Pediatrix Medical Group Inc (MD) 2024 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Pediatrix Medical Group 2024 first quarter earnings conference call.

(Operator Instructions) As a reminder, this conference is being recorded for digitized replay.

I would now like to turn the conference over to Charles Lynch.

Please go ahead.

Thank you, operator, and good morning, everyone.

Welcome to our call.

I'll quickly read through our forward-looking statements and then we'll get into our contents.

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 filings with the SEC, including the sections entitled Risk Factors.

In today's remarks by management, we will be discussing 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 our CEO, Dr. Jim Swift.

Thank you, Charlie.

Good morning, everyone.

Also with me today is Mark Richards, our Chief Financial Officer.

Our fourth quarter results were in line with our expectations.

Our same-unit revenue growth reflected positive volumes in our hospital-based services with NICU days increasing 2.5%.

On the office-based side, we saw ongoing volume strength in maternal-fetal medicine, offset by declines in our primary and urgent care clinics, which I will touch on in my remarks this morning, our practice level operating expenses continue to reflect modestly elevated salary and group health insurance trends, partially offset by lower benefit and incentive compensation.

Finally, G&A expense was largely unchanged year over year despite the additional staffing we have added related to our internal front end revenue cycle management team, we are reaffirming our full-year 2024 outlook of adjusted EBITDA between $200 and $220 million.

And I will focus on this as we believe we are well on our way to enacting changes that will stabilize our margins as compared to 2023 and enable a lower cost structure going forward.

First and foremost, while we have historically undertaken regular portfolio management decisions leading to certain practice exits.

We have now pivoted and are in the process of an accelerated portfolio restructuring plan under which we are exiting a meaningful number of underperforming office-based practices now and for the end of 2024.

This is in addition to the steps we are taking toward performance improvement across our portfolio of practices, including restructurings and stipend renegotiations which we believe will result in increased profitability for the organization.

We've also made the strategic decision to exit our primary and urgent care clinic platform, which represents roughly two dozen clinics in Florida, Texas and Colorado.

This decision was based on our review of the cost and time required to build this platform to scale an undertaking that no longer fits at a time, but we are focused on stabilization of our margin profile.

We intend to complete this exit during the second quarter of this year.

All of this portfolio restructuring activity is targeted to address the components of our practice portfolio that have diluted our consolidated operating margins with a goal of either removing or remediating that dilution over the coming quarters.

Importantly, we have created significant oversight of this restructuring through a strong internal project management team and with designated responsibilities.

And our leadership is in a cadence of regular frequent updates, all focused on execution Second, the transition of our RCM function to a hybrid model is going well.

As you may have seen in our recent filing, we finalized a contract with GateHouse under which that organization will be our third party RCM provider.

We have been working with guide house since late 2023 and have been very pleased with the resources dedicated to Pediatrix the quality of work and the collaboration with our internal team, which we expect will be fully staffed over the coming several months.

As Mark will detail, our RCM performance has not been negatively impacted by this transition, and we believe our hybrid structure is the most cost-effective way to fully support our practices.

Finally, we remain intensely focused on efficiency.

We believe that our portfolio restructuring activity will enable more effective non-clinical support in the future by emphasizing markets where we have significant infrastructure and system relationships.

During the quarter, we also effected a number of position eliminations across operations and G&A such that we are confident that we can maintain a G&A expense level in 2024 that is comparable to or lower than 2023 as a percent of revenue despite the internal additions we have made to our RCM team.

From a timing perspective, much of the impact of our portfolio restructuring will be felt as we move through the second half of the year, and Mark will give some comments about our expected cadence of quarterly adjusted EBITDA.

We do believe that taken as a whole these operating plans will put Pediatrix in a position of far greater margin stability and operational efficiency in addition to enhanced support of our practices affiliated clinicians.

I want to thank all of the pediatrics associates, both clinical and nonclinical for their hard work and dedication to this organization.

We are confident that the operating plans we have in motion will benefit all stakeholders and will enable Pediatrix to effectively continue its mission to take great care of the patient.

With that, I'll turn the call over to Marc Richards.

Thank you, Jim.

Good morning, everyone.

I'll provide some additional details in a few areas.

I'll start with cash flow.

As a reminder, we are a user of cash in the first quarter of each year as we pay out incentive compensation and other benefits.

During Q1, we used $123 million in operating cash flow compared to $101 million in Q1 of 23.

