Pediatrix Medical Group Inc (MD) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Pediatrix Medical Group 2007 first-quarter revenue conference call.

(OPERATOR INSTRUCTIONS) As a reminder, today's conference call is being recorded.

Before I open up the call to the Pediatrix management team, I will read the following forward-looking advisory statement.

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

All statements other than statements of historical fact that address activities, events, or developments that Pediatrix believes, anticipates, intends, expects, or projects, and similar expressions are forward-looking statements.

Forward-looking statements are based on assumption and assessments based on Pediatrix's 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 the Audit Committee's inquiry into historic stock option grant practices, the pending 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 U.S.

Attorney General's investigation of Pediatrix's 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.

At this point, I would like to remind you 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 section.

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

Medel.

Please go ahead, sir.

Thank you, good morning and thanks for joining our call today.

This morning we reported limited financial information for the 2007 first quarter but the information in this morning's press release provides an indication that our business continues to grow.

Once again we must delay the reporting of our full financial results until the ongoing stock option grant review is completed.

Our Board's Audit Committee, their law firm and outside forensic accountants are working with our public accountants to bring this matter to a close.

This process has been conducted independently from management and as a result we just don't have a specific timeline.

We do understand the patience that you, our shareholders have demonstrated as we work through this issue, and let me say this clearly, we are disappointed all we have been able to share with you is the limited financial information that we have presented to you during the past year.

Pediatrix has been and will continue to be a growth business.

Our revenue increased by 14% year-over-year during the 2007 first quarter, and it was once again driven by strong same unit growth which exceeded 10% for the 2007 first quarter.

For the past year we have benefited from a new physician billing code that led to better reimbursements for care provided by our physicians.

This new code and the reimbursement for it effectively established the higher base for the services provided by neonatologists in the intensive care setting.

Following this quarter, we will lap the positive impact of this code but its benefits are ongoing.

As I said, this is a growth business, and we are growing.

We have completed two neonatal physician group acquisitions, one in San Francisco and one in Indiana during the first quarter of this year.

In looking at our pipeline, we remain encouraged that additional groups will be joining us in the near future.

As always, it is hard for us to direct the timing of acquisitions, and throughout the 12 years tha we have been buyers of physician group practices, there's been variability in the timing of acquisitions for any number of transaction-specific reasons.

As I said, our pipeline is strong and we are confident that there is ample opportunity to sustain our growth rate through the combination of acquisitions within our core sub specialties and same-unit revenue growth.

This brings me to our efforts to develop a national group of anesthesiologists.

Clearly there is a great deal of anticipation from our investors for us to enter this arena and I am responsible for having created that anticipation.

We continue to have discussions with several anesthesiology practices, and we are moving forward with due diligence on certain practices.

I have said this before and I will probably need to say it again, we will maintain our deliberate due diligence discipline as we analyze those practices that we have identified with this important initiative.

This is an exciting new platform for us as we work through the due diligence, we are also learning a lot more about this specialty.

We remain optimistic that there is a good opportunity for us to transfer our core competency which is our administrative skillsets to effectively manage hospital-based physician groups through this relatively large specialty.

Last quarter I said I wanted to get out the prediction business in terms of setting a specific expectation for when we will complete the first anesthesia acquisition, but let me assure you that progress is being made and we remain very enthusiastic about our prospects for adding value within this specialty.

During the past few months, we have also been processing some favorable reimbursement news from our largest state, Texas.

As a result of the settlement of a 14-year-old lawsuit that was brought against the Texas Medicaid program, the State of Texas has increased its Medicaid budget for physicians caring for patients under the Medicaid program.

This is very much a work in progress.

The central point to the lawsuit was one we've seen many times before, which is that low reimbursement rates set by state Medicare programs actually create a barrier to care.

Office-based pediatricians and sub specialty physicians don't see as many Medicaid patients in states where reimbursement is too low.

With this settlement, we do expect that our reimbursement from Texas Medicaid will increase.

But it is premature for us to quantify the impact at this time.

The state legislature is still working through a lot of issues around how that increase will flow through the state budget, and the judge will not finalize the settlement until the legislative session ends later this month.

While we are unable to determine how much, we do expect to see higher Medicaid reimbursements for Texas for care provided after September 1, 2007, which is the start of the state's 2008 fiscal year.

Finally, we also announced this morning that Manuel Cadre has joined our Board of Directors.

Manny currently serves as Vice President and General Counsel of the De La Cruz Company, a holding company for Eagle brands here in South Florida and Coca-Cola bottlers throughout the Caribbean.

