the-- you guys completing the first deal and what are the characteristics of the practices you're looking at?

Kevin, I sort of got out of the prediction business, as you and most the people on the call know.

I thought we were going to get our first acquisition done last year.

Really as we got into our due diligence processes and just got more involved, we realized that we wanted to slow, slow the process down a little bit.

I still think and take this for what it's worth, this is the guy who told you we were going to complete one last year.

Right.

I still think we'll get an acquisition done, if not within the first quarter, certainly in the second quarter.

And my hope is that as we move and get more comfortable, that we'll we'll get it done quicker rather than later.

We're looking at practice -- the other problem is, or the other factor is, the stock option review has certainly taken some resources away from what we normally would be -- resources that we would normally be utilizing, so that has slowed it down a little bit as well.

We're looking at practices that will reduce our risk as much as possible.

And so for us that means we're looking at a smaller practice.

We're looking at a practice that's geographically close to where we are.

We're looking at a practice that's in a hospital with whom we have a good working relationship.

We're looking at a practice that is in -- that has some growth potential so it's in an area, so, it just narrows it down pretty dramatically when you start to minimize your risk as much as possible and that's obviously another reason because it takes time to find that practice and to come to agreement with them.

But you should expect to see many of those components.

You should expect to see a practice where we have a good relationship in an area that's growing that's relatively close to where we are, there are large practices out there, 300-physician practices, 200-physician practices that's not what we're going to go after for our first acquisition.

So those are kind of the parameters that we're working with.

Excellent.

Thanks, guys.

Thank you.

Thank you, sir.

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

Please go ahead, sir.

Yes, thanks.

I apologize if you went over this earlier, but just a real quick question on the payer mix that you, changes that you might have seen during the year?

At this point, obviously, at end of the year, typically we get a better picture of where that stands specifically.

Yes, we haven't specifically broke that out at this point.

We will give that information in the future, but we have not given that at this point.

On the same unit basis for most quarters we were pretty flat, probably [inaudible] in the second quarter from the same-unit standpoint if that helps you.

But we have not broken that out at this point.

Okay.

Is that to say that acquisitions that you've made in the past 12 months have had a different sort of payer portfolio?

Yes, every acquisition adds a different payer mix from the average in general, so that could impact it.

But at this point we really haven't put that out.

Okay.

Looks like you're getting pretty decent growth in your, in the other subspecialties.

Wonder if you could give us an idea of how you're specifically you're driving same-store growth in those other practice-based specialties?

Yes, no, we're very happy with the other subspecialties that we're in, the office-based specialties, pediatric cardiology and maternal fetal medicine, have had good growth and we're happy with that.

I mean part of that comes from the strong physician leadership that we have in the practices that want to drive that growth, having the ability that adding physicians gives you the ability to provide more services, so as we recruit more physicians.

And we're in specialties that continue to see more demand.

So we're doing what we can to meet that demand in the strong markets that we're in.

So it's opening new offices, adding physicians to practices and continually looking for additional services in those specialty lines.

So to some degree that's a recruiting function?

That's a piece of it, absolutely, I mean getting more physicians, but it's also the need is there and we have the physicians that are servicing that need so there's general growth in that practice.

In those practice areas.

Okay, and then back over to the core, sort of within NICU, where would you highlight the penetration or sort of the share of the addressable market that you've got?

And I guess, trying to get a sense of what inning we're in and kind of if your exited multiples have been creeping up in that space?

This is Roger, Anton.

Good morning.

The way we think about this is, there's about 3700 neonatologists in the country.

About 1000 of them are in academic centers.

So that's not really within our addressable market.

That leaves maybe about 2700 neonatologists.

There's about 700 or so that are part of Pediatrix.

So, if you look at the addressable market alone, we're about 25% of what we would call our market.

And so, how much more than that will we be able to grow is anybody's guess.

We'll try to get as much of it as we can.

As we said before, our pipeline remains full and so, we're comfortable looking out over the next 18 months and saying, it looks like we're going to continue to grow within our core businesses.

Okay.

And I guess that -- that does it.

Thank you.

Okay.

Thank you.

Operator?

Yes, indeed. [OPERATOR INSTRUCTIONS] Next in queue we go to Bill Bonello with Wachovia.

Please go ahead, sir.

Yes, just a couple of follow-ups, I guess, maybe on some things that were touched on earlier.

But can you be more specific on the acquisition outlook?

In the past you've sort of given guidance for what your expected acquisition spend would be over a year.

Can you tell us what that might be for 2007?

We intend to do that, Bill, as we have done every year.

We just are not in a position to do that as of yet.

