Q2 2022 Pediatrix Medical Group Inc Earnings Call
Yes.
Ladies and gentlemen, thank you for standing by and welcome to the Pediatrics Medical group second quarter 2022 earnings conference call.
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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 or Dan, Our Chief Executive Officer, and Mark 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 pediatrics as 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 pediatrics 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 Dot pediatrics Dot com.
With that I'll turn the call over to Mark or Dan.
Thanks, Charlie.
I'll comment this morning on three areas our results for the quarter and how they play into our outlook for the year, our strategy and our name change and the Pediatrics Medical group.
And some thoughts on the no surprise.
We had mixed results in Q2 patient volumes grew both in hospital based on office based services, despite more difficult comps in the second quarter to what we faced in the first quarter.
Our revenue was impacted by both payer mix and our ongoing transition to oral one as RCM partner as.
As a result, our adjusted EBITDA for the quarter was slightly below the expectations. We shared on our last call with the differential primary primarily in revenue.
We are pleased with our RCM content today, but in retrospect with the speed with which we transitioned from our internal team to our one gave rise to a revenue impact that sit back of our Q1 results and to a lesser extent our Q2 results.
I want to stress that this impact I speak of and which Mark 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.
Ah 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.
It is much smaller a much smaller change in cross trained and other providers have discussed I'm, calling it out only given the tough labor environment. We're in.
We continue to reduce overhead and generate efficiencies in our support services as part of our turnaround strategy.
Our G&A expenses 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 to 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 one acquisition without changing our debt.
The confluence of all the factors I described thus far leads us to expect that to $70 million and adjusted EBITDA.
For 2022 does remain achievable, but we now points to a range.
Between 260 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 amazing affiliated clinicians who provide care as well as the research education and quality and safety improvements required to be the leaders in their final fields.
On July 1st we formally changed our name to Pediatrics Medical group to underscore this complete focus.
Our move into combination of pediatric primary urgent care will help us serve this population much more broadly and effectively.
As discussed last quarter that additions to our team under Dr. Jim Smith, our Chief operating officer, and we're now fully underway in our growth plans between now and the end of 2003, we anticipate we will expand from our current footprint of 21 clients across.
Three markets and Tuesday.
40 to 50 clinics across eight to 10 markets and a half dozen states.
We expect that this growth will come from a combination of de Novo clinic openings in 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.
And there are 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 guide into the details of the arbitration process.
That said, we're certainly not sitting idle.
Managed care team alongside our partners at <unk> have built a really robust capability to manage this arbitration process and a thoughtful data driven way.
Here again, we're much better prepared for this process then we could have been on our own.
Before I turn the call Tomorrow I want to thank our affiliated clinicians our operators and our support team for all their hard work and dedication to this organization. It might now two years at Pediatrics I am really awestruck by what our people do for families across the nation.
Mark.
Thanks, Mark good morning, everyone.
I'll focus my comments today on our revenue cycle management transition process, then add to Mark'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 our one 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 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 our one was negligible for the quarter and is a small component of the $5 million I referenced.
All told you will see in our press release and in our 10-Q filed this morning that both our gross and net <unk> declined modestly for the quarter.
And Dsos came down by one day compared to March 31 to.
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.
And we will continue to do so for the remainder of the year.
Pace and trajectory of this activity could represent a swing factor within our range of expected EBITDA for the year.
For modeling purposes, our 'twenty two 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.
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 three times.
With that I'll turn the call back over to Mark.
Thanks, Mark we'll now open the call to any questions.
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Our first question will come from Tao cue from stifle Pardon me Stifel go ahead.
Hey, good morning.
You mentioned that you saw some improvement in collection towards the end of the second quarter.
Our DSO is down one day in the second quarter, but still pretty much adequate how fast do you think you can get that number down in the next few quarters.
Hey, Tao, it's Mark Richards How're you doing.
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.
A normal cycle out.
Got it.