This differential largely relates to accounts receivable, where our DSOs declined in the first quarter of 23 for Q1 of 20 for our accounts receivable, DSO rose roughly in day and a half from 1231, reflecting a slight impact from the Change Healthcare incident and to a lesser degree, our RCM transition process related to change.

We expect this impact to be just a cash deferral.

We utilized change primarily for insurance verification, and we were able to quickly pivot to two other vendors with minimal disruption.

While it did have a slight tightening effect for us during the first quarter thus far in Q2, we believe that disruption is behind us based on cash receipts.

Secondly, Jim noted that we have now finalized our contract with GateHouse as our RCM provider, and we have been fully engaged in transitioning from our former vendor.

We are undertaking this transition in stages, which will continue in a deliberate fashion over the coming months.

As of today, we have transitioned roughly third of our affiliated practices to guide house with the expectation of completion by the end of the third quarter.

Finally, I'll touch on our 24 outlook and our view of the quarterly progression of our adjusted EBITDA.

As Jim noted, while our portfolio restructuring activity is already well underway, and we anticipate that its financial impact will be largely weighted towards the second half of this year.

As a result, we expect that adjusted EBITDA for the second quarter will contribute 24% to 25% of our full year outlook of 200 to $220 million.

With that, I'll turn the call back over to Jim Thank you, Marc.

Operator, let's now open up the call for questions.

(Operator Instructions) Pito Chickering, Deutsche Bank.

Hey, good morning.

So I'm trying to do the math there in.

So apologies, but I guess and looking at all the progress dispositions or what percent of the annual EBITDA should we be modeling on the fourth quarter?

I'm just trying to figure out the exit rate.

We should be modeling our core growth for 2025?

Pito, it's Charlie weighed on.

We wanted to be clear on our expectations through the first half of this year.

And if you think about the math we've provided given the first quarter adjusted EBITDA of 37 against that on 200 to 2 20, I think, is in the range of 18 or so percent of the full year and with the second quarter as Mark laid out between 24% and 25%, I can give you a sense of the contribution from the first half of this year as we expected for the second half, keep in mind that our normal seasonal pattern of adjusted EBITDA, all else being equal would yield our third quarter being the strongest contributor of the year, followed by the fourth quarter on based on the timing or activity, some of that might be some effected by that activity as it continues to contribute.

But that's the baseline you should be thinking about that on the normal seasonal pattern is plus the third, the third quarter tends to be the strongest.

Okay.

And on the practice disposition I guess looking at the box office in urgent primary care or are these patches that are coming up for renewal or are used for exiting these contracts sort of mid mid I guess contracting cycle just because of the margins?

And then do you have the same success rate on reduced on renewing packages today?

Because you've historically have just wanted to I want to understand more about why now is the time to do with those assets?

This is Jim.

I don't think that there's anything related to your contractual requirements.

You know, we do have some of these practices may have some coal contracts with some of our affiliated health systems, sort of some work around that.

But we didn't envision the restructuring to coincide with any contracts, either employment agreements or service coverage obligations.

We did this because these were practices that we felt were really negative in terms of their their EBITDA contribution and have in the past, we've had some remediation we've done with them, but it was time to look at these effectively and dispose of them.

Okay.

And then just last question, I'm again, going to comment on this one with the dispositions this year and the full-year guidance you're reiterating, do you think you guys can grow 25 with sort of the revised asset base.

I think it's a little bit premature to think into 2025.

The only thing I would I would comment, Vito, is that the financial impact that we anticipate from this activity level will affect our results should affect our results in the second half of this year.

That would not reflect the full year impact of this restructuring activity.

I think that's about as far as we're going to go it related to 2025.

All right, great.

Thanks a lot.

Brian Tanquilut, Jefferies

Please go ahead and this is more robustly in for Brian.

Appreciate you taking my question.

I'm just curious to know your outlook on the volume and rate side of the business.

Just curious if there's anything we should know in terms of the cadence for those two KPI.s this year on Australia, I'll give a quick comment and I'll turn it over to Jim, just related to the first quarter, and this might provide you a little bit of detail our office-based patient volumes on.

We saw real strength in our maternal-fetal medicine volumes they were up about 3% for the first quarter.

Keeping in mind that there was no leap year impact on our office-based services, effectively the same number of offices.

So that's a solid number.

The real offset on the office-based side in volumes was primary and urgent care.

So for the rest of our business, things look fairly stable in the hospital-based side, our negative days were up about 2.5%.

At least the leap day effect is about a percentage point on that.

