Pediatrix Medical Group Inc (MD) 2022 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Pediatrix Medical Group Second Quarter 2022 Earnings Conference Call. (Operator Instructions) As a reminder, your call today is being recorded.

I'll now turn the conference call over to your host, Charles Lynch. Please go ahead.

Thank you, Alan, and good morning, everyone. With me this morning are Mark Ordan, our Chief Executive Officer; and Marc Richards, our Chief Financial Officer. I'll quickly read our disclaimer and then turn the call over to Mark.

Certain statements and information during this conference call may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by Pediatrix's management in light of their experience and assessment of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Any forward-looking statements made during this call are made as of today, and Pediatrix undertakes no duty to update or revise any such statements, whether as a result of new information, future events or otherwise. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the company's most recent annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K, including the sections entitled Risk Factors.

In today's remarks by management, we will be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this morning's earnings press release, our quarterly reports on Form 10-Q and our annual report on Form 10-K and on our website at www.pediatrix.com.

With that, I'll turn the call over to Mark Ordan.

Thanks, Charlie. I'll comment this morning on 3 areas. Our results for the quarter and how they play into our outlook for the year, our strategy and our name change to the Pediatrix Medical Group, and some thoughts on the No Surprises Act. We had mixed results in Q2. Patient volumes grew both in hospital-based and office-based services despite more difficult comps in the second quarter to what we faced in the first quarter. However, our revenue was impacted by both payer mix and our ongoing transition to R1 as our RCM partner.

As a result, our adjusted EBITDA for the quarter was slightly below the expectations we shared on our last call with the differential primarily in revenue. We are pleased with our RCM function today, but in retrospect, the speed with which we transitioned from our internal team to R1 gave rise to a revenue impact that set back our Q1 results and to a lesser extent, our Q2 results. I want to stress that this impact I speak of, and which Marc will further detail, is related only to our RCM transition and not to any change in payer relationships or behavior.

And we are pleased that today, our day-to-day RCM function is substantially improved versus the challenges we faced during this transition. By that, I mean that our front-end activity is moving well, which is significant given that, that area was meaningfully impacted in the early stages of this transition. This impact should affect 2022 alone, and we see no effect therefore, beyond this year. We are also still actively working to mitigate the effect on our 2022 P&L.

On clinical labor, we reported in Q1 that we had not seen any material change in clinical labor costs but we're certainly aware of the tough environment around us. In Q2, our clinical salary costs were roughly $3 million above our forecast. While this is much smaller -- a much smaller change in cost trend and other providers have discussed, I'm calling it out only given the tough labor environment we're in. We continue to reduce overheads and generate efficiencies in our support services as part of our turnaround strategy.

Our G&A expense declined significantly compared to last year and versus our internal projections, and we believe that we will continue to find enhanced operating efficiency without taking away from our dedication to care. We also saved significantly through our Q1 debt refinancing. Interest expense was down more than half year-over-year, enabling 15% growth in adjusted EPS. And finally, our strong cash flow enabled us to fund the repurchase of 3.3 million of our shares. Our CapEx and 1 acquisition without changing our debt levels. The confluence of all the factors I described thus far lead us to expect that $270 million in adjusted EBITDA for 2022 does remain achievable, but we now point to a range of between $260 million and $270 million for the year.

I'll turn to our growth and strategy. All of our efforts are focused on women's, children's and baby's health and on our amazing, affiliated clinicians who provide care as well as the research, education and quality and safety improvements required to be the leaders in their vital fields. On July 1, we formally changed our name to Pediatrix Medical Group, to underscore this complete focus. Our move into a combination of pediatric primary and urgent care will help us serve this population much more broadly and effectively. I discussed last quarter that additions to our team under Dr. Jim Swift, our Chief Operating Officer. And we're now fully underway in our growth plans.

