Q3 2023 Pediatrix Medical Group Inc Earnings Call

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Ladies and gentlemen, thank you for standing by welcome to the Pediatrics Medical Group, Inc. Third quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. Later, we'll conduct a question and answer session and instructions will be given at that time. If you should require any assistance during todays call. Please press Star then zero.

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As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Charles Lynch. Please go ahead.

Thank you and good morning, everyone I will quickly read our forward looking statements and then we'll get into the call.

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 90 to 95 eight.

These forward looking statements are based on its own.

That's been 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 takes no duty to update or revise any such statements whether as a result of new information future events or otherwise.

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 non-GAAP financial measures. 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 our CEO Dr. James.

Thank you Charlie and good morning, everyone also with me today is Mark Richards, our Chief Financial Officer.

Our disappointing results reflected relatively soft patient volumes and persistent practice level of cost inflation, we plan to take meaningful steps to address this shortfall.

Since we firmly believe that our current operating results do not reflect the full earnings potential of.

Of this great company. If you go a step further we believe that <unk> unique organization, we represent both the largest single service provider for newborns in the U S as well as the largest group of maternal field medicine, as a clinician and a women's health sector. Our network affiliated practices provides critical services to women babies and children.

Austin and their funds are greatest.

We have been successful in maintaining a predominantly in network relationship structure, a key differentiator as we have navigated the challenging implementation of the no surprise.

And against the rising interest rate environment, our debt structure has allowed for prepayment of floating rate borrowings and more important our cash flow profile has enabled us to do just that with all of this in mind, we intend to take significant steps designed to support and bolster our core business to generate a stay.

<unk> gross margin profile as we continue to address cost trends and make any necessary changes to our service line footprint.

Let me list our areas of focus first we intend to make structural changes our priority and our inventory practices to enhance the earnings potential of the broader organization. There are wide variances and the financial performance across individual practices within our organization, whether you by geography specialty.

Or sub specialty or any number of other perspectives, we have always taken a proactive but careful approach to portfolio management to ensure that we are dedicating the right resources to the right places to narrow the experiences we will expand these efforts <unk>.

<unk> further actions, we can take in the near term to improve practice performance, where possible and take these steps as quickly as we can second.

We intend to confront the labor cost challenges, we are facing head on to mitigate cost while also remaining competitive and the clinician environment.

We will continue to work with our affiliated practices to review overall staffing needs in order to ensure optimal model that first and foremost support the highest quality patient care, but also are aligned to the current needs of each practice.

Given our financial strength and liquidity, we will focus our capital allocation priorities to build on our core as we have communicated previously.

Given the dislocation that has occurred across the physician service industry over the past several years. We believe that we are favorably positioned as the organization of choice for high quality practices in need of a national platform in which to collaborate with peer.

Lastly, as we disclosed this morning, we have made the decision to transition into a new vendor for revenue cycle management services. We did not make this decision lightly given the importance of this function to our practices and to our overall operating performance. However, our experience over the past year underscores our conviction.

<unk> that true hybrid model, incorporating an internal team focused on front end functions is the appropriate structure to generate optimal performance for pediatrics our decision to make this change reflects our need to migrate more quickly and completely to our hybrid model that we believe can be accomplished with our existing.

Additionally.

Additionally, we observed regression in RCM performance during Q3 to past challenges that we've seen in our dsos and other metrics.

We are focused on turning to a chapter where we rely on our own team where it makes sense and I will now outside of RCM partner for the areas, where we simply cannot match their efficiencies and we expect to begin this transition prior to the end of 2023.

As we have discussed at length. This year, we've been building our internal team, which we believe will help minimize any potential disruptions, while we transition to a new third party vendor.

Our current vendor we will continue to provide services through a transition period as we make the switch to a new vendor.

While this transition period will likely result in some duplicative costs. We believe this too will help mitigate potential transition risks we.

We will be as transparent as possible in terms of what expenses are temporary as compared to underlying and ongoing cost and performance of our go forward revenue cycle management activities.

All told we believe these steps can meaningfully enhance our operating effectiveness put us on a path to sustainable improved gross margins, while ensuring the pediatrics continue can continue to provide best in class support services to our affiliated practices.

With that I'll turn the call over to Mark Richards, Thank you, Jim and good morning, everyone.

I'll provide some additional details for the quarter.

Our adjusted EBITDA for the quarter was roughly $15 million below our internal forecast.

Merrily driven by practice level of operating expenses and also impacted by soft patient volumes.

Our topline results, our same unit pricing growth, primarily reflected year over year recovery.

In both revenue collection rates and payer mix against a very challenging quarter in 2022.

At the practice level, our year over year expense growth was evenly divided between salaries, although <unk> and.

Incentive compensation and benefits on the other.

This underlying salary growth accelerated by roughly 100 basis points as compared to the second quarter of this year when we saw some deceleration.

Finally, our total G&A expense declined slightly year over year.

Somewhat mitigating practice level cost growth.

Based on our third quarter results and our updated forecast for the fourth quarter. We are updating our outlook for the full year adjusted EBITDA to a range of $200 million to $210 million.

Which contemplates a similar contribution in the fourth quarter to what we reported for the third quarter.

Finally, as Jim referenced we continue to reduce our borrowings during the quarter.