He has a broad background working with companies that are actively engaged in mergers and acquisitions and his depth of experience in dealing with public policy issues will be an important addition to our Board.

Manny is an Independent Director with financial background and he will serve as a member of our Audit Committee.

At this point, I will turn the call over to Karl Wagner, our Chief Financial Officer who will provide a greater detail on first-quarter revenue results and our financial provisions as of March 31, 2007.

Karl?

Thanks, Roger.

Good morning.

As Roger said our press release this morning presents a company that remains focused on growth in our business, and this morning I will provide some discussion behind the numbers we reported today.

Our revenue of $214.5 million for the three months ended March 31, was up 14.3% from $187.7 for the same period in 2006.

Revenue growth was driven by several factors that are part of our same unit growth, as well as contributions from acquisitions completed during the past year.

Same unit revenue growth continued to be strong at 10.7% for the first quarter.

Patient volume growth at units that are part of our same unit calculation was 3.9% for the first quarter.

In addition, we continue to see strong volume growth at our maternal fetal and pediatric cardiology practices as well as our newborn screening services.

Overall, same unit growth attributed to volume was 4.4% during the quarter.

On the reimbursement side, we continue to see improvement from our contracted commercial payers, mostly managed care.

We continue to seek and receive modest increases from those managed care contracts that we renegotiate throughout the year.

For the 2007 first quarter, we also continued to benefit from the new neonatal physician code that was introduced in 2006.

This accounted for approximately half of the increase in our reimbursement factors.

While our physicians were billing for that code during the first quarter of last year, not all payers recognized the code initially.

As many of you know that code was the reason for strong same-unit revenue growth for the most of last year starting with the second quarter.

This is really the last period where we have the growth due to this code change.

Same unit payer mix improved sequentially, something we usually see in the first quarter of every year and remains stable for the 2007 first quarter when compared to the first quarter of last year.

Finally, we are not reporting full financial information today.

I do want to remind you that there is some seasonality that affects our business.

On the revenue side, most of our billing is for neonatal physician services.

The majority of codes that our physicians use in the NICU are day-based representing 24 hours of care.

There are fewer calendar days in the first quarter when compared to the third and fourth quarters and this affects our revenue trend.

While there are fewer billing days in the first quarter, our costs associated with providing patient care, largely payroll are spread evenly across the year.

The other typical seasonal events for us is the resumption of the Company's matching fortune of the Social Security or FICA payroll tax at the beginning of each calendar year.

This tax on the first $97,500 of compensation and with salary and bonuses, many of our physicians meet that obligation in the first part of the year.

This cost impacts our expenses, as well as our cash flow for the first quarter each year.

In this morning's release, we also reported some balance sheet information that indicates the strength of our business.

We ended the first quarter with approximately $71.6 million in cash and cash equivalents and we continue to have no amounts outstanding under our $225 million revolving credit facility.

Cash, cash equivalents, and investments March 31, 2007 declined by approximately $40.7 million from year send due to normal recurring first-quarter items.

When you look at the usual first-quarter uses of cash, bonuses to physicians for 2006 accruals, and our matching 401(k), our bonuses for the year exceeded $92 million paid out in the first quarter and our matching contributions were about $9.2 million.

And during the quarter, we also completed about $12 million in acquisition payments.

While we were able to pay these items and fund our operations from available cash -- cash generated during the first quarter.

At March 31, 2007, net accounts receivable were $127.8 million and DSO remained relatively stable and below 60 days.

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

Thanks, Karl, Operator, let's go ahead and open up the call for questions now.

(OPERATOR INSTRUCTIONS) Our first question from the line of Kevin Ellich with RBC Capital Markets.

Thanks for taking the call.

Good morning, guys.

Good morning, Kevin.

I had a couple of questions.

Leading off with same-store growth.

If I do -- if I am doing this math correctly, did you say the CPT coding change accounted for about half of the pricing impact, which would amount to about 3.2%?

That's correct.

About half of that pricing growth was from the new code.

Okay.

So is it safe to assume then that the increased commercial contracts -- the pricing on those contracts could flow through the remainder of the year.

So, for example, if we are seeing 4% same-store volume growth in Q2, we could also see 3% pricing growth and same store growth therefore would be maybe 7% going forward?

Does that make sense?

We do expect to continue to see pricing growth quarter over quarter, we continue to renegotiate managed care contracts with price increases.