Between now and the end of '23, we anticipate we will expand from our current footprint of 21 clinics across 3 markets and 2 states between 40 and 50 clinics across 8 to 10 markets and a half dozen states. We expect that this growth will come from a combination of de novo clinic openings and acquisitions. We're also confident that we can fund this growth with internally generated cash flow, and we intend to execute in a fashion that will not dilute our adjusted EBITDA. Under No Surprises Act, as I mentioned earlier, today, we haven't seen any notable change in payer behavior.

Related to out-of-network cases, we are still waiting for HHS to finalize the tools, guiding to details of the arbitration process. That said, we're certainly not sitting idle. Our managed care team alongside our partners and (inaudible) have built a really robust capability to manage this arbitration process in a thoughtful, data-driven way. Here again, we're much better prepared for this process than we could have been on our own.

Before I turn the call to Marc, I want to thank our affiliated clinicians, our operators and our support team for all their hard work and dedication to this organization. In my now 2 years at Pediatrix, I am really awe struck by what our people do for families across the nation. Marc?

Thanks, Mark. Good morning, everyone. I'll focus my comments today on our revenue cycle management transition process, then add to Marc's comments on our outlook and financial position. At the top line, the decline in our same-unit pricing was measurably less than we reported in Q1 when you exclude the contribution from CARES dollars in both periods. The revenue impact from the RCM related matters Mark discussed, which we bucket as a component of pricing was less than half the magnitude of the first quarter, were roughly $5 million.

Payer mix, which can fluctuate quarter-to-quarter, represented a headwind in Q2 versus a modest tailwind in Q1. Looking at RCM. Our transition to R1 created an increase in accounts receivable and related reserves which unfavorably affected our revenue in the first quarter, and to a lesser degree, the second quarter of this year. This AR buildup continued beyond March, followed by a significant improvement in cash collections towards the end of the quarter. The impact related to our private pay business not managed by R1 was negligible for the quarter and is a small component of the $5 million I referenced.

All told, you'll see in our press release and in our 10-Q filed this morning, that both our gross and net AR declined modestly for the quarter, and DSOs came down by 1 day compared to March 31, to 58 days. We're certainly pleased with this direction, but DSOs at quarter end are still higher than normal. As of today, we view our RCM activities as bifurcated. As Mark noted, we are now running normal billing and collecting activity related to current patient services. Separately, we are also working the more aged AR, and we'll continue to do so for the remainder of the year. The pace and trajectory of this activity could represent a swing factor within our range of expected EBITDA for the year.

For modeling purposes, our '22 outlook reflects adjusted EBITDA in the first half of the year of $116.2 million. Additionally, within our outlook, we expect our adjusted EBITDA for the third quarter to increase in the mid-single-digit percent range compared to $73 million in the third quarter of 2021. Lastly, we remain in a strong financial position. We generated $82 million in operating cash flow in the second quarter, up about $11 million year-over-year, funded $64 million in share repurchases, our normal CapEx, and a small practice acquisition.

At quarter end, our total debt of $800 million was effectively unchanged from March 31. And our leverage, based on trailing 12 adjusted EBITDA, was just under 3x.

With that, I'll turn the call back over to Mark.

Thanks, Marc. We'll now open the call to any questions.

(Operator Instructions) Our first question will come from Tao Qiu from Stifel.

You mentioned that you saw some improvement in collection towards the end of the second quarter, and DSO is down 1 day in the second quarter, but still pretty much elevated. How fast do you think you can get that number down in the next few quarters?

Tao, it's Marc Richards. I mean that's certainly the goal here in the third and fourth quarter. We'd expect improvement through the third quarter and into the fourth quarter. As you know, historically, our DSOs sit right around 50 days. So we still have work to do to shave that down to a normal cycle, Tao.

Got it. And in terms of pricing, could you give us an update on kind of what kind of rate you are seeing out there in terms of either Medicaid or commercial rate. I know that some states have increased their Medicaid rate, I think commercial payers are also more open to higher rate growth to cover inflation. Any commentary you could provide would be much appreciated.

