Q3 2024 Pediatrix Medical Group Inc Earnings Call
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Speaker Change: Ladies and gentlemen, thank you for standing by and welcome to the 2020 for a third quarter's earnings conference. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. If you have a question press one and then zero if you should require assistance on todays call. Please press star.
Speaker Change: And then zero and as a reminder, this conference is being recorded I would now like to turn the conference over to our host Charles Lynch. Please go ahead.
Charles Lynch: Thank you operator, and good morning, everyone.
Charles Lynch: Please read our forward looking statements and then we'll get into the call.
Certainly thank you.
Charles Lynch: Information during this conference call may be deemed to be forward looking statements within the meeting the federal private Securities Litigation Reform Act of 1995.
Charles Lynch: These forward looking statements are based on assumptions.
Charles Lynch: Made by Pediatrics its management in light of their experience.
Charles Lynch: Our historical trends current conditions expected future developments and other factors they believe to be appropriate.
Charles Lynch: 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.
Charles Lynch: Important factors that could cause actual results developments.
Charles Lynch: <unk>.
Charles Lynch: 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 metrics. A reconciliation of these non-GAAP financial measures to most comparable GAAP measures can be found on 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.
Speaker Change: I will turn the call over to our CEO Dr. James Thank.
Speaker Change: Thank you Charlie and good morning, everyone also with me today is Cassandra Rossi, our Chief Financial Officer.
Dr. James: Our third quarter operating results were modestly ahead of expectations driven primarily by same unit revenue growth.
Dr. James: The second quarter payer mix provided a tailwind to our top line, although it did moderate towards the end of the quarter.
Dr. James: Patient volumes were stable to positive across all of our core service lines compared to the third quarter of last year on the hospital based side are in ICU days rose modestly, reflecting slightly positive total births and we saw positive comparisons across newborn nursery pediatric intensive care and Pete.
Dr. James: Possible with services on the office based side maternal fetal medicine volume growth remained strong as we have experienced throughout 2024.
Dr. James: Looking at our exposure to hurricane choline and Milton during the end of September early October while we did experience. Some office closures those are quite brief and we did not see any material disruptions to our hospital based services more importantly, all of our team members who are in harm's way are safe many of our.
Dr. James: Going into hospital based commissions in affected areas remained in their facilities to care for their patients during storms and those in office based settings undertook great efforts both to prepare for the storm and reopen as quickly as possible on behalf of their patients I want to thank our teams for their dedication to patient care.
Dr. James: And similarly, our hospital partners for their own such dedication.
Dr. James: During the quarter, we successfully completed the final wave of our transition to a hybrid revenue cycle management structure and I am pleased that not only is the transition behind us, but we were able to complete it without any meaningful disruption to our operating results.
Dr. James: Our internal team has worked in full collaboration with our new vendor Guide House, and we will now shift our focus from transition to driving improved performance. We also remain focused on completing our portfolio restructuring plan by the end of the fourth quarter.
Dr. James: This plan, we are exiting businesses totaling $200 million of revenue with an expectation of approximately $30 million in annualized improvement in adjusted EBITDA based on 2023 results we.
Dr. James: We expect to realize a portion of this in 2024 and the remainder in 2025 and beyond as I discussed last quarter. Our operating teams have moved quickly.
Dr. James: <unk> fully to ensure that patient services are not disrupted during these transitions and we have identified appropriate pathways for these exits including transitions to private practice, new ownership or hospital partnerships based on our third quarter results.
Dr. James: The progress of our operating plans, we have narrowed our outlook of full year, adjusted EBITDA to $205 and $215 million.
Dr. James: 2024 has been and continues to be a period of significant change for pediatrics our goals. However are unchanged.
Dr. James: Our attention on those service lines with solid financial underpinnings.
Dr. James: Solidify our margin profile and create meaningful operating efficiencies for pediatrics.
Dr. James: In turn we believe that executing on our plans will enable us to support highly collaborative and critical patient services and continued investments in clinical research and education.