We generated just over $81 million in operating cash flow.

We repaid the remaining $40 million in revolver borrowings during the third quarter.

With the full revolver capacity of $450 million available to us and we ended the period with $21 million in cash.

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

Thank you Marc operator, let's now open the call for questions.

Certainly ladies and gentlemen, if you'd like to ask a question you May press. One then zero on your telephone keypad.

Remove yourself from the queue by repeating the one zero command. If you are using a speaker phone. We do ask that you. Please pick up the handset before pressing the numbers once again the place yourself in the queue. You May press. One then zero at this time.

We will go to the line of Brian Tim Quillin with Jefferies. Please go ahead.

Hey, good morning, guys. Thanks for all the color.

I guess my first question as I think about practice level expenses and how you are looking to address that.

Are there levers that you can pull.

It's adjusting clinician wage rates or subsidies that you can ask for from the hospitals.

We should be looking for.

Hey, Brian I'll start with that from the subsidy standpoint.

As one of the things, we do look at especially when we're looking at the ODI and news the startup.

To make sure that we do have the available revenue to us when we bring clinicians on so thats certainly something that we'll look at going forward, we always look at on an annual basis.

As far as the comp.

The framework, we have the fixed and variable comp and I think we're trying to look at what the right.

Mix of that that is as we've seen.

On the variable comp as we've recovered in the RCM areas through the year, we've seen some variable comp has gone up but we do need to look at it through the lens of which practices have a.

Variable comp structure, and just a base cost structure and we're going to look at all of those things together.

Got it Okay, and then maybe as I think about the Rev cycle side, what were your learnings from the RCM transition years back that you think will make this transition from either.

You look for a third party vendor, bringing a third party vendor and hybrid.

Yes ill start and then all of US can speak to it Ryan I guess, what I've learned is I know more about Rev cycle now than I ever wanted to have my entire clinician.

Clinician career so.

So I think we understand very much would probably it's rooted in what we've described we believe that our services are unique our services unique at the bedside for the patients in terms of finding out as simple as things like the name of the baby and the insurance of which parent and so we just believe we need to have people closer to the bedside.

Did that start the process on the front end and a more complete fashion. That's why we've invested alongside our current vendor of having people here who are employed for pediatrics that are undertaking those tasks and why we're adding in significant resources as we make this transition. So I think we're going in.

Eyes wide open our entire leadership team our entire operations team.

Really as tightly involved in this transition Mark I don't know if you have any of that I think thats well, Jim I wouldn't say that we certainly learned a lot from the last transition and those lessons learned will be applied in spades to what.

We plan on doing over the next 12 months or so.

Jim if I, if I'm going to just throw a quick follow up I mean, you've been there for a while and therefore you transition. This is an external vendor things seem to be working okay. It wasn't broken on the Rev cycle side. So is it pretty much like just bring it back to how you ran things prior to bring RCM back in the day.

No Brian we're going to we're going to have an outside vendor for much of the back end the problem.

And what we identified when we made the decision to transition is that.

Obviously, the labor cost from issued a turnover of labor was always an issue and then there was a big component that we expected in our current vendor that there was going to be a technology solution available to us because we were going to have to invest.

Millions of dollars on technology.

Technology transition.

That never happened, we do believe that there are vendors out there who can and will help us with that but I think the court we looked at it through the cost of means gaining a workforce and a technology in the previous setting and knew that there are efficiencies by bringing in an outside vendor. Hence the reason we made that change.

We said, what we learned and what we believe and we will strongly standby is that it has to be a hybrid model, we have to own the front end and what we do at the level of patient care and physician practice level and then have a vendor who has more efficiencies on the back end.

Awesome. Thank you.

Yeah.

Thank you as a reminder, you may place yourself into the queue by pressing one then zero on your Touchtone phone will go to the line of Kevin Fischbeck with Bank of America. Please go ahead.

Hi, This is Matt on for Kevin Fischbeck.

So the first question is just regarding non same store revenue.

So it sounded like non same store revenue was a headwind to growth so what drove that.

Hey, it's Charlie.

Youll notice through the through the course of this year.

Largely been the case not at in a very material fashion, but something of a fashion.

And I think there is some comparability and that to what Jim mentioned around our review of our footprint in our portfolio. We have had some practice.

Exits in the light through the course of this year as we reviewed the portfolio at our footprint and that's where you see that net negative in these in the non stimulant side.

Okay. Thank you I guess I just have one follow up.

So we've been hearing from the hospital companies a lot about increased professional fees do you have an ability to go back and get subsidies to offset the margin pressure.

Also we have had great relationship with our hospital partners and as it relates to those those fees.

And the structure of those fees, we've done very well.

<unk> to place those fees when we need them, we're not somebody and you need to understand.

Understand it that we're not reliant to a large extent and on those contract fees. However for those services that have smaller volumes, but higher intensity. We do look at that and so we will have whether it be on new opportunities in <unk> or whether current pressures result in increase.

Cost, we will go back and see what we can do on those fees with our health systems.

Alright, Thanks, that's helpful.

Thank you and with that we have exhausted the queue at this time. Please continue.

Okay.

All right operator, thank you and thank you everyone for being on the call. We are I have available with the team throughout the rest of today and please reach out and give additional questions.

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T event conferencing you may now disconnect.

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