Q2 2023 Pediatrix Medical Group Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Pediatrics second quarter earnings Conference call. At this time your telephone lines are in a listen only mode. Later, there will be an opportunity for questions and answers with instructions given at that time.
If you should require assistance during the conference call. Please press Star then zero in a specialist will assist you off line.
As a reminder, your call today is being recorded I will now.
Turn the conference call over to your host Charles Lynch. Please go ahead.
Thank you Alan and good morning, everyone and welcome to our call I will quickly read our forward looking statements before we get into our comments.
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 eight.
These forward looking statements are based on assumptions made.
Made by Pediatrics as management in light of their experience and assessment of historical trends current conditions expected future developments and other factors they believed 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 I.
A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this morning's earnings press release quarterly reports on Form 10-Q, and our annual report on Form 10-K, and finally on our website at pediatrics Dot com with that I'll turn the call over to our CEO Dr. Jim Swift. Thank you Charlie and good morning, everyone also with me today.
Our operating results for the second quarter continue to track very near our expectations patient volume trends decelerated somewhat from the first quarter, but remained stable to positive.
Within our hospital based services and ICU days increased year over year offset by softer volumes in the pediatric ICU and the pediatric floor. We attribute this to a retort turned to normal summer seasonality. After a number of years of distortions from COVID-19 and non seasonal respiratory diagnosis.
And we anticipate that volumes in these settings will increase seasonally as we move through the fall and into the winter.
The ambulatory side, our volume growth was driven by maternal fetal medicine and pediatric cardiology.
Certain of our inventory some specialties such as our A&P practices saw a similar seasonal deceleration in volume growth to what we saw in both the peds ICU and the peds floor.
Similarly, we would anticipate a seasonal reacceleration in patient traffic as the school year begins.
Turning to rate our reported pricing was quite strong which largely reflects the progress we've made in improving our revenue cycle operations. Our payer mix was also stable year over year on.
On the cost side, our practice level of compensation and benefits expense reflected a deceleration in underlying salary growth as compared both to the first quarter and the fourth quarter of 2022. Additionally, our G&A expense declined by roughly 5%.
Year over year, reflecting our ability to maintain efficiencies and generate leverage against our revenue growth.
Lastly, we generated strong cash flow during the quarter, which allowed us to repay roughly $75 million and borrowings.
As Youll see in our press release. This morning based on our second quarter results. We are maintaining our full year outlook for adjusted EBITDA of between 235 and $245 million.
Now I'll touch on a number of business or strategic priorities first as I mentioned, our second quarter results reflect reflect improved air collections, which in turn reflect the efforts we put forth to staff. Our front end activities internally, we remain focused on further improvement through the second half of this year second.
Growth.
We're working on three fronts on the sales side. We believe we continue to have great relationships with our existing hospital partners, which we view as our strongest pathway to new contract growth, but we're also focused on new relationships is a good example of this we've finalized an arrangement with <unk> children's hospital the <unk>.
Only independent specialty children's hospital in New York State.
Under which pediatrics affiliated clinicians will provide pediatric hospitalists and Intensivist services.
We're excited that the opportunity to work with the leadership of <unk> and to help ensure that patients who have received the highest quality care possible.
Within our primary our urgent care platform. We're also expanding in the Houston market. We opened our first de Novo Pediatrics branded clinic. This last fall and we are scheduled to open an additional de Novo clinic during the second half of this year and both Houston and Orlando, We are actively rebranding our acquired clinics under the pediatrics name.
And lastly during the second half of 2023, we are planning to open three de novo clinics in the Denver market, marking our entry into a third priority market for us.
Finally, we haven't completed any acquisitions year to date, we believe there are opportunities in the market and we anticipate that we may begin committing a modest amount of capital during the second half of the year focusing in our core service lines.
In those instances, where we are in and out of network position.
Our success rate in arbitration continues to lead the industry averages for providers and I want to commend our managed care team for this success.
Against that backdrop I'm also pleased to note that we have now been able to reestablish and in network payer agreement in one of our markets. Following a period when we were previously out of network.
We believe this reflects our ability to work constructively with our payer partners and arrive at a structure that first and foremost benefits our patients, but also represents an economically appropriate level of compensation for the critical services provided by our affiliated clinicians.
With that I'll turn the call over to Mark Richards, Thanks, Tim Good morning, everyone.
First as Jim mentioned, we continued to decrease both our gross and net accounts receivable in the second quarter. Our net AR days at June 30 were 49 down from 51 at March 30, and 53 at December 31 for a four day improvement year to do.
Ed.
In turn this improvement supported the contribution to our revenue growth from the rate that we reported this morning.
Quickly turning to our P&L underlying same unit salary growth remained above our historical norms, but that growth did decelerate by over 100 basis points as compared to the first quarter of this year into Q4 of 'twenty two.
With that our practice level SWM beeline. This sequential improvement was modestly offset by higher incentive compensation accruals, which are based on practice level revenue and financial performance.