Speaker Change: I'd like now to formally introduce <unk> <unk>, our executive Vice President Chief Financial Officer, and Treasurer, Cassandra has been with the company for more than 15 years, taking on increasing and more senior roles within our finance organization I've had the pleasure of working with her throughout my own tenure here and over the past several months.
Speaker Change: We have spent significant time, ensuring that this leadership transition will be a sneak one it's all really the very experienced and dedicated finance organization and all of US on the leadership team look forward to her continued contributions to the company and with that I'll turn the call over to software.
Speaker Change: Thanks, Tim and good morning, everyone.
Speaker Change: First I'd like to thank Kim our board and the pediatric team for the opportunity to serve as Chief Financial Officer as Jim noted I spent a considerable part of my career here and it's an honor to continue to support such a valuable organization, particularly at such an important time in our evolution.
Speaker Change: True believer that our finance organization should play an important role not only in strategic decision, making decisions across our entire organization all of which have financial implications.
Speaker Change: We have a talented group of dedicated employees that are part of the CFO organization accounting Finance enterprise data analytics information technology and revenue cycle management.
Speaker Change: Each function overlap with every single part of the business and I consider it my responsibility to ensure that we bring a full suite of financial data and analytics to the table as well as identify innovation and automation opportunity so that our operators and shared services partners can make.
Timely and informed decision and ultimately work towards our shared goal of operating more efficiently.
Speaker Change: With that said.
Speaker Change: Some additional details on the quarter.
Speaker Change: Our consolidated revenue growth of just under 1% reflected strong unit growth offset primarily by the impact of our portfolio restructuring activity in.
Speaker Change: In total this impact was just over $20 million during the quarter, reflecting both practice disposition is completed and the <unk>.
Speaker Change: Divestitures of our former primary and urgent care clinics.
Speaker Change: <unk> died practice level, FW and <unk> expenses declined year over year.
Speaker Change: Also reflecting our portfolio restructuring.
Speaker Change: On a same unit basis. These expenses did increase year over year, but at a slower pace in same unit revenue and we did see a year over year deceleration in underlying salary growth not only as compared to the prior year period, but on a sequential basis as compared to the first and second quarters of 'twenty four.
Speaker Change: Our G&A expense increased modestly year over year, primarily reflecting the additional staffing we have put in place as part of our hybrid revenue cycle management structure.
Speaker Change: Incentive compensation based on financial results. This was partially offset by efficiency efficiencies, we've created through the year through staffing reductions across shared services as a result of our smaller footprint across fewer service lines. We continue to anticipate that full year 2020 for G&A expense.
Speaker Change: Will be comparable to 2023 G&A on a dollar basis for.
Speaker Change: For those of you keeping models I'll note that our depreciation and amortization expense declined to $6 3 million compared to $9 2 million in the prior year. This decline primarily reflects lower depreciation expense related to our practice is positioned and our third quarter level of DNA ACB.
Speaker Change: Fairly consistent going forward all else being equal.
Speaker Change: Moving to cash flow, we generated $96 million in operating cash flow during the third quarter compared to $81 million in the prior year as Jim noted we completed the final wave of our transition to a hybrid revenue cycle management structure during the quarter with no disruptions to cash generation, we ended the quarter.
Speaker Change: With cash just over $100 million, reducing our net debt to $515 million from $600 million at June 30th. This reflects net leverage of just under two five times based on the midpoint of our outlook of adjusted EBITDA for the year with.
Speaker Change: With respect to the cash on our balance sheet. We are currently investing that cash and very attractive time deposit accounts and interest rates that are substantially similar to our debt service costs. We expect to use this cash and any cash accumulated during the fourth quarter of 'twenty for early in 2025 to make physician incentive.
Patient payment and other benefit payments, namely our <unk> matching contributions our intent is to reduce any potential borrowing needs. In Q1 2025 before we turn to expected free cash flow generation in Q2, 25 and beyond finally, I'll reiterate that based on our.
