Q4 2024 Pediatrix Medical Group Inc Earnings Call
Steve Martin, Jeff Higgins Future4adventures.com
[music]
[music]
Hollying's Ride Kara Hacker Adele Aero K everyone Kijiah
Tammy: Thank you for standing by. My name is Tammy and I will be your conference operator today. At this time, I would like to welcome everyone to the Pediatrics Medical Group, Inc. Fourth Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
Tammy: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad.
Speaker Change: If you would like to withdraw your question, again, press star 1. Thank you. I would now like to turn the conference over to Charles Lynch. Please go ahead, sir.
Thank you, operator. Good morning, everyone.
Speaker Change: Welcome to our fourth quarter earnings call. I'll quickly read our forward-looking statements and then turn the call over to Mark.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Any forward-looking statements made during this call are made as of today.
Speaker Change: and Pediatrics undertakes no duty to update or revise any such statements whether as a result of new information, future events, or otherwise.
Speaker Change: Important factors that could cause actual results development 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.
Speaker Change: In today's Remarks by Management, we will be discussing Non-Gas Financial Metrics.
Speaker Change: With that, I'll turn the call over to our CEO, Mark Gordon.
Mark Gordon: Thank you, Charlie, and good morning, everyone. Also with me today is Kasandra Rossi, our Chief Financial Officer.
Mark Gordon: First, I want to thank Charlie, who will be departing at the end of this month. Charlie's contributions to our strategic goals and the communication of those goals to you will be missed. Please join me in wishing him well in his future endeavors.
Speaker Change: I want to begin by thanking our Board of Directors for reappointing me as Chief Executive Officer after serving as Executive Chair. I'm excited to return to this role and particularly at this point in time for the company following a period of such significant change.
Mark Gordon: As I'll explain in a few minutes, I returned out of...
optimism about our prospects.
Mark Gordon: I will begin with our fourth quarter results and then spend time on our strategic priorities for 2025 and beyond.
Mark Gordon: So we finished 2024 with very strong fourth quarter and therefore year-end results. Our same-unit revenue growth was strong, driven by continued favorable payer mix and positive volumes. Our same-unit cost trend continued down compared to the third quarter as well.
Mark Gordon: As a result, the adjusted EBITDA of $69 million was significantly above the expectations we provided in our updated guidance last year.
Mark Gordon: From a strategic standpoint, we completed our portfolio restructuring on time, exiting practices that represented 200 million in annual revenue and a clear drag on earnings with their requisite overhead.
Mark Gordon: I work very closely with our operating teams, who are incredibly focused on this goal. Their very hard work ensured that we were able to begin 2025 with a more focused portfolio and a more efficient operating team.
Mark Gordon: Similarly, the successful transition of our revenue cycle management function to a hybrid model enables us to focus this year first on ensuring the stability of our now very improved RCM process, and then on continued improvement in our performance.
Mark Gordon: Next, I'll add my thoughts on our strategic priorities following our portfolio restructuring and RCM transition.
Mark Gordon: First, we start with a sector-leading balance sheet with net debt of about 1.7 times. This affords us both flexibility and opportunity, which is most important in turbulent times.
Mark Gordon: We now have a smaller footprint resulting in a more focused and more efficient organization and our priorities are quite clear.
Mark Gordon: We will first and foremost prioritize patient-centric care by providing optimal support to our clinicians and our practices.
We will seek to strengthen our hospital
Mark Gordon: And we will look to be good stewards of our improved financial position and our cash flow.
I also fully believe that the net result
Mark Gordon: Following these priorities can be consistent, visible, and strong operating results.
Mark Gordon: With that in mind, and based on a robust budgeting process in which we focused on both the headwinds and opportunities we face in 2025.
Mark Gordon: This morning, we provided a preliminary expectation of adjusted EBITDA of between $215 and $235 million.
Mark Gordon: Kasandra will shortly provide some additional thoughts, but we believe that this represents a rigorous, yet realistic and achievable outlook.
Mark Gordon: for our business this year, which we will obviously revisit and update as appropriate.
coming words.