As we have talked about before, when we negotiate, we try to build in annual escalators into our contract and get longer-term contracts.

We do expect to continue to see -- see improvement.

In the past, prior to seeing some impact from payer mix, we had 2% to 4% from reimbursement factors.

I think that is probably in the range of what we will continue to see on a go-forward basis, and as we have said before from the volume standpoint, it is 3 to 5%.

Excellent.

Thanks.

And then going back to the change -- potential changes in Texas, which, I believe, is one of your largest states, if not -- I believe in 2005 at least it accounted for about 28% of revenue.

Would the Medicaid mix be comparable to the overall corporate mix in Texas?

It would be reasonable to assume it is in that range.

There's nothing unusual about Texas as far as our mix that makes it significantly different.

Okay.

And then on the acquisition front, have you seen any change in the multiples and the valuation of the deals coming down the pipeline?

It is Roger.

We -- we have seen a higher ask, and I don't know if that's a reflection of what's going on in the marketplace overall, but we -- we are trying to stay where the historical multiples are, but we are seeing a higher ask, and I would not be surprised going forward if we were -- if we started looking at multiples that were a little bit higher than what they have been historically.

I see.

Last question.

On the anesthesiology front.

I believe last quarter you kind of indicated and maybe I read it the wrong way that you had kind of narrowed the search down to a few practices.

And has that changed?

Or are you guys talking to, more anesthesiology groups before making this final decision?

We are doing two things at the same time.

We do have two practices that we are very interested in, and we have narrowed it down to those two practices.

We are in the due diligence process there, and -- but by the same token, we also continue to build up the pipeline.

Okay.

Continue to go out and talk to practices all over the country.

So we are focused on two specific practices, but we continue to talk to other practices across the country.

Fabulous, thanks guys

Our next question from the line of Anton Hie with Jefferies.

Please go ahead.

Yes, good morning.

Guys, can you remind us whether -- does -- did Atlanta roll into the comp base yet?

Or will we wait until that is in for a full quarter of a year ago?

Atlanta would need to be in for the full quarter.

So it will be in our second-quarter same unit comparison but it was not in our first quarter.

Okay.

And it sounded like on the previous question you were still confident in kind of the 3 to 5 range on volume looking forward.

So that's despite bringing Atlanta in?

Yes.

I mean we think our volume growth will be 3 to 5%.

There's no indication that will change.

It's been that range 15 years.

So we don't see any indication that that will change.

Now to remind you, that is an annual basis and sometimes we see swings above and swings below.

Sure.

But we have seen that continuing and we see no reason for that to change.

Okay.

I would kind of -- it sounded like from your prepared remarks that we could characterize the big swing in cash as really more of a cash flow issue than earnings and understanding the seasonality in there, I just wanted to make sure that we are gathering that correctly.

Yes.

I mean, as I mentioned, we had a significant swing.

We have significant cash outflows in the first quarter, the bonus payments this year of $92 million to our physicians for 2006 bonuses was significantly larger than a year ago and our 401(k) as we continue to get larger and people contribute more to that has continued to grow at $9 million.

But there were honestly no one-time items in there either?

Excuse me?

No one-time items as far as the cash flows or earnings in there either?

No.

Okay.

And I guess -- your $12 million in on acquisition to spend so far this year.

Any update kind of on your thinking in terms of the full-year spend target?

At this point, we really haven't given guidance on that and we really don't want to be putting out specific guidance on the annual target at this point.

Okay.

I suspect you will give me the same answer if I ask about kind of where the SG&A outlay is kind of trending versus a year ago?

Yes, you are probably right.

Thanks.

Next question

Next question from the line of [Chad Fuegare] with Wachovia Securities.

Your line is open.

Hi, guys.

I am actually on for Bill.

He is out travelling.

But Roger, I understand obviously from your prepared remarks that you can't discuss the details of the options -- the options review, but is there anything you can tell us that might explain why the review is taking so long.

I think now we are coming up on ten months or so for this, and I guess what we are just trying to understand is what needs to be completed before we can put this behind us?

Yes, there is not much I am going to be able to tell you.

It is just a complicated process.

It's -- you have a lot of people involved.

There is the Audit Committee and then the law firm that they hired and then the -- the accountant -- the forensic accountants that they have hired and then our auditors.

So it is just a pretty significant review of the options and when they were issued and all of that stuff.

So that's all that is going on.

It's just taking much longer than any one of us would have ever anticipated.

Right, okay.

Okay.

No, that's a great answer actually.

Thank you.