Speaker Change: Our results for the first nine months of the year, we have narrowed our expectation of full year 2024, adjusted EBITDA to a range of $205 million to $215 million.
Speaker Change: With that now I'll turn the call back over to Jim. Thank.
Jim: Thank you Sandra operator, let's now open up the call for questions. Thank you. If you wish to ask a question. Please press one and then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command.
Jim: We're using a speaker phone please pick up the handset before pressing the numbers. Once again, if you do have a question. Please press one and then zero.
Speaker Change: And our first question will come from the line of Ryan Daniels with William Blair. Please go ahead.
Speaker Change: Yeah, Hi, everyone. This is Jack on for Brian. Thanks for taking the question you mentioned that you increased internal staffing I believe as part of the RCM transition are you at okay levels now like as we look into fourth quarter and into 2025 or is it still going to be an area that you want to bolster up kind of throw out throughout the next.
Year or so.
Speaker Change: Yes. So we actually believe we are fully staffed I know when we initially move to this hybrid revenue cycle management structure. We noted that we should add approximately 150 head we have actually been able to fully staff. Our teams up and we are in the mid <unk> and we feel that that is appropriate moving forward and of course.
Speaker Change: We will keep an eye on that as we gain additional efficiencies as we move into 2025.
Speaker Change: Okay perfect. Thank you and then just a quick follow up I know like in the release you noted the same unit revenue from net reimbursement related factors increased just from the improved payor mix and modest improvements in hospital contract admin fees on both of these fronts are these two dynamics something we should expect going forward I think the.
Speaker Change: Payer mix was evidenced last quarter as well so maybe just to.
Speaker Change: By that and then is it.
Speaker Change: Is the contract administration fees like is that improvement mainly from renegotiations or is there something additional underlying there. Thanks.
Speaker Change: We will split this up a little bit this is Jim I'll handle the contract revenue with our hospital partners.
Speaker Change: A fair amount of time end of 'twenty two into 'twenty three renegotiating.
Some of those contracts and feel that we're at levels.
Speaker Change: That are appropriate for the services, we provide on a go forward basis, obviously, what we see is pretty stable pricing and remember we're not a redemption relies on a lot of contract revenue. However.
Speaker Change: If a hospital wants to increase the service or looks for additional services. That's always in play. So again, we will look at those judiciously as we move forward, which will be the same same pace in 2025.
Speaker Change: And I take the payer mix question I think you could say, we've pretty much seen about a four quarter reset of sorts for payer mix.
Speaker Change: Know that we've been very transparent in the past that we know what is happening is a little bit tougher for us to put our fingers on the why I think we're going to need to watch this and see how it plays out over the next couple of quarters, and we think it's probably some type of a reset that will level off.
Speaker Change: Okay understood. Thanks for the color and then if I could just slip one final question on the same unit revenue increased again at a pretty decent clip this quarter.
Speaker Change: I think it was up a little over 5% can you just maybe talk about what is in your control to keep the same unit revenue steady and kind of stabilize going forward or is this kind of more like a function of just market growth and what's happening in terms of volume.
Speaker Change: Yes, so I mean of course on our volumes for our neonatology business, we are pretty much takers in volumes. So it is really what's happening in the market I think in the one area. We have had some strength is MSM, we have seen a little bit.
Speaker Change: Acuity is a bit higher there. So we have had some additional visits and we do expect that that will hold as we head into 2025.
Speaker Change: Okay perfect. Thank you again guys.
Speaker Change: Thank you we do have a question from Jack <unk> with Jefferies. Please go ahead.
Speaker Change: Hey, good morning, welcome to Cassandra and congrats to everyone on the corner.
Jack Brian: A couple of things I wanted to touch on here, probably just the two biggest moving pieces I think that are in folks' minds on the restructuring plan and then on the RCM front.
Speaker Change: Uh huh.
Speaker Change: On the restructuring plan.
Speaker Change: The commentary pretty clear I guess two things on that.