But when we are able to release our earnings, we're going to give you all that guidance.

Okay.

So you just can't do that for the regulatory purposes, not because you don't have visibility?

Right.

Okay.

Okay.

And then you talked about somebody asked about escalators on the managed care pricing.

I guess to ask a little more specifically, as you look at 2007, would you expect managed care price to go up as much as it did in 2006?

Well, 2006 was a pretty strong year for us on managed care pricing.

So that would be a great year, again and clearly we strive to do that.

I'm not sure I would step out that far to say it would be as strong as it was in 2006.

Okay and then I think you're going to say we have to wait on this one.

Any thoughts on your use of cash?

We have to wait on this one.

Okay.

That's fine.

And then on the anesthesiology, just curious, I mean, as you've done the due diligence, is there anything that you've encountered that's made you less excited or more skeptical about your ability to be successful in that space?

I think the best way I would answer that question is by saying, we've pretty much run into the same general picture that we run into neonatology, which is that there are practices out there that we believe, clearly, we can help produce better outcomes and better results.

There are other practices who may feel like they don't need us to help them.

After we look at the process, which is really where we are able to help these practices, we don't see anything that's very different from neonatology.

We see practices who don't know how much they're supposed to be collecting.

We see practices that outsource their whole billing and collection.

We see practices who don't do a lot of managed care contracting, who don't do a lot of renegotiations for their managed care contract.

So we -- when I say we don't see anything that makes us think we won't be able to get to a similar place than where we're at with neonatology, really what I mean is, that even though the practices are different and the physicians are different and a lot of the coding and those processes are different, the processes where we are able to make an impact pretty much are similar, and what we're seeing across the country, and we've talked to probably more than 50 practices in the last two or three years, we're seeing a pattern that is similar to what we see in the neonatology.

Okay, and then the last question, are there any other specialties that you're looking at, or is anesthesiology where, besides neonatal and what you're already in, your focus right now, are you also still in the process of thinking about other subspecialties that you might want to, or specialties that you might want to explore?

We pretty much made our decision, and we like to focus -- we think that the -- we think the recipe for success in this business is to remain focused, and so we have made our decision.

We're going to go into anesthesiology.

We're not thinking about anything else.

I mean there may be some related areas as there are in neonatology, whether it's pain management or, free-standing surgical centers, or those kinds of things, but the core specialty is anesthesiology.

Perfect.

Thank you.

Okay, Bill.

Thanks.

Thank you very much, Mr. Bonello.

Next representing BlackRock, a question from the line of Rob Halsey.

Please go ahead, sir.

Good morning.

Hi, Rob, good morning.

Karl, when you said the new billing code came in in January of '06, but you were conservative with it, was it the case that you didn't bill it aggressively at first to see how it was received or did some managed care payers just not follow the new coding?

It was a combination of things.

It was, we clearly had to go to some payers and renegotiate rates because it wasn't a code that was in there and some of them wanted to do that.

So there was some impact to doing that.

Some payers didn't recognize it right away, so it took us some time so we had to rebill it under the old code until they recognized that.

That took some time to get that done.

So it was a conservative process in the beginning of the year when it first started rolling in.

It did get adopted much quicker than we had initially anticipated as we saw impacts in the second quarter and third quarter.

Pretty much it was fully adopted at that point.

Did -- probably would still be some year-over-year improvement there because of the new code in the first quarter?

First quarter we might see some of that, yes.

Great, thanks.

[OPERATOR INSTRUCTIONS] We do have Dawn Brock with JPMorgan in queue.

Please go ahead, ma'am.

Good morning, gentlemen.

Good morning, Dawn.

Just a quick maintenance question.

You had very strong recruiting historically, and I just wanted to know for the year what the recruitment/new hires looked like from the -- from the -- from the dockside that aren't coming from the acquired practices?

At this point, I mean we're pretty happy with how the recruiting goes.

It's pretty standard.

This has been a busy time, as a lot of the fellows that will come out this summer are making decisions on where they will be going and it's been fairly busy.

But I think it's been pretty much normal for us on our expectations and the recruiting process at this point.

Are you willing to give us any numbers around that, Karl?

I actually don't even have any specific numbers around that at this point.

Okay.

Thank you very much.

And thank you, Ms. Brock.

With that, Dr. Medel, Mr. Wagner, I'll turn the call back to you for any closings remarks there are no further questions.

Okay.

Well, thanks very much.

I appreciate everyone listening this morning and we will be back with you as soon as we're able.

Thank you.

Ladies and gentlemen, Dr. Medel is making today's conference available for digitized replay.

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That does conclude our revenue call for this fourth quarter 2006.

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