Tao, it's Charlie. I don't know that we saw anything in the quarter on the Medicaid side to call out. Our general expectation is something in the flattish range, and that's generally how it came through. As Mark Ordan mentioned, we're still in effectively business as usual related to managed care, renewals and contracting. And as I've said in the past, our general view related to overall same-unit peer pricing, excluding the impacts of payer mix or as we've seen in the first half of this year, some of the RCM matters, something in the modest range of 1% plus 1% to 2%. And digging through the -- some of the impacts to our reported pricing this quarter were in that similar range.

Got you. If I may squeeze in one more. Congrats on the rebranding efforts. I remember that during the pandemic, there was a delay of this initiative due to cost concerns, what kind of G&A impact would this have on the second quarter? Any lingering impact in the second half, do you expect here?

It actually had a very modest effect. We had done so much of the work internally. We have a terrific Head of Marketing and a marketing team. And we had made a lot of the changes. So the incremental expense to formally change the name was negligible, and I think it's really going to have a galvanizing effect on the organization.

We'll go next to the line of Brian Tanquilut with Jefferies.

I guess, Mark, as -- I guess, Mark and Marc, but Mark, just on the guidance, maybe without going into quarterly guidance, any color or qualitative comments you can make for us to consider as we model Q3?

Sure. We were going into the quarter thinking that the $270 million was the appropriate number. And as I said, $270 million is certainly achievable. Because of the -- I would say, the most major setbacks that we had was from the -- the R1 -- the transition to R1 and the cost. It hit the revenue line item, but I look at it as a cost that was incurred in Q1 and to a lesser extent in Q2. And we'll see how much of that we can recover. We've been working hard, and we have a terrific team doing it to know what that will shake out to by the end of the year. And then payer mix certainly fluctuates by quarter, and then this quarter, it had a negative effect on us. So we felt that it's analytically more appropriate to call to a range of $250 million to $270 million. But we can't say where in that range we'll fall. And again, depending on how we recover from the transition efforts that we described that, that will have a major effect on where we end up.

Brian, specific to your question on Q3, we expect quarter-over-quarter when looking back to Q3 of '21, growth quarter-over-quarter in the low single digits.

Got it. Okay. That's very helpful. And then I guess, Mark, since you touched on payer mix. Do you think or are you seeing any signs that this is kind of the broader macro environment is starting to show up in the payer mix? I mean we saw this obviously during the last recession. So just curious what you're seeing maybe ahead of time.

No. We haven't -- we're not seeing that. As a matter of fact, payer mix -- and I know from other organizations, same thing, payer mix can really fluctuate a lot and not because of the pattern. There is no pattern that we see that would indicate any shift, or I would have called it out.

We'll go next to the line of Kevin Fischbeck with Bank of America.

Great. So I think you mentioned a $10 million headwind in Q1 and $5 million in Q2 on the R1 transition. Is that $15 million kind of like something that we should think about as potentially coming back in? And I guess in your guidance range, is that like how you think about the high end or the low end of that range? Or are there other factors besides how much of that you're recouping?

No. I would think of a component of that loss in the first half of the year has gone. Some of it, of course, is still recoverable, and that's what we're parsing out right now.

Okay. So that uncertainty on mix shift? And then is there a labor pressure? Like how do you think about if we thought at least $270 million now being, let's just -- I'll just say it this way, you're not saying it this way, but at least $270 million being at least $260 million, what are the fact -- what are the main buckets besides this are we thinking about?

Those -- labor is a relatively small factor. As I said, I called it out this time because I didn't want people to think that we're not focused on the factor in a tough labor environment. We have a different labor mix than other than hospitals do and others do. So I think that and other factors make it hit us less -- so the primary swing factors for 2022 that we see today are a combination of mix and what we can recover in the RCM transition process.

Obviously, the other factor is we don't forecast what the thing is going to be, but we had solid -- but (inaudible) gains in volumes for the quarter. So all those things will determine where we are in that range.

Okay. But there's no change in your volume outlook per se from last -- a few other factors?