Mark Gordon: I'd anticipate that some of you are wondering, with the strength of our business and all that we accomplish, why not guide to a higher number?
Mark Gordon: Bear in mind that adjusted for the leap year at 2024 adjusted EBITDA was roughly 220 million dollars So at midpoint of 2025 guidance of 225 million is of course an increase
Mark Gordon: As I began my remarks, I returned to Pediatrics as CEO because I see a real opportunity to further transform the company through better hospital relationships, better recruiting, which by the way will report to me, and growth and opportunities that both of these will afford.
Mark Gordon: We are of course mindful that we are in a period of great uncertainty with headwinds in the healthcare provider space.
Mark Gordon: These headwinds make us realistic about the year ahead, but in no way do they counter our optimism.
With that, I'll turn the call over to Kasandra.
Kasandra: Thanks Mark and good morning everyone. I'll provide some details of our fourth quarter results and then I'll discuss some of the parameters of our preliminary 2025 outlook.
Kasandra: Our consolidated revenue growth of just over 1% reflected strong same-unit growth of 8.7%.
Kasandra: largely offset primarily by the impact of our portfolio restructuring activity.
Kasandra: In total, this impact was just over $35 million, reflecting a large share of the annualized $200 million in revenue that our restructuring represented, based on 2023 financials.
Kasandra: On the cost side, the decline in practice-level SW&B expenses also reflected our portfolio restructuring.
Kasandra: On a same unit basis, the growth in these expenses continued to decelerate as compared to both the prior year period and on a sequential basis.
Kasandra: I'll note that while this trend is encouraging, same-unit salary expense growth continued to be above the average range of 2-3% that we saw pre-2022.
Kasandra: The increase in our G&A expense on a year-over-year basis primarily reflected incentive compensation based on strong financial results.
Kasandra: The additional staffing we added through most of 2024 as part of our hybrid RCM model was offset by efficiencies we have created through the year through staffing reductions across other shared services.
Kasandra: Moving to cash flow, generated $135 million in operating cash flow in the fourth quarter compared to $73 million in the prior year.
Kasandra: Partially driving this strong cash flow was a sequential decline in our accounts receivable DSO, which ended the year at 47 and a half days compared to 51 and a half days at September 30th, which as you may recall we attributed to RCM transition related activities.
Our capital expenditures were $3.5 million.
Kasandra: As a result of this cash generation, we ended the year with cash of $230 million, reducing our net debt to $386 million from $515 million at September 30th.
Kasandra: This reflects net leverage of just over 1.7 times based on our reported 2024 adjusted EBITDA.
Kasandra: With respect to the cash on our balance sheet, we expect to use a good portion of that cash to fund Physician Incentive Compensation payments and other benefit payments.
Kasandra: namely our 401k matching contributions that we always make during the first quarter of the year and we will not have to draw on our revolver.
Kasandra: As we move through 2025 we would expect to build cash again and Mark and I will work with our Board of Directors to determine our best course.
Kasandra: Turning to our preliminary 2025 outlook, as Mark said, this outlook is the result of a robust budgeting process and also reflects the finalization of our 2024 portfolio restructuring plan.
Kasandra: From a modeling perspective, this outlook contemplates full-year revenue of approximately $1.8 billion.
Kasandra: It also contemplates full-year DNA expense in the range of $220 to $230 million compared to our 2024 DNA of $238 million.
Lastly, I'll note the normal seasonality of our quarterly results.
Kasandra: Within our expectations of full-year adjusted EBITDA of $215 to $235 million, we anticipate that our first quarter 2025 adjusted EBITDA will represent approximately 17% of that annual expected range.
Kasandra: There are a number of known factors we incorporated into our 2025 Outlook. The first of these is the expected EBITDA benefit of our Portfolio Restructuring Plan.
Speaker Change: Recall that our total expected benefit is approximately $30 million on an annualized basis, roughly a third of which we realized during 2024. In addition, as Mark referenced, 2024 was a leap year, which contributed about $4 million in adjusted EBITDA last year, all else being equal.
