Q2 2024 Pediatrix Medical Group Inc Earnings Call
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Operator: Welcome to the Pediatrics Medical Group 2024 Second Quarter Earnings Conference Call. At this time, all participant lines are in a listen-only mode. If you would like to ask a question during today's conference, you may press one, then zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Charles Lynch. Please go ahead.
Speaker Change: Ladies and gentlemen, thank you for standing by. Welcome to the Pediatrics Medical Group 2024 Second Quarter Earnings Conference Call. At this time, all participant lines are in a listen-only mode. If you would like to ask a question during today's conference, you may press 1, then 0 on your telephone keypad.
Charles Lynch: Thank you, operator. And good morning, everyone.
As a reminder, this conference is being recorded. I'd now like to turn the conference over to Charles Lynch. Please go ahead.
Charles Lynch: I'm going to quickly read our forward looking statements before we begin 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 1995. These forward-looking statements are based on assumptions and assessments made by Pediatrics Management in light of their experience and assessment of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate.
Charles Lynch: Thank you, Operator, and good morning, everyone. I'm going to quickly read our forward-looking statements before we begin the call.
Charles Lynch: Any forward-looking statements made during this call are made as of today, and Pediatrix undertakes no duty to update or revise any such statement, 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 non-gap financial metrics.
Certain statements and information during this conference call may be deemed to be forward-looking statements.
within the meeting of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by Pediatrics 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.
Charles Lynch: 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.
Charles Lynch: A reconciliation of these non-gap financial measures to the most comparable gap 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.pediatrics.com. With that, I'll turn the call over to our CEO, Dr. Jim Spence. Thank you, Charles.
Charles Lynch: In today's Remarks by Management, we will be discussing Non-Gas Financial Metrics.
Speaker Change: 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.pediatrics.com. With that, I'll turn the call over to our CEO , Dr. Jim Swift.
Dr. Jim Spence: Thank you, Charlie, and good morning, everyone. Also with me today is Mark Richards, our Chief Financial Officer, and Cassandra Rossi, our Senior Vice President of Financial Reporting and Assistant Treasurer. Our second quarter operating results exceeded our expectations, driven by same unit revenue growth and operating efficiencies we created during the first half of this year. Our revenue benefited from a strong payer mix, as detailed in our press release. While patient volumes remained stable overall, within our patient volumes, NICU days declined slightly, with hospital-based volume growth driven by other subspecialties, including newborn nursery, Pediatric Intensive Care, and Pediatric Hospitals.
Speaker Change: Thank you, Charlie, and good morning, everyone. Also with me today is Mark Richards, our Chief Financial Officer, and Cassandra Rossi, our Senior Vice President of Financial Reporting and Assistant Treasurer.
Speaker Change: Our second quarter operating results exceeded our expectations, driven by same-unit revenue growth and operating efficiencies we created during the first half of this year. Our revenue benefited from strong payer mix, as we detailed in our press release.
Speaker Change: While patient volumes remained stable overall, within our patient volumes, NICU days declined slightly with hospital-based volume growth driven by other subspecialties including newborn nursery, pediatric intensive care, and pediatric hospital services.
Dr. Jim Spence: On the office-based side, maternal-fetal medicine volume growth was strong, but was offset by volume declines in pediatric urgent care. During the quarter, we recognized revenue related to a one-time settlement with a payer that favorably impacted the quarter's adjusted EBITDA by approximately $3 million. Even accounting for this item, however, the results exceeded our expectations. We are maintaining our full year 2024 outlook for adjusted EBITDA of between $200 and $220 million. And I'll focus this morning on our operating plans that are fully in motion, and how we anticipate the execution of these plans will condition us as we exit this year. And during the second half of this year, we plan to exit our remaining office-based pediatric subspecialty practice.
Charles Lynch: On the office-based side, maternal-fetal medicine volume growth was strong, but was offset by volume declines in pediatric urgent care.