Also within our P&L G&A expense remained under $60 million in the quarter and within our financial outlook for the full year of 2003, we continue to anticipate that our G&A will be less than 12% of revenue.
Turning finally to our balance sheet.
We repaid roughly $73 million in revolver borrowings during the second quarter and our total debt at June 30th was $675 million for net leverage of three times based on trailing 12 adjusted EBITDA, notably.
Notably over the past 12 months, we have repaid a total of $125 million in borrowings on our revolver and term loan.
We anticipate that we will generate sufficient cash flow to repay all of our revolver borrowings during the third quarter and begin to build our cash position following that.
We believe this is appropriate given our outlook that we may commit capital to acquisitions in the coming year.
With that I'll turn the call back over to Jim. Thank.
Thank you Marc operator, let's now open up the call for questions.
Thank you ladies and gentlemen, if you do have questions. Please press one.
Zero on your telephone keypad.
You'll hear an indication you've been placed into queue and you may remove yourself from the queue by repeating the one then zero command.
Again for questions Press, one then zero.
We'll first go to the line of Peter Chickering with Deutsche Bank go ahead.
Hey.
Hi, Good morning, guys. Thanks for taking my questions.
Can you help us bridge, the EBITDA margins from from <unk> into the back half half a year.
And then can we use the margins towards the back half of the year as a launch pad for 2024.
Hey, how are you Peter this is mark Richards.
Let me help you with that and unpack a couple of items that are within our margin specifically in the second quarter of this year.
You will note that same store rate growth quarter over quarter accounted for about $12 $5 million.
Despite the fact that our.
$13 million of that was related to salaries wages and cub and the remainder call. It about $9 $510 million was related to our incentive compensation plan. So great growth same store 12, 5 million incentive comp quarter over quarter.
Rate growth.
Isn't necessarily indicative at a practice by practice level.
And as a result of the.
<unk>.
Distribution of that rate improvement certain practices that are in bonus are receiving a disproportionately higher portion than in prior periods. So we will with that.
<unk>.
Our RCM improvement stabilizes across the portfolio, so will the related incentive compensation.
Okay.
Okay fair enough.
Dsos have come down five quarters in a row.
So is this all.
RCM is just.
Creative process and also have you been able to collect any of the receivables that have been previously written off.
Sure.
Okay.
Despite the fact that we are at 49 days here at the end of the second quarter. There is still room for improvement.
And our guidance anticipates that improvement over the coming quarters.
And then you guys.
No to recover any of the.
Mcgarrah those written off last year.
Our.
Revenue recognition is an experience based model so to the extent, we have been catching up on prior reserved receivables.
To the extent they are collected those amounts are are flowing through to the P&L, which is a very small component.
Of the two five plus percent same store rate growth.
Perfect great. Thanks, so much.
Certainly.
Yeah.
One moment please for our next question.
And that will come from the line of Brad.
One moment please.
Thanks for taking the question.
Being up because of incentive comp.
Probably a good sign but how do we think about the opportunity to reset or are just back down the debt.
Specific cost item crossline.
You want to start.
<unk>.
In most cases.
Renew automatically from year to year. So it really is dependent on our practice specific discussion.
And we're having some of those conversations just internally across the practices to make sure that.
Number one looking at the averages across the country in terms of compensation for these different specialties, making sure that we're at market or slightly above market to to be competitive in some of these areas, but that's an active conversation.
This year and into 'twenty four.
Got it and then Mark obviously free cash flow or cash flow is in general very strong. Some of this is collecting some of that but as we look forward with these things the right way to think about your more normalized cash generation.
Okay.
Youre right.
We have had some lumpiness over the past 12 months with respect to that.
The balance sheet has flagship quarters from quarter to quarter, our bonus payments go out in the first quarter. Therefore in the first quarter of the year, we were a net borrower, but I would think about that as the year tails on.
That that borrowing coming down to zero here in the third quarter with free cash flow then building up as we approach the end of the year.
Got it one last question for me if I may you called out your entry into the Denver market with the clinic and urgent care strategy.
Should we be thinking about the margin differential between the.
The legacy businesses.
This.
Got it.
Thanks.
Hey, Brian It's Charlie.
Thank your best rule of thumb as these clients are mature, they're pretty comparable to or a little bit accretive to our overall margin profile.
Keep in mind, we've got experience in two markets in Houston and Orlando with.
Preexisting clinics with pre existing patient traffic, albeit only on the urgent care side in a primary care, so thats, a little bit new ground, but but that's been our experience and then obviously with the new openings. Another opening in Houston This year and a few in Denver there'll be a ramp period, where we'll we'll sustain some some.
<unk> losses, as we get those those clinics opened staff and Unbilled patient traffic, yes, Brian It's Jim I'll just add that.
As an important market for us with our presence.
In the newborn nurseries in the neck use in the <unk> and in the peds floor in multiple hospitals in the Denver Metro market. So we think this is a natural extension of the services, we provide in the community and feel that we have a patient relationship that will be an advantage for us in that market.
Awesome. Thank you guys.