There's still some growth in our in our Nikki days underlying verse were relatively stable, I would say roughly flat with Avon rate of admission and length of stay up slightly, which is a phenomenon we have seen relatively consistently the last of the last couple of years.

So to put that together, I would say that our outlook for 2024 as we developed our budget and our forecast was for a stable volume profile across our business line and stable demand.

And I would say that, Jim, that that's effectively what we experienced in the first quarter.

Yes, that's exactly what we saw.

And I think, yes, we remain encouraged by the volumes that we've seen in maternal-fetal medicine, which really carries over from that the end of last year.

So not that that's necessarily a leading indicator in terms of unit volume.

But it is encouraging to us that that is a Our platform is very important to the organization.

Got it.

Thank you very much for that clarity.

And then I guess just pivoting to the SWP. line, I'm curious to know how you all think that's going to progress throughout the year.

I know Q1 is usually high from a seasonal perspective, but curious if you could provide any color on that.

Yes.

And I would say that there are a couple of components in there.

As Jim mentioned, our underlying salary trend remains a little bit elevated versus our historical experience and salary inflation.

Some offset this quarter by, you know, some some lesser growth in the other components of that SW&B, particularly incentive compensation.

The second point I would make is that as we affect our operating plans and the portfolio restructuring, that would necessarily have an impact on paper on our SWB center revenue because the from the basket of practices and sites that are in our in our plans, as you would imagine, have a meaningfully higher percent of underlying SW&B as a percent of revenue.

Kevin Fischbeck with Bank of America

Great.

Thanks.

Can you help us size from a revenue perspective from what the assets that you're looking to come, it would represent that.

And just to be clear, it sounds like you're saying that they have an absolute negative EBITDA margin as well from those?

Yes, Kevin, in terms of the the total asset count, I would point you to a couple of other pieces here, you know, with respect to call it some of the disposition activity that we're going through.

If you look at kind of nine same unit revenue for the quarter, it's down about $6.8 million.

The bulk of our disposition functions right now are reflected in that non-same unit line item.

So some of the components related to kind of the winding down of the losses you'll see coming through non-same unit in the coming quarters in terms of all the pieces there, this this effort remains fluid.

So so nailing down the various components right now, it's a little premature, but we'll be able to provide additional details in the coming quarters as these practices are unwound.

I guess maybe just to make sure I understand that comment.

So you're saying that in Q1 it's 7 million.

So that would run rate at EUR28 million.

But it sounds like is going to build as the year goes on.

So it's going to be more than 28 million annualized, and we can track that pace.

That's right at that number through the year.

That way to think about?

That's right.

That's correct, Kevin, that that that number right now reflects in-process dispositions that will continue to grow as we continue to execute on our plan.

But there's no target for to run rate number at this point still to be determined at this point in time.

Okay.

And then there's a second part of this, and I missed it.

It sounds like you said you were doing something about doing stipend or something.

What was the other area of margin improvement?

Yes, I think in that setting, Kevin, we're obviously we're always in discussions with our health system partners to the extent that there are services, whether those be ambulatory services or inpatient services, if there's a requirement for us to provide coverage.

We want to make sure that our services are adequately reflected in terms of the stipend support.

So it's part of the discussion we have year over year with our health system partners.

And that's just with regard to the coverage requirements of those mandatory practices.

Okay.

Then maybe just my last one.

I think that you guys had gone into this kind of urgent care business with the view that it was going to add a leg of growth as to the company.

How do you guys think about when you're done with this portfolio restructuring, like what what is the right growth algorithm for pediatrics from a top line perspective?

Yes, I think for primary and urgent care is probably twofold.

One, we acquired you know, we acquired a couple of assets in primary urgent care and they're very good practices.

The problem is if there were not a larger number of attractive acquisitions do doing primary and urgent care.

And obviously, then it becomes a heavy lift in terms of and rolling out these independent practices in that portfolio across countries.

So we just thought that the time to do that was distracting from from what we need to do.

Our focus, though on growth would be in the core services that we continue to perform.

If you look at it from standpoint, we didn't announce it specifically.

I know on a press release, we did acquire an MFM practice in California that has been a great addition to our portfolio of MFM.

So you'll see more of that activity both on our core and long-standing ambulatory services that fit with our inpatient services and our ability to execute on both organic and inorganic growth on the inpatient side.

And ladies and gentlemen, for any additional questions, please press one than zero on your telephone keypad.

And we have no other question.

You may continue Thank you all for joining the call today, and we'll talk to you next quarter.

Ladies and gentlemen, that does conclude your conference for today and thank you for your participation.

You may now disconnect.