Charles Lynch: During the quarter, we recognized revenue related to a one-time settlement with a payer that favorably impacted the quarter's adjusted EBITDA by approximately $3 million. Even accounting for this item, however, results exceeded our expectations.
Speaker Change: We are maintaining our full year 2024 outlook for adjusted EBITDA of between $200 and $220 million. And I'll focus this morning on our operating plans that are fully in motion and how we anticipate the execution of these plans will position us as we exit the year.
Speaker Change: As we discussed last quarter, we developed a broad-based portfolio restructuring plan, which we believe will add roughly $30 million in annualized EBITDA when completed. Under this plan, we have targeted exiting a meaningful number of office-based pediatric subspecialty practices.
Speaker Change: This portfolio restructuring plan was formalized during the second quarter and as a result we will be exiting almost all of our office-based practices other than maternal-fetal medicine during 2024.
Speaker Change: The goals of these strategic exits are to focus our attention on those service lines with solid financial underpinnings, solidify our margin profile, and create meaningful operating efficiencies for pediatrics.
Speaker Change: From the standpoint of our revenue and geographical footprint, only a small portion of this restructuring was completed during the first half of 2024, although our operating results do reflect some of the cost benefits of increased efficiencies, including the reduction of our operating structure from 7 to 4 regions.
Speaker Change: However, our exit activity is now fully underway. Late in the second quarter and soon thereafter, we completed two transactions through which we divested of our roughly two dozen primary and urgent care clinics.
Speaker Change: And during the second half of this year, we plan to exit our remaining office-based pediatric subspecialty practices.
Speaker Change: Our operating teams are moving quickly but thoughtfully to ensure that patient services are not disrupted during these transitions. We are working diligently on appropriate pathways for these exits, including transitions to private practice, new ownership, or hospital partnerships.
Speaker Change: Many of our affiliated physicians have already found new homes with excellent partners and will continue to serve their communities with their world-class care.
Speaker Change: Following the completion of these plans, we will have exited businesses that generated approximately $200 million in revenue.
Speaker Change: 2023.
Speaker Change: Our refocused portfolio will consist of our core hospital-based services, including neonatology, pediatric intensive care, and a number of other inpatient pediatric services, and on the office-based side, our maternal-fetal medicine practices.
Speaker Change: Lastly, our revenue profile will be approximately 80% hospital based and 20% office based.
Speaker Change: As we have stated previously, we anticipate a favorable impact of this portfolio restructuring will be approximately $30 million of annualized adjusted EBITDA following the completion of these plans.
Speaker Change: Concurrent with these operating plans we remain on schedule to complete the transition of our remedy cycle management functions to a hybrid model alongside our new third-party RCM provider, GuideHouse.
Speaker Change: As of today, roughly three-quarters of our practices have been transitioned from our prior vendor, with the remainder targeted for completion during the third quarter.
Speaker Change: Thus far, this transition has not created any material disruptions to our RCM performance, and we continue to believe that this structure will provide the opportunity for enhanced performance in the future.
Speaker Change: As it relates to our 2024 guidance, we are in the midst of an aggressive reshaping of our company, our service lines, and our operational support.
Speaker Change: Mark will provide some additional financial details, but our unchanged outlook from the full year adjusted EBITDA of $200 to $220 million reflects our best gauge of how all of these moving parts will flow through our results for the remainder of 2024.
Mark Richards: We remain steadfast in our goal to exit this year as a more focused and efficient operating company, comprising highly collaborative and critical patient services that we believe provide opportunities for strategic growth.
Speaker Change: We also remain committed to supporting our company's long-standing investments in clinical research and education, which are foundational to our mission.
Speaker Change: Lastly, we announced this morning that our Board of Directors has appointed Cassandra Rossi, our Senior Vice President, Financial Reporting, and Assistant Treasurer, as Executive Vice President, Chief Financial Officer, and Treasurer, effective October 1st.
Speaker Change: Sandra joined the organization in 2009 and has served in various senior level accounting, finance, and treasury roles with increasing responsibility, including her most recent role as Senior Vice President, Financial Reporting, and Assistant Treasurer.