Speaker Change: Finally, we have not factored any contribution to our results from M&A activity in 2025. While we are always pursuing a pipeline of additions to our core business, the timing and magnitude of any contribution is not incorporated into this outlook.
There are also other factors that we contemplated.
Speaker Change: First, while we are very pleased with the RCM transition that we completed in September of 2024, our focus for the first half of this year is in maintaining the stability of our performance under this hybrid model.
Speaker Change: while looking for additional improvements in that performance through process improvement and automation initiatives.
Speaker Change: Second, payer mix proved to be a strong positive factor in our 2024 operating results. This is not a business driver that we can control and as a result we are not contemplating any trend change in 2025 which could impact our results in either direction.
Speaker Change: Finally, I noted that our underlying practice level cost trend improved throughout the second half of 2024. That trend remains above our historical range of 2 to 3 percent.
Speaker Change: This area is a key focus of our operating team, but it's premature at this point to presume continued deceleration, particularly given the still inflationary environment we're in, and the significant amount of recruiting and retention activity required across our organization.
Mark Gordon: With that, now I will turn the call back over to Mark.
Mark Gordon: Thank you, Kasandra. Operator, we will now open the call for questions.
Mark Gordon: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue.
To rejoin a question, simply press star 1 again.
Speaker Change: And your first question comes from the line of AJ Rice with UBS. Your line is open.
Hi, everybody. Good luck, Charlie, and welcome back, Mark.
First
Speaker Change: Maybe just to drill down a little bit more on the 25 Outlook, there's a lot going on with the restructuring of the operations and some of the other things you've called out. I wonder if you could just speak to what sort of level of embedded same facility volume growth
Speaker Change: and pricing expectations, are you baking in, and any other same store metrics to give us a little better sense of what the underlying trends are when you normalize for everything else that's going on.
Speaker Change: Sure, so for volume, I guess I'll take them one at a time. For volume, we did have a bit of acceleration of volume in the back half of 24 with NICU days coming in, you know, just under 3% and births were up about 30 basis points in Q4.
Speaker Change: The other stats for Neonatology, Lent-to-Stay was flat, Admin Rate was slightly up.
Speaker Change: But, you know, we are takers of volume for the most part, so we did include flat volume in our outlook for 2025. Talking about MFM, we did see mid-single-digit growth there all year, and that was really based on a little bit of higher acuity resulting in some additional visits to our MFM clinics.
Speaker Change: But from a modeling perspective, we did assume that volume would be flat.
Speaker Change: Looking at pricing, we talked a little bit about payer mix and we know that payer mix was a massive tailwind for us in 24, but we do anticipate that that will level off and of course as we work our way through 2025 that comp will get a little bit tougher, so we do have that flat.
Speaker Change: On the managed care side, we talked about the fact that we expect 2025 to be pretty stable, which actually will take as a win in the hard and tough environments that we're operating in where payers still are a bit immobile.
Speaker Change: And then on the RCM side, collections were really strong in the back half of 24, and the metrics are looking great.
Speaker Change: But we did build in some improvement in 2025 into our outlook, but we are really focused on stabilization. And as we move through the year, you know, we'll see if we can kick that up a bit with automation initiatives and process improvement.
Speaker Change: So we do see that flattening out, but if we can make some additional headway there, you know, we'll build that in as we move through the year.
Speaker Change: Okay, that's great. Let me, maybe just on the follow-up question, we heard a lot, we're hearing a lot from the hospital operators about
Speaker Change: anesthesiology, and more recently we've heard hospitals talk about radiology. I wonder in your NICU management relationships, are you seeing any opportunities for improved economics? Any comment on what those discussions are like?
Ah-hem
Speaker Change: We have strong and continuous conversations with our hospital partners and that's always been a part of what we do. So we would expect going forward that that's going to continue to be part of what we do. But we're not baking into our forecast any increase. So we'll report as we go along.
Okay. All right. Thanks a lot.
Speaker Change: Next question comes from the line of Jax Levin with Jeffries. Your line is open.