No.

Okay. And then on the labor side, you have a lot of different businesses you've been expanding different businesses. Would you say the labor's more difficult in any specific part of the business?

Not really anything I would call out there. I mean the last time that we have a terrific recruiting arm in the in the business. So we've done a very good job of being pace with turnover. And there's no particular area that's driving the increase in costs. And the increase in costs are relatively modest that I thought worth calling out, nonetheless.

And we will move next to the line of Pito Chickering with Deutsche Bank.

So on that sort of $50 million charges sort of in the first half of the year due to R1. My understanding is that was simply the aging of receivables into different buckets, hence the charges. You said that part of the first quarter component of $10 million is gone. Can you explain sort of why that's gone? I thought easily didn't get a bill out into a payer hence it's aged out. So I'm not clear why they would not be recoverable when they are on sort of caught up with the billing.

Go ahead.

Sorry, Mark. Now the component of that is denials and timely filings. So at any point in time, to the extent bills haven't been set out -- at that point in time, it's a timing issue, if those bills are not sent out under the correct timing is dictated by our payer contracts, that money has been lost. So that's the component I referred to.

And that plays into it -- just from -- based on experience, that is what effectively plays into the buckets of AR and how we will reserve against them as they flow through.

Okay. Fair enough. And then to follow up on Kevin's question on the sort of the salary cost, about $3 million above the forecast. I was under the impression that most of your positions were sort of under multiyear contracts with both fixed and variable components. So you've always been sort of more insulated from sort of these labor pressures. So I guess I'm a little -- can you sort of walk me through where that $3 million sort of came from versus expectations? Because I guess I thought you actually have been more inflated in this than that.

Yes. Pito, it's -- keep in mind, we've got in the thousands of clinical providers across the organization. So as pleased as we are with our general turnover rates. There is still turnover. It's relatively modest, but there is. So as we looked at the second quarter, and dug into those individual practices, et cetera, where there was a financial call out, the majority of instances were related to that modest level of turnover and open position that hadn't yet been filled and the like, and thus the need for either existing clinicians in that practice to take extra shifts on call over time and the like prior to refilling that position.

So in each one of those instances, obviously, there's been a work plan, and we do think that there's recapture there with some cost savings. But that's a general tone of how we saw in the quarter. And again, as Marc mentioned, roughly $3 million runover versus our internal forecast is relatively minor.

All right. A last question here on pricing. Just -- can you refresh us on where the out-of-network revenues are today that has changed sort of versus year-end? And also on the government versus commercial payer mix as you sort of think about potential recession environment, so where are we today versus where we were in 2008?

If I understand your question correctly, we continue to be overwhelmingly in network, less than 5% of our (inaudible) with over 95% in network. So that hasn't changed at all over the last 2 years. And as I said, we haven't seen any pattern or change in behavior while we wait for clarity from HHS. But I'm not sure that I answered exactly your question. Did I?

Yes. Then that's for network. And then I guess the question is, as people are thinking about different recessionary risks here. What's the sort of government commercial mix today? And where was that in '08?

I don't know if I have a stat from '08 on hand right now. But I can speak to what our experience has been over the past 4 or 5 years. And from an absolute standpoint in terms of the percent of our patient volume as measured by gross charges on either the 2 sides, government or nongovernment, which is how we look at it. Where we stand today, the government component is very comparable to where it's been over the past couple of years, and actually -- even for this quarter is maybe 100 bps or more lower than where it kind of topped out, call it, about 4 years ago.

And during that period, as we view it, it is likely that, that employment growth through the middle and latter stages of economic expansion prior to the pandemic had a favorable role for us.

Next, we'll go to the line of Whit Mayo with SVP Securities.

Maybe just a follow-up on the payer mix question. I don't know if you've disclosed this, but I was just curious, what percent of your commercial revenues today are coming from patients on the exchanges?

