Pediatrix Medical Group Q3 2024 Earnings Call Transcript

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November 1, 2024

There are 8 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the 2024 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. And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Charles Lynch.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. I'll quickly read our forward looking statements and then we'll get into the call. Certain statements and information during this conference call may be deemed to be forward looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 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 Pediatrics undertakes no duty to update or revise any such statements whether as a result of new information, future events or otherwise.

Speaker 1

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 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, our quarterly reports on Form 10 Q and our annual report on Form 10 ks and on our website at www.pediatrics.com. Now I'll turn the call over to our CEO, Doctor. Jim Switz.

Speaker 2

Thank you, Charlie, and good morning, everyone. Also with me today is Cassandra Rossi, our Chief Financial Officer. Our Q3 operating results were modestly ahead of expectations, driven primarily by same unit revenue growth. Similar to the 2nd quarter, payer mix provided a tailwind to our top line, although this did moderate toward the end of the quarter. Patient volumes were stable to positive across all of our core service lines compared to the Q3 of last year.

Speaker 2

On the hospital based side, our NICU days rose modestly, reflecting slightly positive total births, and we saw positive comparisons across newborn nursery, pediatric intensive care and peds hospitalist services. On the office based side, maternal fetal medicine volume growth remained strong as we have experienced throughout 2024. Looking at our exposure to Hurricane Helene and Milton during the end of September early October, while we did experience some office closures, those were quite brief and we did not see any material disruptions to our hospital based services. More importantly, all of our team members who were in harm's way are safe. Many of our affiliated hospital based clinicians in affected areas remained in their facilities to care for their patients during storms.

Speaker 2

And those in office space settings undertook great efforts, both to prepare for the storms and reopen as quickly as possible on behalf of their patients. I want to thank our teams for their dedication to patient care and similarly our hospital partners for their own such dedication. During the quarter, we successfully completed the final wave of our transition to a hybrid revenue cycle management structure. And I'm pleased that not only is the transition behind us, but we were able to complete it without any meaningful disruption to our operating results. Our internal team has worked in full collaboration with our new vendor GuideHouse and we will now shift our focus from transition to driving improved performance.

Speaker 2

We also remain focused on completing our portfolio restructuring plan by the end of the Q4. Under this plan, we are exiting businesses totaling $200,000,000 revenue with an expectation of approximately $30,000,000 in annualized improvement and adjusted EBITDA based on 2023 results. 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, but thoughtfully 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 Q3 results and the progress of our operating plans, we have narrowed our outlook of full year adjusted EBITDA to $205,000,000 $215,000,000 2024 has been and continues to be a period of significant change for pediatrics.

Speaker 2

Our goals, however, are unchanged to focus our attention on those service lines with solid financial underpinnings, solidify our margin profile and create meaningful operating efficiencies for pediatrics. 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. I'd like now to formally introduce Cassandra Rossi, 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.

Speaker 2

And over the past several months, we have spent significant time ensuring that this leadership transition will be a smooth one. Cassandra Lee is a 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 Cassandra.

Speaker 3

Thanks, Jim, and good morning, everyone. First, I'd like to thank Jim, our Board and the pediatrics team for the opportunity to serve as Chief Financial Officer. As Jim noted, I've 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. I'm a true believer that our finance organization should play an important role, not only in strategic decision making, but in decisions across our entire organization, all of which have financial implications. 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 3

These functions 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 opportunities so that our operators and shared services partners can make timely and informed decisions and ultimately work toward our shared goal of operating more efficiently. With that said, I'll provide some additional details on the quarter. Our consolidated revenue growth of just under 1% reflected strong same unit growth, offset primarily by the impact of our portfolio restructuring activity. In total, this impact was just over $20,000,000 during the quarter, reflecting both practice dispositions completed and the divestitures of our former primary and urgent care clinics. On the cost side, practice level SW and B expenses declined year over year, also reflecting our portfolio restructuring.

Speaker 3

On a same unit basis, these expenses did increase year over year, but at a slower pace than 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 1st and second quarters of 2024. Our G and 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 and incentive compensation based on financial results. This was partially offset by 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 2024 G and A expense will be comparable to 2023 G and A on a dollar basis.

Speaker 3

For those of you keeping models, I'll note that our depreciation and amortization expense declined to $6,300,000 compared to $9,200,000 in the prior year. This decline primarily reflects lower depreciation expense related to our practice disposition and our Q3 level of D and A should be fairly consistent going forward, all else being equal. Moving to cash flow, we generated $96,000,000 in operating cash flow during the Q3 compared to $81,000,000 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 with cash just over $100,000,000 reducing our net debt to $515,000,000 from $600,000,000 at June 30.

