Pediatrix Medical Group Q2 2023 Earnings Call Transcript

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August 3, 2023

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. 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. And as a reminder, your call today is being recorded.

Operator

I'll now turn the conference call over to your host Charles Lynch. Please go ahead.

Speaker 1

Thank you, Alan, and good morning, everyone. 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 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 facts Any forward looking statements made during this call are made as of today, and Pediatrics undertakes 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 ks, Its quarterly reports on Form 10 Q and its current reports on Form 8 ks, including the sections entitled Risk Factors.

Speaker 1

In today's remarks by management, we will be discussing non GAAP financial metrics. 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 ks and finally on our website at pediatrics.com. With that, I'll turn the call over to our CEO, Doctor. Jim Swift.

Speaker 2

Thank you, Charlie, and good morning, everyone. Also with me today is Mark Richards, our Chief Financial Officer. Our operating results for the Q2 continue to track very near our expectations. Patient volume trends decelerated somewhat from the Q1, but remain stable to positive. Within our hospital based services, NICU days increased year over year, offset by softer volumes in the pediatric ICU and the pediatric floor.

Speaker 2

We attribute this to a return to normal summer seasonality after a number of years of distortions from COVID and non seasonal respiratory diagnoses. And we anticipate that volumes in these settings will increase seasonally as we move through the fall and into the winter. On the ambulatory side, our volume growth was driven by maternal fetal medicine and pediatric cardiology. Certain of our inventory subspecialties such as our ENT practices saw a similar seasonal deceleration in volume growth to what we saw in both the peds ICU and the peds floor. And similarly, we would anticipate a seasonal reacceleration in patient traffic as the school year begins.

Speaker 2

Turning to rate, our reported pricing was quite strong, which largely reflects the progress we've made in improving Our practice level compensation and benefits expense reflected a deceleration in underlying salary growth as compared both to the Q1 and the Q4 of 2022. Additionally, our G and 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 $75,000,000 in borrowings. As you'll 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 $235,000,000 $245,000,000 Now I'll touch on a number of business and strategic priorities. First, as I mentioned, our 2nd quarter results reflect improved AR collections, which in turn reflect the efforts we put forth to staff our front end activities internally.

Speaker 2

We remain focused on further improvement through the second half of this year. 2nd on 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.

Speaker 2

As a good example of this, we finalized an arrangement with Blythe Dale Children's Hospital, the only independent specialty children's hospital in New York State, under which pediatrics affiliated clinicians will provide pediatric hospitalist and intensivist services. We're excited that the opportunity to work with the leadership of Blythe Dale and to help ensure that patients they have received the highest quality care possible. Within our primary urgent care platform, we're also expanding. In the Houston market, we opened our 1st de novo pediatric Branded clinic this last fall, and we are scheduled to open an additional de novo clinic during the second half of this year. In both Houston and Orlando, we are actively rebranding our acquired clinics under the pediatrics name.

Speaker 2

And lastly, during the second half of twenty twenty three, We are planning to open 3 de novo clinics in the Denver market, marking our entry into a 3rd 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. Lastly, I'll briefly comment briefly on the No Surprises Act. As we've discussed at length in the past, Our focus has been maintaining strong payer relationships and are predominantly in network status, while at the same time undertaking a comprehensive thoughtful approach to the arbitration process in those instances where we're in and out of network position.

Speaker 2

Our success rate in arbitration continues to lead 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 an 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 1st and foremost benefits our patients, but also represents an economically appropriate level of compensation With that, I'll turn the call over to Mark Richards.

Speaker 3

Thanks, Tim. Good morning, everyone. I'll provide some additional details for the quarter. First, as Jim mentioned, we continued to decrease both our gross net accounts receivable in the 2nd quarter. Our net AR days at June 30 were 49, down from 51 at March 30th and 53 at December 31st for a 4 day improvement year to date.

Speaker 3

In turn, This improvement supported the contribution to our revenue growth from the rate that we reported this morning. Quickly turning to our P and 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 Q1 of this year and to Q4 of 2022. Within our practice level SW and 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 and L, G and A expense remained under $60,000,000 in the quarter.

Speaker 3

And within our financial outlook for the full year of 2023, We continue to anticipate that our G and A will be less than 12% of revenue. Turning finally to our balance sheet. We repaid roughly $73,000,000 in revolver borrowings during the Q2 and our total debt At June 30 was $675,000,000 for net leverage of 3 times based on trailing 12 adjusted EBITDA. Notably, Over the past 12 months, we have repaid a total of $125,000,000 in borrowings on our revolver and term loan A. We anticipate that we will generate sufficient cash flow to repay all of our revolver borrowings during the Q3 and begin to build a cash position following that.