Speaker Change: How do you think about modeling that into the fourth quarter on the revenue line are we approaching that sort of run rate around the $200 million that you would think on a quarterly basis or is it still a little below that trend.
Speaker Change: It was in the third quarter and then in terms of EBITDA contribution can you confirm if there was any.
Benefit in the third quarter, if you'd expect any benefit in the fourth quarter, that's embedded in the guidance on that front.
Speaker Change: So I think on the practice dispositions and on the revenue topic, you will see that the impact of the practicing physicians in our non same unit activity. We mentioned that during the quarter that was about $20 million and if you look at the year to date on that is about $50 million.
Speaker Change: We did last quarter, let to know that most of that activity is slated toward the end of the year and it is really back loaded mostly in the fourth quarter. So while we do anticipate getting to that $200 million of revenue. It will be by the end of the year with the most of that to come in the fourth quarter.
Speaker Change: And on the EBITDA contribution we did put out a number in may.
Speaker Change: <unk> $30 million is our expectation of what would flow through from the full suite of our portfolio restructuring. We do expect that we will see about a third of that in 'twenty four but.
Speaker Change: The rest of that will roll into 'twenty five.
Speaker Change: Okay got it that's really helpful.
And then maybe on the RCM front I mean, it sounds like everything is going according to plan their.
Speaker Change: Obviously 22, and 23 were both years, where that was a pretty material headwind to revenues and earnings.
Speaker Change: Should you think about the opportunity.
Speaker Change: Call. It 12 to 24 month basis, if everything continues to go according to plan and Rev cycle, what sort of.
Speaker Change: Is there any framework you can build out for how we should think about what that could mean.
Speaker Change: Either a revenue or an EBITDA front.
Speaker Change: Yeah. So we're a little early on being able to kind of quantify what we expect we will have in terms of improved performance as we move out of 'twenty for one thing. We were clear about is 2024 was just going to be all about stabilization. The fact that between March of 2024 in September.
Speaker Change: 2024 that we moved $1 6 billion of revenue and 800 million a day are with no material disruption is upbeat. So we're very pleased about the collaboration and now we're going to move to automation and looking for ways. We can improve performance, while the guide house, our vendor staffing it.
Speaker Change: Up to speed and fully trained and our teams are up to speed. We're looking to the future. We absolutely expect there will be improved performance, but we're really not ready to quantify what that may be and when.
Speaker Change: Yeah.
Speaker Change: Awesome, Thanks very much.
Speaker Change: Yes.
Speaker Change: Thank you as a reminder, press one and then zero for questions and we do have a question from Peter Chickering with Deutsche Bank. Please go ahead.
Speaker Change: Hi, there this is Kieran, Ontario, Peter Thanks for taking the question.
Kieran: I just wanted to ask if you've seen any improvement and maybe your ability to secure additional funding from hospitals, whether that be in the form of subsidies or something else.
Kieran: I know you've commented before that you don't get subsidies from the majority of your hospitals, but <unk>.
It sounds like to us there's still a lot of specialty groups out there that are that are kind of asking actually using and getting them in a lot of cases. So I was just wondering if you think that might be an opportunity in 2025.
Jim: Yes, Jim.
Speaker Change: We know there's a lot of noise out there on other specialties, particularly on the adult side.
Speaker Change: Some of that contract revenue from our hospitals, our relationship with our hospital partners has been very stable and where we have needed.
Speaker Change: Again, because of inflation and wages or inflation and the needs of staffing we have been successful in negotiating increases to those and again as I said earlier on the call.
We've largely got a number of those done.
Speaker Change: Late 'twenty, two and through the beginning of 2023.
And again, if we believe we need those associated with increased costs. We will approach our hospital partners. If its a new service line that would require us to have contract revenue, we always negotiate those.
Speaker Change: Fully at the beginning of the contract. So there is an opportunity there, but I don't think that we have the same.
Speaker Change: Same requirements that some of the adult service lines out.