In terms on pricing could you give us update on kind of what kind of rate you are seeing.
They are 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 should covering inflation any commentary you could provide would be much appreciated. Thank you.
Hey, Tom 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 Thats.
Generally how it came through.
As Mark mentioned excuse me.
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.
It's 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, we're in that similar range.
Got you if I may just squeezing one more.
<unk> congrats on the rebranding efforts.
Remember that during the pandemic there was a delaying office initiatives cost concerns and what kind of G&A impact would this have on the second quarter any lingering impact in the second half do you expect to hear.
It actually had a very modest effect, we had done so much of the work internally, we have a terrific head of marketing and the marketing team and we had made a lot of the changes so the incremental expense to formally change. The name was was negligible and I think is really going to have a galvanizing effect on on the organization.
Got you. Thank you.
Thanks, Tom.
We'll go next to the line of Brian <unk> with Jefferies Go ahead. Please.
Hey, good morning, guys.
Yes, Mark as I guess, Mark and Mark but Mark.
Just on the guidance, maybe without going into quarterly guidance any color or qualitative comments you can make.
To consider as we model Q3.
Sure Lee.
We.
We were going into the quarter thinking that the $2 70 was the appropriate number and as I said $2 70 is certainly achievable because of the I would say the most.
Major setbacks that we had was from the <unk> trends the transition to <unk> and the cost it hits 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 will see how much of that we can recover we've been working hard and we have a terrific team doing it to nowhere.
That will shake out by the by the end of the year and then pay.
Payer mix, certainly fluctuates by quarter and this quarter it had a.
It had a negative effect on us.
So we felt that it's analytically more appropriate to grow to a range of $2 50 to $2 70.
But we can't say, we are in that range will fall and again, depending on how we recover from the transition efforts that we described.
That will have a major effect on where we end up.
Brian and specific to your question on Q3, we expect quarter over quarter, when looking back to Q3 of 'twenty one.
Growth quarter over quarter in the low single digits.
Got it Okay. That's very helpful. And then I guess, Mark you touched on payer mix.
Do you think or are you seeing any signs of businesses like the broader macro environment starting to show up in the payer mix I mean, we saw that obviously during the last recession. So just curious what you're seeing maybe ahead of time.
No we haven't.
Not seeing that as a matter of fact, payor mix and I know from from other organizations same thing payer mix can really fluctuate a lot and not because of a pattern. There is no pattern that we see that would indicate any any shift or I would have called it out.
Alright got it thank you.
We will go next to the line of Kevin Fischbeck with Bank of America go ahead.
Great. Thanks.
So I think you mentioned 10 million headwind in Q1 and $5 million in Q2 on the <unk> transition is that is that $15 million kind of like.
Something that we should think about as potentially coming.
Back in I guess in your guidance range is that how to think about the high end the low end of that range or are there other factors besides how much of that.
Cooper.
No.
I would think of.
A component.
Sure.
That loss in the first half of the year is gone some of it of course is still recover recoverable and that's what we're parsing out right now.
Okay. So so that uncertainty on mix shift and then is there a labor pressure like how to think about if we thought at least $1 270, now being let's just I will just say it this way that youre not saying it this way, but at least 270 being at least $2 60.
What other fact, whether main buckets besides <unk>.
Besides us are we thinking about.
Yes.
Labor is a relatively small factor as I said I called it out in the slide because I didn't want people to think that we're not focused on the fact, we're in a tough labor environment, we have a different labor mix than other than hospital and do and others do so.
That and other factors make it hit us less so the primary swing factors for 2022.
What we see today are a combination of.
Mix and <unk>.
What we can recover.
Sam.
The transition process obviously.
The other.
We don't we don't forecast.
It is going to be but.
We had solid but.
Gains in volume for the quarter. So all of those things will determine where we are in that range.
Okay, but there's no no.
Change in your volume outlook per.
Per se from last note is other factors okay.
And then.
On the on the labor side.
A lot of different businesses that have been extended because it would you say the labors.