Speaker 3

We believe this is appropriate given our outlook that we may commit capital to acquisitions in the coming year. Keep in mind that our liquidity position is very strong with total revolver capacity of $450,000,000 With that, I'll turn the call back over to Jim.

Speaker 2

Thank you, Mark. Operator, let's now open up the call for questions.

Operator

We'll first go to the line of Pito Chickering with Deutsche Bank. Go ahead.

Speaker 3

Hey, good morning guys. Thanks for taking my questions.

Speaker 4

Can you help us bridge the EBITDA margins from 2Q into the back half a year? And then can we use the margins by margins back half of the year as a launch pad for 2024?

Speaker 3

Hey, how are you, Pito? This is Mark Richards. Let me help you with that and Unpack a couple of items that are within our margins, specifically in the Q2 of this year. You will note That same store rate growth quarter over quarter accounted for about $12,500,000 Despite the fact that our compensation salary and benefits line item was up quarter over quarter by $23,000,000 $13,000,000 of that was related to salaries, Wages and comp and the remainder, call it about $9,500,000 $10,000,000 was related to our incentive compensation plan. So rate growth same store $12,500,000 incentive comp quarter over quarter increasing by about $10,000,000 And what I want to call your attention to there with respect to the margin for the quarter is that despite Corporate wide improvement in rate growth that isn't necessarily indicative at a practice by practice level.

Speaker 3

And as a result of the 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 as our RCM improvement Stabilizes across the portfolio, so will the related incentive compensation.

Speaker 4

Okay. Fair enough. DSOs have come down 5 quarters in a row. So is this all Our Centimeters, is this just a change of process? And also have you been able to collect any of the receivables that have been previously written off?

Speaker 3

Sure. And yes, I'll even expand on your observation there over the past 12 months, our DSO has come down by 9 days. The vast majority of this is associated with rate improvement. And despite the fact that we are at 49 days here at the end of the And quarter there is still room for improvement and our guidance anticipates that improvement over the coming quarters.

Speaker 4

And then like have you guys been able to recover any of the the ARR that was written off last year?

Speaker 3

Yes. Our revenue recognition is an experience based model. So to the Dan, we have been catching up on prior reserved receivables. To the extent they're collected, those amounts are flowing through to the P and L, which is a very small component of The 2.5% plus same store rate growth. But it is negligible component of that.

Speaker 4

Perfect. Great. Thanks so much.

Operator

Certainly. One moment please for our next question. And that will come from the line of Brian Tanquilut with Jefferies. One moment please.

Speaker 5

Thanks for taking the question. I guess, Jim, you guys called out same unit salary Being up because of incentive comp, so that's probably a good sign. But how do we think about the opportunity to Reset or adjust back down the that specific cost item across the line.

Speaker 2

You want to stop and follow-up? Sure, sure.

Speaker 3

I mean those incentive plans are in place and they're contractual and in most Cases renew automatically from year to year. So it really is dependent on a practice specific discussion. And

Speaker 2

Brian, we're having some of those conversations just internally across the practices to make sure that we're number 1, 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 Be competitive in some of these areas, but that's an active conversation this year and into 2024.

Speaker 5

Got it. And then, Mark, obviously, free cash flow or cash flows in general were strong. Some of this is collecting some of that AR, right? But As we look forward, I mean, what do you think is the right way to think about your more normalized cash generation?

Speaker 3

Well, you're right. We have had some lumpiness over the past 12 months with respect to that. The balance sheet has flexed, of course, from quarter to quarter. Our bonus payments go out in the Q1. Therefore, in the Q1 of the year, we were a net borrower, But I would think about that as the year tails on, that borrowing coming down To 0 here in the Q3 with free cash flow then building up as we approach the end of the year.

Speaker 5

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.

Speaker 2

Yes. How should we

Speaker 5

be thinking about the margin differential between the core or the legacy businesses and this, This new strategy of yours. Thanks.

Speaker 1

Hey, Brian, it's Charlie. I think your best rule of thumb is as these clients are Sure. They're pretty comparable to or a little bit accretive to our overall margin profile. Keep in mind, we've got experience in Mark, it's in Houston, Orlando with pre existing clinics with pre existing patient traffic, albeit only on the urgent care side and not primary care. So that's a little bit new ground, but that's been our experience.

Speaker 1

And then obviously with the new openings, another opening in Houston this year And if you in Denver, there'll be a ramp period where we'll sustain some startup losses as we get those clinics opened, staffed and then build Traffic.

Speaker 2

Yes, Brian, it's Jim. I'd just add that it's an important market for us with our presence In the newborn nurseries, in the NICUs, in the PICU 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.

Speaker 5

Awesome. Thank you, guys.