Speaker Change: Got it that's helpful. Thank you and then and then second just won another another good cash flow quarter.
Speaker Change: It seems like the cash flow generation should benefit from RCM and the divestitures. So just wanted to see how youre thinking about getting back into M&A in the near term now that you're under two times leverage.
Speaker Change: Any commentary you can provide on the pipeline would be great. Thank you.
Speaker Change: Yes, we're pretty happy with the pipeline we have on the core services.
Speaker Change: So we think theres a real opportunity there.
Speaker Change: Coming up.
Speaker Change: End of the year here and then into 'twenty five so our focus is really looking at both our inorganic and organic pipeline, but we think there is a meaningful number of acquisitions that we can start down the path on now that we've righted the ship in terms of some of these other.
Speaker Change: We are facing.
Speaker Change: Okay.
Speaker Change: And does that answer your question.
Speaker Change: I'm all set thank you. Thank you.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: I have a question, yes, we do have a question from AJ Rice with UBS. Please go ahead.
Speaker Change: Thanks.
Speaker Change: It's been a little echo there, but anyway.
AJ Rice: Can you maybe just more broadly on the cash flow question.
AJ Rice: Obviously, there's the revenue cycle management.
AJ Rice: You agree work, there's the portfolio restructuring.
Speaker Change: Sense of what a normalized cash flow from operations or even free cash flow.
Speaker Change: Run rate is that you're generating at this point to raise again.
Charlie: Hey, Jay it's Charlie.
I can give some historical reference which is that our experience in general has been our conversion of EBITDA to operating GAAP operating cash flow is typically been in a kind of 60% to two thirds range.
Charlie: That's probably a good baseline to think about.
Clearly this year, we've got a lot of moving parts, but I think looking forward thats, probably a big kind of set of guardrails to think about.
Speaker Change: Okay, and then as you said.
Speaker Change: You said, you've got a couple of things that are committed cash flows committed to.
Speaker Change: The first quarter of 2005 at this point.
Speaker Change: You just asked about M&A, but I'm wondering more broadly share.
Speaker Change: Share repurchases.
Speaker Change: And other things.
Speaker Change:
Our capital deployment, maybe just give a little update on your thinking about capital deployment strategy from here.
Speaker Change: Yeah, So as we actually head into 'twenty five we of course expect to use all that cash on our balance sheet early in the year, but as we move into 'twenty five and we get our budgets finalized and we see if we're in a place and we may have excess cash. We of course, we will look at all of the options available to us to deploy capital when you were talking a bit about <unk>.
Speaker Change: We look always at share repurchases potentially paying down debt or some combination of those but I think be the message. There is that we have optimal flexibility as to what we should do with our excess cash.
Speaker Change: Okay, maybe just one final point of clarification on the $30 million from the portfolio restructuring.
Speaker Change: Is there any stranded overhead or is that incorporate getting rid of any corporate.
Speaker Change: Expense that doesn't need to continue because of the downsizing of those.
Speaker Change: Practices.
Speaker Change: I guess I would just say $30 million is a hard number or is there may be other opportunities over the next year or two.
Speaker Change: Q I know this $30 million was our estimate I wouldn't call. It a hard number there is we have the potential for that to actually come out a little bit better when we get through all of this activity, but it is intended to be the full suite of cost that supported the practices that are exiting the organization, we will always look for.
Speaker Change: Opportunities for additional efficiency as we move into 'twenty five and that's really part of what we're doing right now with our 25 budget planning.
Speaker Change: Okay. Thanks, a lot.
Speaker Change: Sure.
Speaker Change: Thank you as a reminder present, one and then zero quick question.
Speaker Change: Okay.
Speaker Change: And we have no further questions at this time please continue.
Speaker Change: Yes.
Speaker Change: Thank you operator, and thank all of you for joining the call. This morning have a great day.
Thank you that does conclude our conference for today. Thank you for your participation and for using AT&T Executive teleconference. You may now disconnect.
Speaker Change: Yeah.
Speaker Change: Yeah.
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