(OPERATOR INSTRUCTIONS) And our next question from the line of Herb Tinger with Morgan Keegan.

Thanks.

Good morning.

Just a few questions.

Could you provide us any additional flavor on the acquisition pipeline for neonatology other than what was mentioned in the prepared comments, in terms of is it getting bigger, sizes of practices, et cetera.

I would say, Herb, it is pretty much the way it's always been.

We always talk about there being different buckets.

Practices we are just talking to.

Practices that we are in the process of giving us information so we can put a value on the practices.

Practices that have decided to move forward and negotiate with us.

And practices with whom we have already negotiated a price and we are in the due diligence process.

We have practices in all of those buckets.

Sub practices as always are larger than others.

Last year, we completed that acquisition in Atlanta, which is a large practice.

There are practices in the pipeline, that are of similar size.

There are smaller practices.

I think our pipeline, is full, and as far as the quality of it, I would say it is pretty much what it always is.

Okay.

Thanks.

Regarding the new Board member you just announced this morning, given his International business exposure, could one imply that the Company may be looking to expand further outside the U.S.

beyond Puerto Rico?

No, I wouldn't read into that at all.

He does have a lot of experience in mergers and acquisitions and so we think his experience there will be helpful to us as we -- as we move forward with our basic core business and our anesthesiology practices.

And he also has a tremendous amount of experience dealing with -- with government issues and we think that some of that will accrue to us as well.

Okay.

Finally, last question.

Are there any markets where you guys are losing any NICU contracts?

Yes.

Within -- within the last few -- few weeks, we have been notified that we have lost a contract in Las Vegas, and there is another contract in a different state which is -- which we are trying to renegotiate in -- in Fort Wayne, Indiana which we may also be about to lose.

Is there any particular reason why that has occurred recently?

No.

It is not something that we are used to around here.

It is not something that happens to us.

They are both very independent reasons.

The one in Las Vegas was one of the old Magella contracts that we acquired when we bought the Magella group practice.

There was some lack of satisfaction with one of our medical directors there.

We thought we had that turned around, and we were informed by the hospital that they were moving in a different direction.

That was a surprise us to, as I say, and we are not used to losing contracts, but we have lost that one.

The one in Fort Wayne actually we did not know that contract was in peril, and we found out about it through the newspapers, and there was a newspaper article where the hospital administrator was quoting as saying that he was going to make a change.

When we found out about that, we contacted the hospital, and we are trying to understand what the issues are.

So that's the one where I am saying, we have a shot at maybe not losing it, but just what has occurred makes me feel that, maybe -- we are probably not going to be able to save that contract.

I mean, I think it is important when we look at these contracts, these aren't, something that kills the Company.

I mean, as Roger said, we don't like doing it.

It is not something that -- that we like going through this process, but it's something we will certainly learn from and it's not a material issue us to as we go through this -- and we're going to continue running our business and I think we'll be stronger learning from what occurred in these markets as we go forward.

So I think it is real important to put in perspective.

We are in over 250 hospitals across the country, and these are two these are two contracts we are talking about.

Unfortunately, they were a little more public so there is a lot of discussion about them, but I think it is important to note it is not material and it's only 2 of 250 hospitals that we are in.

So since this is something that hasn't really happened to you guys in the past, how long do you think it would take you to relocate the affected doctors to another location?

Well, right now we are talking to all the individuals in both locations and trying to get them -- and showing them what we have in other markets, or in some cases the practices we have within the market.

So we are actively working with them to relocate them.

There is not really a timeline on that.

So it is going to depend on their personal preference and their desires, but we are working very closely to try and make that happen.

Fortunately for us, Las Vegas is a big, growing area and we do have other contracts with other hospital systems in that market, and the majority of our physicians who are currently working in that one hospital, we'll be able to find spots for them because the growth that we are experiencing in that same market.

Okay, guys, thanks a lot.

Our next question from the line of Mike Hughes with Delaware Investments.

Please go ahead.

Yes, couple of questions.

I think in the past you have typically been the sole bidder on the acquisitions.

Is that still the case?

Or has maybe private equity emerged as a competitor?

On the acquisition side, we really haven't seen anyone coming in that to bid against us on acquisitions.

We have been able to stay disciplined.

As Roger said we are seeing some higher asks in some of the acquisitions we are working at.

I think we are going to see changes in those multiples.

I think in the past we have seen -- individual practice base depends on mixes of practices.

I also think some of it depends upon the state and in some practices we are looking at states where the managed care has very favorable laws that help them, so we don't have an opportunity to maybe see as much in that.