More difficult in any specific part of the business.
Not really anything I would I would call out there.
Last time that we have we have a terrific recruiting arm.
And the Great news that we had.
Got it very good job in pace.
With turnover, there's no particular area.
That's driving.
The increase in costs and the increase in costs are relatively modest and I thought it worth calling out nonetheless.
Alright, great. Thank you.
And we'll move next to the line of <unk> Chickering with Deutsche Bank.
Go ahead please.
Hey, good morning, guys. Thanks for taking my questions here on that sort of $50 million of charges.
<unk>.
The first half of the year due to our one 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 this is Alan I thought it easily didn't get a bill out into a payer, hence it's aged out so I'm a little unclear.
Why they would not be recoverable when the <unk> sort of caught up with the billing.
Well go ahead.
Alright, Mark no.
<unk> of that is.
Denials and timely filings.
At any point in time to the extent those haven't been set out.
At that point in time, it's a timing issue, yes, those bills are not pan out.
Under the correct time.
As dictated by our payer contracts that money has been lost so that's a component and I referred to.
And that plays into it.
Just from.
Based on experience that is what effectively plays into the.
The buckets of <unk> and I will we will reserve against them as they flow through.
Okay Fair enough and then a follow up on Kevin's question on the sort of the salary costs about three months above the forecast.
Under the pricing most of your physicians are under multiyear contracts with both fixed and variable components.
So you always are more insulated from some of these labor pressures so I guess.
I guess youre walking through where that $3 million or came from versus expectations, because I guess I thought you actually been more insulated.
Yes, Peter.
Keep in mind, we've got.
And one thousands of clinics.
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 at the second quarter.
And dug into those individual practices et cetera.
There was a financial callout.
The majority of instances were related to that.
That modest level of turnover and open position that hadn't yet been filled and alike and thus the need for either existing clinicians in that practice to take extra shifts on call overtime and alike prior to refilling that position so.
And each one of those instances, obviously theres been a work plan and we do think that.
Theres recapture there with some cost savings, but that is thats. The general tone of how we saw in the quarter and again as Mark mentioned.
Roughly $3 million run over versus our internal forecast is.
Relatively minor.
Since our core business, and where it's where it's accretive so we and many of our sub specialties were actively looking at ways to increase our increase our footprint, we'd like to grow in.
And certainly Nick used.
My time and full time is spent with our hospital systems and prospective hospital partners.
To find ways to increase <unk>.
Certainly in primary and urgent care, you mentioned <unk>, we acquired outright nightlife Orlando and Nightlight.
Houston.
And.
We will look at both de Novo growth and also acquisition growth and we think both of those we can do without without.
Undue pressure on using our cash flow and as we mentioned.
Which I think is very important we're also able to buyback.
Three 3 million shares of our stock.
With all of this without.
Managing our debt levels at all.
So we are eager to grow.
There are opportunities some of it.
<unk>.
Lack of clarity from.
From HHS properly informed.
Some lag but.
But.
We're still we're still active and out there.
Perfect. Thanks.
As a reminder, ladies and gentlemen, if you do have questions. Please take this opportunity now to press. One then zero on your Touchtone phone.
We'll go to the line of a J rice with credit Suisse go ahead.
Alright, Thanks, Hello, everybody.
A couple of things obviously, the step up on the buybacks I wanted to ask you about that.
Is that an opportunistic buy you did in the second quarter or should we begin to think that youre going to commit more capital to that going forward.
Well.
I have the classic CEO answer.
These are the kind of decisions that we work closely with our board and we think when we think that that is a strong use of capital that we put our capital and we felt.
The board itself.
Unanimously business was a good time to be buying back our shares.
I can't comment on future activity.
Okay.
A lot of back and forth on the <unk> transition.
Impact it's had on.
Revenues to date I wondered within the context of that.
Yeah.
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.
Our <unk> dropped the ball is there something you did that.
It 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 Asia.