Jax Levin: Hey, thanks, good morning, congrats on the quarter, and thanks to Charlie, and congrats stepping back in to Mark. Hopefully that covers the pleasantries. I just wanted to touch back.
Speaker Change: And I think you gave a lot of color. It's really helpful.
I guess just backing out the leap year.
Speaker Change: putting in the 20 million from the restructuring, you get to like the 240 level, right? And so, taking all the rest of the commentary, I guess the expectation is...
Speaker Change: that wage inflation is going to outstrip high core rents assuming payer mix is flat in the guide like you said Kasandra, is that the right way to think about it and sort of to get to that sort of five to twenty five million dollar
Speaker Change: versus a 2040 sort of starting point when you adjust for those first two items. Am I thinking about that the right way?
Speaker Change: I think that when we thought about the appropriate range, I think about the comments that Kasandra made and then I made earlier.
There are enough headwinds in the provider's face.
Speaker Change: that just make us cautious. You know, and obviously, throughout the economy, this is a time of real uncertainty.
So that tempered our thinking.
Speaker Change: And importantly, it's mid-February, but that's why they say we'll update people. So there's certainly...
Speaker Change: It's an opportunity to do better. We just wanted to be careful in our guidance. It wasn't because of a negative trend or something specific like that. It was just being mindful of the environment that we're in and the uncertainty.
Speaker Change: Okay, got it. That makes sense and I appreciate that given, I guess, you know, how much all of us are checking Twitter on a daily basis for sort of nebulous headwinds. One follow-up here. Maybe taking a step back.
Speaker Change: is something that's perhaps positive that's coming out of that same sphere of influence.
There's talk now that's a little more positive on IVF.
Speaker Change: I think it's something that's pretty clearly could be a large tailwind for you on a multi-year basis.
Speaker Change: Maybe in terms of, are you seeing any sort of benefit there? How should we think about that opportunity for you? Is this something you've looked at or something you're contemplating as you look out a few years?
Speaker Change: But what I'd say is that we agree that it is a possible tailwind for us. We have not calculated that yet, and it's not incorporated in our numbers, but we do think that is a potential strong tailwind.
Got it. Thanks and congrats again on the quarter.
Thank you. Thank you. And for the pleasantries.
Speaker Change: Next question comes from the line of Fleet Mayo with Lirien Partners. Your line is open.
Fleet Mayo: Hey thanks, good morning. First a two-part question. One, Kasandra, what do you think the earnings tailwind was in 2024 from
Speaker Change: the improving payer mix. And two, I don't think that that mix development was incorporated within the initial plan that you developed last year. So I'm curious when you isolate that one factor, Mark, how do you think about the overall performance of the business in all the other areas? Thanks.
Mark Gordon: Sure, so on the pay-or-mix tailwind, I think if you kind of take Q4 and you look at the same unit growth of about 9% with about 6% of that coming from pricing, pay-or-mix is about a third of that. So it's a meaningful number for 2024.
and Mark Against the Wall.
Mark Gordon: I was going to say, because of structural changes in the way, you know, payers, there's been a migration toward exchanges, we don't see this necessarily as stopping or reversing, but so this very well could hold.
but we can't we can't positively state that.
Mark Gordon: Yeah, this is about the fifth quarter in a row that we did see some some tailwind in payer mix and like Mark said if it is a permanent shift we would expect that to level off but like we mentioned in our prepared remarks you know it going either way can of course move our move our numbers in either direction.
Mark Gordon: Do you know what percent of your commercial revenues are coming from patients on the exchanges now?
Mark Gordon: We don't have that number. Yeah, we usually can't see that with with any specificity. So it's a primary reason why we, you know.
Mark Gordon: can't truly validate that the exchange migration is the key driver. We don't disagree with it, but we just can't validate it through our data.
Mark Gordon: Right, okay. And maybe just one last one, Mark, just you reference in your prepared comments some...
Mark Gordon: and things about the business that give you, you see great opportunity I think was your quote. Just what are some of the areas where you have the most optimism as you think about
Yeah.
for 2025. Thanks.
I've seen two of them that I thought about.