Speaker Change: This honor succeeds Mark Richards, who has played an instrumental role in our transformation activities since joining the company in 2020, and will remain in his position through a transition period this fall.
Speaker Change: I want to congratulate Cassandra on her new role. I particularly want to thank Mark for all of his contributions to Pediatrics.
Speaker Change: Similarly, I want to thank all of our Pediatrics Associates, both clinical and non-clinical, for their hard work and dedication to this organization.
Speaker Change: particularly during this time of significant change. We're confident that the operating plans we have in motion will enable pediatrics and our affiliated commissions to effectively continue our mission to take great care of the patient. With that, I'll turn the call over to Mark Richards.
Mark Richards: Thanks Jim. Good morning everyone. I'll provide some additional details in a few areas.
Mark Richards: Within our P&L, our G&A expense declined year over year, despite the additional staffing we have put in place as a part of our hybrid revenue cycle management structure.
Mark Richards: And we anticipate that full year 2024 GNA expense will be comparable to or lower than 2023 GNA on a dollar basis.
Mark Richards: First.
Mark Richards: You'll see we recorded long-lived asset impairments and losses on disposals in our P&L. These all pertain to the formalization of our portfolio restructuring and the related accounting requirements, and all were non-cash expenses.
Mark Richards: Moving to cash flow, we generated $109 million in operating cash flow in the second quarter compared to $93 million in the prior year.
Mark Richards: Our cash flow benefited from a reduction in DSOs, which declined from 52 days at March 31st to 49 and a half days at June 30th.
Mark Richards: Part of this decline reflects a catch-up in collections following some minor disruptions during the first quarter of 24 related to the change healthcare incident.
Mark Richards: From an RCM standpoint, I would characterize our performance as expected, which is notable given the magnitude of activity we have undertaken in transitioning to our new provider under our hybrid model.
Mark Richards: Our cash generation enabled us to pay down all of the revolver borrowings we utilized in the first quarter, and we ended the quarter with $20 million in cash on the balance sheet.
Mark Richards: As a result, our net debt position declined to roughly $600 million, at or below three times leverage based on our outlook of adjusted EBITDA for the year.
Mark Richards: We expect to generate additional free cash flow during the second half of 24 based on our normal conversion of EBITDA to cash flow.
Mark Richards: We also anticipate that our ongoing capital expenditure needs will decline following the completion of our portfolio restructuring.
Mark Richards: On a preliminary basis, we expect that our annual CapEx will be in the range of $16-$20 million, significantly lower than our average outlays of $30 million in the past several years.
Dr. Jim Spence: Finally, for modeling purposes, I'll reiterate that our second quarter adjusted EBITDA includes approximately $3 million related to a one-time payment settlement that we do not expect to recur.
Mark Richards: Finally, for modeling purposes, I'll reiterate that our second quarter adjusted EBITDA includes approximately three million dollars related to a one-time payer settlement that we do not expect to recur.
Jim: For the second half of 24, we expect that our adjusted EBITDA will be fairly ratable in the third and fourth quarters. With that, now I'll turn the call back over to Jim.
Jim: Thank you, Mark. Operator, let's now open up the call for questions.
Speaker Change: Thank you and our first question is from AJ Rice with UBF. Please go ahead.
Speaker Change: Hi, everybody. Thanks for the question. Just a couple quick things.
AJ Rice: I may have this wrong, but it looks like, to me, you're now assuming about $40 million in restructuring.
Speaker Change: And I thought we were at 25 before, if I'm right. What's changed there in any sense about how that's going to play out, how much have you already incurred and how much will you incur as you progress through the rest of the year?
Mark Richards: A-I-N-G-H-A-T-I-O-N
Mark Richards: It's Mark Richards.