That we had in retrospect move to a roughly.
We had an RCM team big RPM team and in the move from RCM team two.
Two are one I'd say with hindsight, which is always handy.
We should have retained our team longer to give one more time to get up to speed and and we did that more roughly that's what I mean by more roughly than than I wish we had.
No.
No recourse to.
Our one in I would say it just collectively it didn't go as smoothly as we had hoped.
Okay.
And.
This is the kind of thing that can happen, we have an enormous RPM function.
So I think we did it we did it pretty well, but not as well as I wish we had.
Having said that importantly, we're at a point we're at a point today, where we have a very solid RPM function and as I mentioned in addition to that we have an arbitration capability that we would never been able to match on our own so as mark rightly pointed out that the other side of the RPM effort right now.
And collecting as much as we can from the earlier months to recover as much as possible.
But I think that it would.
Very good transition.
A very good move to transition to our one we're not disappointed with our decision at all we are disappointed by the turbulence and matter of fact that had we believe that we kept people on our team longer it would have been.
It would've been a better transition and less costly for us.
Okay.
You did mention with respect to no surprise act in your.
Comment.
You're geared up your team to be able to deal with any arbitration.
Issues that might result.
I just wonder.
Are you seeing is that gearing up for something that may happen or you're actually seeing more cases go to an arbitration at this point or would you.
It would be more.
We're overwhelmingly in network. So we haven't seen we haven't seen.
The increase in arbitration, the only areas, where we're out of network and we have had arbitration we have been very pleased with the dealers.
But we know that.
One of these days there will be a there will be some some final ruling and things.
Things will settle in and and we will need to have a process.
<unk>.
These in arbitration.
And it doesn't sound like you're seeing any delay.
<unk> re contracting.
As people are waiting for those final rules to come out.
Just sort of normal course, it sounds like the way you're describing it is that correct yes.
Correct.
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 we haven't certainly to date, we haven't seen that.
Alright, and then just my last area just a quick question is on the.
Push from the pediatric urgent care centers.
You've known some of them for a little while now.
The thing.
Developing either Maggie more or less optimistic about the economics of that business and the opportunity set.
And a lot of it during COVID-19 was put in place.
And maybe parents were saying, Hey, I've got a pediatric urgent care center, because I want to keep my kids away from.
Places, where they might catch kogan from adults are you seeing any change in the demand profile as we progressed through the pandemic.
We weren't basing our decision on what we saw at the time was a COVID-19 bumped by Denny acquisition. You look you look not only at <unk>.
What's going on at the moment, but what's going on.
Historically so.
We werent moving into this because of a.
Covid froth in earnings. So we continue to we continue to be very pleased with the P&L.
These operations and the economic opportunity and are thinking about it hasnt hasnt changed.
If there are times when there is a blip because of the Covid, which obviously for oil.
You don't want another COVID-19, but obviously, that's not that that's not the driver of our our reason to do this or reason to do this is as it's always been that way.
<unk>.
Our major markets.
Our largest employer PD nutrition, we have an enormous impact on what happens in pediatric care in our markets and we think that this is this is a very important step to filling out our ability to help.
Mothers and babies and children.
Okay.
Great. Thanks, so much.
We have a follow up question from the line of Kevin Fischbeck with Bank of America.
Great. Thanks, I just wanted to get maybe a little more color about what you mean about the arbitration improvements with our one 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 we're.
That work is in is in Texas.
We have the arbitration process.
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.
Our machine in place to handle and to handle that intelligently and I think we have that today. Thanks.
Thanks to our partnership with our team our managed care team and our one.
I think that would've been very difficult to to.
To build on our own.
Okay, I guess do you have a sense.
About where your pricing is versus kind of the meeting and in network. My assumption is that if you're out of network almost definition relates because you'd be above median in network.
Right. So I guess in that 5% there might be some risk, but broadly speaking any way to think about that.
No we don't.
It very payer by payer.
Yes.
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