As a reminder, if you do have questions. Please take this opportunity now to press. One then zero on your keypad. We will go next to the line of Kevin Fischbeck with Bank of America go ahead.
Mr. Fischbeck with accidentally released your line if you could please press one then zero again.
Meanwhile, we have a follow up question sorry, Kevin Fischbeck line has re queued, we will open up that line go ahead.
Yes.
Kevin Thanks for taking the question.
So on pricing that was strong in the quarter.
Can you parse out how much of that was due to the improving collection versus rate update.
Sure.
As I said earlier, the vast majority of that is driven by.
Collections.
Which which directly correspond if you look at the balance sheet.
<unk> is down.
Which of course is driving a piece of that as well as the DSO coming into play it. So it's primarily a reversion to.
Thank you and then on the no surprises Act.
Can you talk about what Youre seeing and how the process is working and what your win rate as compared to the industry.
Yes, I'll touch on it and let Jim add some more color.
As I think Youre aware CMS reports the the average win rate from initiators of arbitration cases, which is almost exclusively providers is just over 70% like 71% as our last report and we've quoted in the past.
Success rates in the range of 75% plus in.
In a linear fashion our success rate has actually improved.
Over some time, Jim you might want to yes, I think.
What we believe unfortunately, the industry has to have this capability from a physician or provider service standpoint. So we've continued to build out this capability internally to make sure that we understand the arbitration process to make sure that we have accurate data on what is truly the qualified payment amount that <unk> and mark.
<unk>.
And not really be this ghost contracting piece with some of these ppas.
That are drawn down a bit by the payers. So we think it's a robust process that we continue to approve upon so we're very proud of the team leading this and feel strongly that we'll continue to engage with payers.
Really want to be in network, but to the extent we are out of network, we will participate in the arbitration process.
Thank you.
We have a follow up question from the line of Peter Chickering with Deutsche Bank go ahead.
Hey.
One more margin question for you.
Looks like the back half of your guidance is around 11% and while I know you aren't giving 2020 for guidance.
Can you help us think about using that 11% bridge into 2020 for kind of what are the headwinds and tailwind.
For next year that we should be thinking about.
Yeah.
No I think I think heading into next year of course rate continues to be a concern. Despite the improvements that we have seen we're not in a position at this point to provide 24 guidance.
Obviously, where we end up this year with our RCM efforts and.
And the related financial impact of that will be heavily.
Driving our 24 forecast and related guidance.
And just one last piece and it's a little bit more related to Q2, 'twenty three 'twenty four but maybe helpful.
As we've talked the last couple of quarters about.
Overall.
Compensation trends.
Particularly on the salary side as mark referenced on the incentive compensation and how that flowed through this quarter and one thing to think about is the way we view it which is here in the second quarter, we've kind of passed something of a high watermark and the delta between overall compensation trend in top line trends, which.
Educate us about our outlook for the remainder of this year and hopefully you as you think about exiting and going into 'twenty four.
Okay, Great and then you guys have been shrugging off the at risk around Seo just crippling other practices and I. Appreciate your commentary around kind of that exposure I guess.
As you look at sort of contracting with managed care for next year.
Yes.
We just wanted to be we certainly want to participate and remain a network and more importantly, we are having subsequent conversations with those payers, where we are out of network to try to come back in network.
And not being gleeful about what we've done from a success standpoint in the arbitration process. So the goal is largely being network. Charlie if you want to follow on that yes.
I would say.
Our our visibility in terms of contracted rates into into next year is not dissimilar from what you hear from other providers, we have a very broad based and diversified book of managed care contracts.
That typically have a multiyear terms such that we have.
Got it.
I think I have a specific number that I could quote, but a fairly high percentage.
In network agreements that have full visibility into 2024 and as we've referenced in the past.
Our underlying.
Rate trend in terms of allowable is modest.
As I've talked a lot in the past our pricing experience, excluding distortions from things like RCM factors or payer mix is in the 1% 2% range.
And that is inclusive of what tends to be relatively flat Medicaid pricing. So that's probably your best guidepost to think about as we as we look into 'twenty four with the caveat that Jim mentioned that there are unknowns around the NSA.
That we don't want to.
So just glide path okay.
Okay.
One quick follow up on there.
Obviously, it's been free.
The massive deflationary pressures across the health care system is that giving you guys ammunition to increase that.
I'd say, it's a pretty it's a pretty firm environment out there related to physician services. When you when you try to counterbalance the inflationary pressures that providers are feeling and trying to pass along against a admittedly consolidated payer environment and the.
Some of the unknowns around how the NSA components can be wielded on the payer side. So those are counterbalancing measures is in our experience that.
That places a little bit of restriction on how fully we could we could pass through some of the inflationary pressures that we felt at this point.
Okay.
Okay, great. Thanks, so much and a great job on getting those dsos down guys.
Thanks, Thank you.
And speakers, we have no further questions in queue at this time.
Thank you operator, and thank you all for joining the call. We will see you in the third quarter.
Ladies and gentlemen that will conclude your conference call for today. Thank you for your participation and for using AT&T Teleconferencing you may now disconnect.
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