So I think we are going to see that float up and down, but we aren't seeing competition in bidding for practices at this point.

Okay.

Great.

And then second question, I think -- did you say the cash bonuses paid in the first quarter were $92 million for '06; is that correct.

That's correct.

Do you have a comparable number for the prior year?

Yes, I do, that number was, I think, about $75 million.

Okay.

So I guess that tells us something about the earnings growth.

It tells you something about -- yes, how the year looked last year.

Thank you very much.

Appreciate it

(OPERATOR INSTRUCTIONS) Our next question from the line of Kevin Ellich with RBC Capital Markets.

Please go ahead.

Hi, guys.

I just wanted to follow up on the NICU contracts.

Is it safe to assume that in aggregate the two contracts are not meaningful even though Vegas is one of your larger markets assuming -- as Roger stated you have other contracts in that market?

Yes, I mean -- one thing I want to say any contract loss is meaningful to us, it's something we have to learn from and kind of understand the factors about that.

From our financial growth and the growth of the Company we are still going to grow.

It's not a material item to us that is going to affect us going forward in any significant way.

So--.

It is not material from a financial standpoint.

It is material for me from an administrative standpoint.

Sure.

In then in the history of the Company, how many contracts have you lost?

I -- I don't know over the last 20 years.

I mean there have been some.

It is not something that is routine, but, we lose some, we pick some up.

There are -- throughout the year we are always adding hospital contracts in markets.

There's a small hospital here, a hospital that wants to open a level II or a new level III that may open up, we've placed in another group or just a new hospital.

On the flipside there have been times that we have lost a few in the past.

We will walk away from some, if the contract -- if the hospitals are not profitable or for other reasons.

We also walk away from contracts.

So I think that although clearly this is not something we are used to losing two contracts, it's -- over the last 27 years, it is something that does happen occasionally.

Okay.

Thanks.

Our next question is from the line of [Hamlin Thompson] with [West Field].

Please go ahead.

Thanks for taking my question.

My question relates to the exploration of the anesthesiology market.

How much capital, or what type of expenses are you running from the P&L today as you explore that market?

From a capital standpoint, really not a lot that we are spending capital expenditure-wise, but we have added some staffing.

As we have talked in the past we added somebody that is going to head up that area for us.

He's added some people working for him.

It is not significant to our overall numbers.

I think we will see significant growth once we get the acquisition in and the cost to run that.

Right now we are building an infrastructure of the management level, but not a lot of the transaction costs typically you would expect.

We are not building a collection infrastructure but we have hired somebody that is going to oversee the collection process and they understand how we run because we think that is real important.

They understand what we do and they bring expertise in the anesthesia side that can help us in our evaluation and we have brought in consultants in the process on the compliance side and the coding side that has expertise in that.

They are helping us evaluate that.

It hasn't been significant.

Then when you finally do announce progress in -- in terms of making an acquisition there, do you think the first acquisition is accretive?

Or at what point does it begin to add to your earnings?

At this point everything we have been talking about we do expect the acquisition that we will do will be accretive.

Clearly it won't be accretive as some of the other deals we do.

Because we do have G&A spend that we're going to have to do.

As well as we have talked in the past we expect multiples to be higher than we have spent on our core business.

So accretion won't be the same as it has been the past but we do expect it to be accretive.

Then historically you guys have been really conservative on your balance sheet.

But you are a bigger company now.

Your cash flow has been more stable understanding there's volatility quarter within quarter.

Can you just talk about your thoughts on your debt structure if any and your capital structure going forward?

I think at this point there has really not been a lot of discussion on changes to the capital structure here, primarily because as we get into anesthesiology, the opportunity to put more money at work is there, that we will have to evaluate as we go forward in looking at the capital structure.

We do understand.

We don't have any leverage on our balance sheet, and if we had leverage, we could -- it would probably be a good thing.

But we don't want to go out there and put a lot of leverage on our balance sheet rather than looking at the acquisitions and spend it on acquisitions.

So we want to just settle down, understand the anesthesia area, start doing some acquisitions and learn and evaluate where that takes us in the future.

Thanks for your efforts and the call

(OPERATOR INSTRUCTIONS)

Okay.

Thank you, operator.

If there are no more questions, we will go ahead and terminate the call.

Thank you.

And the conference has concluded; is that correct?

Yes.

Very good.

Ladies and gentlemen, the conference call has concluded for the day.

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You may now disconnect.