Speaker Change: I'll jump in. Yeah, you're right. Initially, our transformation and restructuring costs as a result of our
Speaker Change: And a first assessment of the portfolio restructuring was in that $20 million range since then. We have added to the number of practices we'll be exiting, and accordingly, we've increased our estimate related to those exit costs.
Mark Richards: You know, consists of both severance costs, lease termination, and the like. So, yes, that has increased.
Speaker Change: All right, and have you incurred much of that yet, or is that maybe later in the year, or how does that lay out?
Speaker Change: Yes, we have incurred a component of that through June 30th, as you'll note.
Mark Richards: We expect that will continue and, you know, come to a completion here towards the end of December .
Mark Richards: Okay. So, thanks for coming, H.M.
Mark Richards: All right.
Speaker Change: I wondered if I could just ask about...
Speaker Change: Commercial Contracting, and so forth. I think you have a reference in the press release that says you're a...
Speaker Change: PayorMix, Trend, Commercial, was it up? I wonder, is that because of this $3 million settlement, or if you X that out, would it still have been up? And anything to call out there, and any commentary on what you're seeing with this?
Speaker Change: You know no surprises act Arbitrage types of situations. Is there an uptick? It's steady now at this point. And how are you doing on those cases?
Speaker Change: Hey Jay, it's Charlie. I'll take that in a couple of ways.
Jay: Air Mix, Improvement that we
Jay: does not include a significant amount of the settlement that we referenced from one payer. It's more related to, as we look at our payer mix being binary, just a greater mix of non-governmental monies versus Medicaid. In terms of payer contracting.
Speaker Change: We didn't have a lot to comment on this quarter. You know, we view the landscape across all of our managed care relationships as stable and rolling forward with normal course renewals as we've done in the past.
Speaker Change: Okay, just to close, best wishes to you, Mark, and congratulations to Cassandra on the appointment.
Mark Richards: Thank you, A.J.
Mark Richards: It's been a pleasure.
Speaker Change: And next we go to Brian Tanquilut with Jefferies. Please go ahead.
Speaker Change: Hi, this is Nur Robleh for Bryan. Thank you for taking my question. I was curious if you could provide some more insights on the office space.
Speaker Change: [inaudible]
Speaker Change: Hey, it's Mark Richards. As we noted in...
Mark Richards: in the earlier discussion.
Speaker Change: The bulk of the office exits are slated here.
Speaker Change: for the third and fourth quarters. We have seen traction in the second quarter and subsequent to June 30th. However, the bulk of those exits really are slated for the second half of the year, and the impact of which, as this tails off,
Mark Richards: You'll see in both our non-fame store revenue numbers and the like that this will increase throughout the year. However...
Mark Richards: You know, the full impact of both the exits and the offsetting costs associated with those exits.
Mark Richards: will be will be realized in 25. So looking at Q3 and Q4, we would see, you know, consistent quarters to the second quarter rolling out in Q3 and Q4 ratably.
Mark Richards: with the positive impact of these restructuring activities really coming in earnest in 2025.
Speaker Change: Got it. Thank you. Thank you very much for that. And just picking up on AJ's question on, you know, the strong pricing growth this quarter.
Speaker Change: Just curious if you all think there's positive momentum to run rate pricing from these current levels. If you could provide some context to that, that'd be helpful.
Speaker Change: Typically, as we look at changes in PairMix, we take that as it comes because it can be very difficult to forecast those types of changes.
Speaker Change: And from a historical standpoint, our paramedical does fluctuate, you know, quarter to quarter, tends to have a longer trend line to it than...
Mark Richards: So as we look at our forecast for the remainder of the year, while we're certainly pleased about the paramedic strength we've seen so far in the first half, it's not necessarily something that we're going to roll forward as persisting, but we'll take that as it comes.
Speaker Change: Awesome, thank you very much.
Mark Richards: And the next question is from Peto Chickering with Deutsche Bank. Please go ahead.
Mark Richards: Hey guys, you got Benjamin Shaver on for PETO. Nice quarter, just a couple of questions. So the first one is, um,
Benjamin Shaver: So 2Q is very strong even when you back out that $3,000,001x benefit you quantified earlier and you said it was ahead of your expectations, but you only reiterated the guidance. So does that mean...