Operator

We'll go next to the line of Kevin Fischbeck with Bank of America. Go ahead. Mr. Fischbeck, we've accidentally released your line. If you could please press 1 then Sorry, Kevin Fishback's line has re queued.

Operator

We will open up that line. Go ahead.

Speaker 6

Hi. This is Cynthia Gutierrez on for 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 collections versus rate update

Speaker 3

Sure. As I said earlier, the vast majority of that is driven by improved collections, Which directly corresponds if you look at the balance sheet, AR is down, Which of course is driving a piece of that as well as the DSO coming into place. So it's primarily A reversion to a normalized reserve rate, which is still ongoing.

Speaker 6

Thank you. And then, on the No Surprises Act, can you talk about what you're seeing and how the process is working and what your win rate is compared

Speaker 1

Yes, I'll touch on it and let Jim add some more color. As I think you're aware as CMS reports, And the average win rate from initiators of arbitration cases, which is almost exclusively providers, is just over 70%, like 71% Last report, we've quoted in the past, success rates in the range of 75% plus and In a linear fashion, our success rate has actually improved over some time. Jim, you might want to add some color. Yes.

Speaker 2

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, the QPA end markets and not really this ghost contracting That we continue to improve upon. So we're very proud of the team leading this and feel strongly that we'll continue to engage with payers. We really want to be in network, but to the extent we're out of network, we will participate in the arbitration process.

Speaker 6

Thanks.

Operator

We have a follow-up question from the line of Peter Chickering with Deutsche Bank. Go ahead.

Speaker 4

Good morning. Thanks for letting me come back in. One more margin question for you. It looks like the back half of your guidance is around 11%. And while I know you aren't giving 2024 guidance, can you help us think about using that 11% bridge into 2024 kind of what are the headwinds and tailwinds

Speaker 3

Be concerned despite the improvements that we have seen, we're not in a position at this point to provide 2024 guidance. Obviously, where we end up this year with our RCM efforts and the related financial impact That will be heavily driving our 2024 forecast and related guidance.

Speaker 1

And Pito, just one last piece and it's a little bit more related to Q23 than 2024, 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, How to close to this quarter. One thing to think about is the way we view it, which is here in the Q2, we've kind of passed something of a high watermark In the delta between overall compensation trend and top line trend, which educates us about our outlook for remainder of this year and hopefully you as you think about exiting and going into 2024.

Speaker 4

Okay, great. And then, look, you guys have been shrugging off The risk around the NSAO just been crippling other practices. And I appreciate your commentary around the kind of network exposure. I guess, As you look at sort of contracting with managed care for next year, I mean, could you

Speaker 3

just sort of talk about kind

Speaker 4

of what you're seeing Rate increases versus historical ranges, that'd be helpful.

Speaker 2

Well, I'll start and then Charlie can follow on. I think one of the things we're Shrugging off anything related to No Surprises Act. Obviously, we're as I've said on other calls, these are the relatively early innings of this process. And still, there are decisions to be made on some of the court cases coming to bear. We just want to be we certainly want to participate and remain in network.

Speaker 2

And more importantly, we are having 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 So the goal is largely be in network. Charlie, if you want to follow on that.

Speaker 1

Yes. I would say Our visibility in terms of contracted rates 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 term such that we've got a I don't think I have a specific number that I could quote, but a fairly high percentage of in network agreements that have full visibility into 2024. And as we've referenced in the past, our underlying Rate trend in terms of allowables is modest. As I've talked a lot in the past, our pricing experience, Including distortions from things like RCM factors or payer mix is in the 1% or 2% range, and that is inclusive of What tends to be relatively flat Medicaid pricing.

Speaker 1

So that's probably your best guidepost to think about as we look into 2024, with the caveat Jim mentioned that there are unknowns around the NSA that we don't want to just glide past.

Speaker 4

Okay. Let me just one quick follow-up on there. I mean, obviously, it's been pretty massive in the inflationary pressures across the healthcare Is that giving you guys ammunition to increase that those rate increases? Or you think that's just sort of the world that you guys have to live in?

Speaker 1

I'd say it's a pretty firm environment out there related to physician services 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 So those are counterbalancing measures in our experience that places a little bit of restriction on how Fully, we could pass through some of the inflationary pressures that we felt at this point.

Speaker 4

Okay, great. Thanks so much and a great job on getting those DSOs down guys.

Operator

Thanks, Ben. Thank you. And speakers, we have no further questions in queue at this time.

Speaker 2

Thank you, operator. Thank you all for joining the call. We'll See you in the Q3.

Operator

Ladies and gentlemen, that will conclude your conference call for today. Thank you for your participation and for using AT and T event

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Earnings Conference Call
Pediatrix Medical Group Q2 2023
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