I don't know if we've ever had a perfectly clean view on that with because generally and even going back to the initiation of the exchanges. Oftentimes, we would be submitting a claim to the same carrier, whether it was exchange program or not. So we've never had a perfectly clear view of ACA volume. But that said, in general, any kind of contracts we had that covered that were under the existing contract we have with the payers. So they had an exchange program or a normal insurance program, our contracts were comparable.

Got it. I guess, maybe to ask it a different way. If you look at -- go back to 2014, I mean, did you see an uptick in maybe your commercial mix where that could be attributed to exchange patients? I'm just trying to get a sense of sort of how you guys think about that.

I think we get back to you on that.

Yes. My recollection, we didn't at the time, but we can track back. I don't remember being anything that...

No. That's fair. Just -- I'm just trying to obviously think about like if the subsidies go away, the potential headwind could be if there is a headwind. But the other question, United has a notice on their website that indicates that you may be out of network in Georgia in 2023. I'm sure you probably can't discuss this, but maybe there's nothing abnormal about this. I presume this is just ongoing negotiations. So I just thought I'd ask if there's anything to talk about there. And then really a final question just on the G&A target, $250 million. Are you feeling any better or worse about that?

On the first, we wouldn't comment on that. There's normal negotiating processes with all of our payers, we have over 500 contracts, and I'm aware of that. So there's nothing else to read into that. And on our G&A targets, yes, we're comfortable with what we've laid out.

We'll go next to Ryan Daniels with William Blair.

This is Jack Senft on for Ryan Daniels. I just had one quick question. I think all my other questions have really been answered. So I know the Brave integration wasn't an outright acquisition, or kind of given the inflationary environment and other current market additions with rising rates, et cetera. Do you have any update on the acquisition pipeline, and possible investments? I guess just to kind of rephrase this, what's your mindset when it comes to M&A and investments like Brave? Are you kind of looking at areas to supplement growth on urgent care side, more technology investments, et cetera? Any color you have on that would be appreciated.

Well, not to sound too big. We're excited to grow in any area where it fits our core business and where it's accretive. So we -- in many of our subspecialties, we're actively looking at ways to increase our footprint. We'd like to grow in serving NICUs. A lot of my time and James Swift's time is spent with our hospital systems and prospective hospital partners to find ways to increase. Certainly, in primary and urgent care, you mentioned Brave, we acquired outright NightLight of Orlando and NightLight of Houston. And we will look at both de novo growth and also acquisition growth. And we think both of those we can do without undue pressure on using our cash flow.

And as we mentioned, which I think is very important, we were also able to buy back 3.3 million shares of our stock with all of this without changing our debt levels at all. So we are eager to grow when there are opportunities. Some of it -- the lack of clarity from HHS probably informs some lag, but we're still active and out there.

(Operator Instructions) We'll go to the line of A.J. Rice with Credit Suisse.

A couple of things. Obviously, the step-up on the buybacks, I wanted to ask you about that. Is that an opportunistic value in the second quarter? Or should we begin to think that you're going to commit more capital to that going forward?

Well, it's -- I have the classic CEO answer. These are the kind of decisions that we work closely with our Board, and we think that there's a strong use of capital, that's where we put our capital. And we felt -- the Board felt unanimously that there's still a good time to be buying back our shares. So I can't comment on future activity.

Okay. A lot of back and forth on the R1 transition and the impact it's had on revenues to date. I wondered within the context of that, I'm not 100% clear. Is that something you would characterize as just what can happen when you make a transition like this? Do you feel like R1 drops the ball? Is there something you did that has resulted in this? And is there any recourse to try to -- do they owe you any kind of concession because this has happened?

I said in my comments that, that we had in retrospect, moved too abruptly. So I'd say we had an RCM team, a big RCM team. And in the move from our RCM team to R1, I'd say with hindsight, which is always handy, we should have retained our team longer to give R1 more time to get up to speed. And we did that more abruptly. That's what I mean by more abruptly than I wish we had. There's no recourse to R1. And I would say it just -- collectively, it didn't go as smoothly as we had hoped. It -- and this is the kind of thing that can happen, we have an enormous RCM function. So I think we did it pretty well, but not as well as I wish we had.