Speaker Change: Yeah, well, I think it's short and long term and we're on it right now. There are two areas that I think are really key to our future success. One is really, really systematic work on our hospital relationship.
I mean, it's old-fashioned.
Speaker Change: call it grinding or blocking and tackling but that's that's what we're going to be very focused on
Speaker Change: really go in hospital system by hospital system to make sure we have the strongest relationships. And that's both with ones where we enjoy a relationship now and also where there are prospective opportunities.
Speaker Change: The second is in recruiting, you know, we are nothing but our people.
Speaker Change: And I think with another benefit of being more streamlined is we can really focus on how we do the best job possible in attracting and retaining amazing clinicians.
Speaker Change: we have for a long time had a happy home for people. We want to make sure that we really maximize what that can provide. So that might seem amorphous but it is the core of what we do and we're going to be all over it. We already are.
Okay, thanks.
Speaker Change: Again, if you would like to ask a question, press star 1 on your telephone keypad.
Speaker Change: Next question comes from the line of Peter Chikurin with Dolce Bank. Your line is open.
Speaker Change: Hey guys, you got Benjamin Shaver on for PETO. Congrats on a nice quarter. I actually have a couple of questions on, I guess I'll hit pricing first.
Speaker Change: So obviously very, very strong in the fourth quarter. I was just wondering how much of that 5.9% came from improvements in hospital contract admin fees?
And then the second part of that question is...
Speaker Change: Price was very strong in the second half of this year and I was wondering if that sort of comps into the first half of 2025. Thanks.
Speaker Change: So on the contract revenue hospital admin fees for the pricing component it was probably just under a third there as well.
and then on the pear mix.
Speaker Change: As how that flows into 2025, we're really just looking at flat pricing overall between payermix, managed care, contract admin fees, and then a little bit of a bump up in RCM.
collections.
Bye.
Speaker Change: Yeah so really we considered the primary and urgent care exit as part of the entire portfolio restructuring so that's included in that 30 million dollar lift in EBITDA of which we realized about a third of that in 24 and the rest will come through in 25 but it wasn't a discreet event it was really an entire portfolio restructuring. Yeah and most of it was not related to primary and urgent care. Right. It was to the really broad array of ambulatory practices.
and importantly, the overhead that accompanies that.
Speaker Change: Gotcha, that makes sense. That's super helpful. And then I said the last question on sort of your capital allocation. You mentioned that you obviously finished the quarter with a lot of cash on the balance sheet you guys are generating.
Speaker Change: cash as well. You mentioned you had no real plans for M&A and you're going to mainly be using that cash just support and continue to invest in your business. I assume that most of the stuff that you mentioned happens every year right?
I was just wondering are you going to add me?
Speaker Change: clarity on maybe any leverage targets that you're looking at and sort of how you're thinking about returning cash to shareholders.
Speaker Change: Thanks. Well, as I mentioned in my prepared remarks, you know, and we all know it, in a period like this with a lot of turbulence, we think having an incredibly strong balance sheet is very, very helpful.
Speaker Change: It provides us with opportunities in a lot of areas and that can include M&A.
Speaker Change: But, you know, it's early in the year, and we'll watch how the year progresses, how the sector progresses.
Speaker Change: and then, as Kasandra said, we'll work with our board of directors to decide what our best course is.
Speaker Change: Do you think we need to do something with paying down debt further?
Speaker Change: something else to return money to shareholders, we'll look at what the best use of our money is. But, you know, this has been a sector that has not rewarded people for having high leverage and we anticipated that and we also learned from it. So we're very pleased to be
Be where we are.
Speaker Change: Yeah, that makes a lot of sense. Thanks, that's super helpful. That's all I have, but congrats again on the nice quarter.
Speaker Change: There are no questions at this time. I would now like to turn the call back over to Mark Ordan for closing remarks.
Mark Ordan: Thank you all for tuning in today and for your support, your good questions, and again, Charlie, we wish you all the best along with our thanks.
Have a great day.
This concludes this conference call. You may now disconnect.
Slow, Dramatic Music
[music]
[music]
Thanks for watching!