Speaker Change: Set The Street Missmodeled 2Q, or if there's any additional color on how we feel about consensus in 3Q and 4Q, it would be super helpful. Thanks.
Speaker Change: I would, Jim, you can jump in here as well, but a comment that I would give is that, yes, the second quarter was
Jim: was a little bit ahead of our expectations at the EBITDA line.
Jim: So to that end, you know, we believe that looking at where consensus estimates are, for example, for the third quarter, that level looks appropriate to us.
Unknown Executive: roughly comparable to what we've seen in overall births for the quarter year over year.
Speaker Change: The payer mix versus the hospital contract admin fees contributed to that increase year-over-year and then also on the hospital contract
Speaker Change: Please see the complete disclaimer at https://sites.google.com or at https://sites.google.com
Speaker Change: Thank you.
Speaker Change: You know, physician, then what the growth rates historically of those two businesses are, just to give us a sense, because it's not 100% clear to me what the implications are for growth from this restructuring. Thanks.
Unknown Executive: I'll start just, again, I'll just start from the standpoint of what we're looking at across the environment and Charlie can dovetail into it. I think, you know, what we talked a lot this year about is obviously stabilizing the margins and stabilizing the business. And I think, yes, the pivot to growth is paramount in our mind of where we're going, starting really at the tail end here and in 2025. And we believe there are unique opportunities in that 80-20 mix of both ambulatory and our hospital-based service lines, including NICU.
Unknown Executive: And so we have a number of those opportunities we're looking at. And I think our focus for 2025 is going to be, you know, really focusing on moving past the disposal of practices and on RCM and really accelerating what we're doing on our growth trajectory. That will be the main focus in 2024 and 2025.
Speaker Change: and on RCM and really accelerating what we're doing on our growth trajectory. So I think that will be the main focus N24, N25.
Speaker Change: The only thing I would add to that is
Speaker Change: Win.
Speaker Change: We've made a lot of comments over the past several quarters related to maternal-fetal medicine. You know, for the first half of this year, stamina volume growth across our MFM practices was quite strong, approaching the mid-single digits.
Speaker Change: and that has been persistent going back into 2023 as well.
Speaker Change: So, you know, we do think that, you know, structurally, strategically, and geographically, you know, those practices providing MFM services are very well positioned. So it's maybe something to keep in mind if you think about that, you know, non-acquisitive growth algorithm.
Speaker Change: as opposed to what Jim mentioned, you know, that we can layer on top of related to strategic growth.
Speaker Change: Okay, that's helpful. And I guess maybe just any color on...
Speaker Change: Payermix, I guess maybe post the $200 million that you're divesting, is that Payermix look similar to the overall company or does that have an implication post, does that shift mix more towards commercial or more towards government?
Speaker Change: No, it shouldn't have any meaningful implications.
Speaker Change: All right, great, thanks.
Speaker Change: And we have a follow-up from Pedo Chickering's line. Please go ahead.
Peto Chickering: Hey guys, sorry, just a couple of additional quick ones. Do you have any maybe incremental color on any discussions you're having with managed Medicaid? And then sort of how should we think about for same-store inflation versus pricing increases? Thank you.
Speaker Change: For us, Medicaid Managed Care
Speaker Change: That's largely a pass through from whatever state's Medicaid schedule is to what we should be what we should be reimbursed
Speaker Change: Yeah, so it's just on the same store labor inflation versus pricing.
Speaker Change: But yeah, we saw some modest deceleration during the second quarter, nothing that we would particularly call out, but some modest deceleration, you know, I think our focus here is, you know, with the portfolio restructuring that we're undertaking.
Speaker Change: Thanks guys, super helpful.
Speaker Change: Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.
Speaker Change: We're sorry, your conference is ending now. Please hang up.
Speaker Change: Thanks for watching!
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