Having said that, importantly, we're at a point today where we have a very solid RCM function. And as I mentioned, in addition to that, we have an arbitration capability that we would never have been able to match on our own. So as Marc rightly pointed out that the other side of the RCM effort right now is collecting as much as we can from the earlier months to recover as much as possible. But I think that it was a very good transition, a very good move to transition to R1. We're not disappointed with our decision at all. we're disappointed by the turbulence and by the fact that had, we believe had we kept people on our team longer, it would have been a better transition and less costly for us.

Okay. You did mention with respect to No Surprise Act in your comments that you've geared up your team to be able to deal with any arbitration issues that might result. I just wondered, are you seeing -- is that gearing up for something that may happen? Or are you actually seeing more cases go to an arbitration at this point? Or was your arbitration be more.

We're overwhelmingly in network. So we haven't seen an increase in arbitration. The only areas where we're out of network, and we have had arbitration, we've been very pleased with the results. But we know that one of these days, there will be a -- there will be some final ruling and things will settle in, and we will need to have a process to settle these in arbitration.

And it doesn't sound like you're seeing any delay in MCO recontracting as people are waiting for those final rules to come out. It's just sort of normal course. It sounds like is the way you're describing it. Is that correct?

Yes. That's correct. And I would say the latter part of last year people were -- a lot of people were expecting it to be a much tougher environment. We haven't -- certainly to date, we haven't seen that.

All right. And just my last area, just a quick question is on the push from the pediatric urgent care centers. Obviously, you've known some of them for a little while now. Anything developing, either making you more or less optimistic about the economics of that business and the opportunity set. And a lot of this during COVID was put in place and maybe parents were saying, hey, I would go to a pediatric urgent care center because I want to keep my kids away from places where they might catch COVID from adults. So are you seeing any change in the demand profile as we progress through the pandemic.

We weren't basing our decision on what we saw at the time was a COVID bump like any acquisition, you look not only at what's going on at the moment, but what's going -- what went on historically. So we weren't moving into this because of COVID frost in earnings. So no, we continue to be very pleased with the P&L of these operations and the economic opportunity, and our thinking about it hasn't changed. If there are times when there's an upward blip because of the COVID, which obviously -- for all reasons, you don't want another COVID. But obviously, that's not the driver of our reason to do this. So our reason to do this is as it's always been that we are -- in our major markets, the largest employer of pediatricians, we have an enormous impact on what happens in pediatric care in our markets. And we think that this is a very important step to filling out our ability to help mothers and babies and children.

We have a follow-up question from the line of Kevin Fischbeck with Bank of America.

I just wanted to get maybe a little more color about what you mean about the arbitration improvements with R1. What exactly are you guys -- have in place now that maybe you wouldn't have been able to do before?

Well, the arbitration process right now is only where we are out of network, and we're the only place where principally out of network is in Texas. And I would say that we have the arbitration process which many people don't know in a case-by-case process. So you can imagine how laborious process like that could be if it ever became significant. So you have to have a machine in place to handle that and to handle that intelligently. And I think we have that today thanks to our partnership with our team our managed care team and R1. And I think that would have been very difficult to build on our own.

Okay. I guess do you have a sense about where your pricing is versus kind of the median in network? My assumption is that if you're out of network almost definitionally, it's because you'd be above the median in network rates. And I guess in that 5%, there might be some risk. But broadly speaking, any way to think about that?

No. We don't -- that -- it varies payer-by-payer and contract-by-contract, so I don't have that.

Okay. And gentlemen, we have no further lines in queue at this time.

Well, we thank you all for your understanding and your support, and we look forward to updating you on our progress as we move forward. Enjoy the rest of your summer.

Ladies and gentlemen, that will conclude your conference call for today. Thank you for your participation and for using AT&T Event Teleconference Inc. You may now disconnect.