Speaker 3

This reflects net leverage of just under 2.5x based on the midpoint of our outlook of adjusted EBITDA for the year. With respect to the cash on our balance sheet, we are currently investing that cash in very attractive time deposit accounts at interest rates that are substantially similar to our debt service costs. We expect to use this cash and any cash accumulated during the Q4 of 2024 early in 2025 to make physician incentive compensation payments and other benefit payments, mainly our 401 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 2025 and beyond. Finally, I'll reiterate that based on our results for the 1st 9 months of the year, we have narrowed our expectation of full year 2024 adjusted EBITDA to a range of $205,000,000 to $215,000,000 With that, now I will turn the call back over to Jim.

Speaker 2

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

Operator

Thank And our first question will come from the line of Brian Daniels with William Blair. Please go ahead.

Speaker 4

Yes. Hi, everyone. This is Jack Thompson for Brian. Thanks for taking the questions. You mentioned that you increased internal staffing, I believe, as part of the RCM transition.

Speaker 4

Are you at okay levels now, like as we look into Q4 and into 2025? Or is this still going to be an area that you'll want to bolster up kind of throughout the next year or so?

Speaker 3

Yes. So we actually believe we are fully staffed. I know when we initially moved to this hybrid revenue cycle management structure, we noted that we should add approximately 150 heads. We have actually been able to fully staff our teams up and we are in the mid-130s and we feel that that is appropriate moving forward. And of course, we will keep an eye on that as we gain additional efficiency as we move into 2025.

Speaker 4

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 payer mix and then modest improvements in hospital contract admin fees. On both of these fronts, are these two dynamics something we should expect going forward?

Speaker 4

I think the favorable payer mix was evidenced last quarter as well. So maybe just to clarify that. And then is the contract administration fees, like is that improvement mainly from renegotiations? Or is there something additional underlying there? Thanks.

Speaker 2

We'll split this up a little bit. This is Jim. I'll handle the contract revenue with our hospital partners. We spent a fair amount of time end of 2022, end of 2023 renegotiating some of those contracts and feel that we're at levels that are appropriate for the services we provide. On a go forward basis, obviously, what we see is pretty stable pricing.

Speaker 2

And remember, we're not an organization that relies on a lot of contract revenue. However, if a hospital wants to increase a service or looks for additional services, that's always in place. So again, we can look at those judiciously as we move forward, which will be the same pace in 2025.

Speaker 3

And I can take the payer mix question. I think you could say we've pretty much seen about a 4 quarter reset of sorts for payer mix. I know that we've been very transparent in the past that we know what is happening. It's 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, We think it's probably some type of a reset that will level off.

Speaker 4

Okay, understood. Thanks for the color. And then if I can just slip one final question in there. The same unit revenue increased again at a pretty decent clip this quarter. I think it was up a little over 5%.

Speaker 4

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? Thanks.

Speaker 3

Yes. So I mean, of course, on our volumes, for our neonatology business, we are pretty much takers of volume. So it is really what's happening in the market. I think in the one area we have had some strength is MFM. We have seen a little bit acuity is a bit higher there.

Speaker 3

So we have had some additional visits and we do expect that that will hold as we head into 2025.

Speaker 4

Okay, perfect. Thank you again guys.

Operator

Thank you. We do have a question from Jack Slevin with Jefferies. Please go ahead.

Speaker 5

Hey, good morning. Welcome to Cassandra and congrats everyone on the quarter. Couple of things I want to touch on here, probably just the 2 biggest moving pieces I think that are in folks' minds on the restructuring plan and then on the RCM front. On the restructuring plan, the commentary pretty clear. I guess, two things on that.

Speaker 5

How do you think about modeling that into the Q4 on the revenue line? Are we approaching that sort of run rate around the $200,000,000 that you think on a quarterly basis? Or is it still a little below that trend like it was in the 3rd quarter? And then in terms of EBITDA contribution, can you confirm if there was any benefit in the Q3 or if you'd expect any benefit in the Q4 that's embedded in the guidance on that front?

Speaker 3

So I think on the practice dispositions and on the revenue topic, you will see that the impact of the practice dispositions in our non same unit activity, we mentioned that during the quarter that was about $20,000,000 And if you look at the year to date on that, it's about $50,000,000 We did, last quarter let you know that most of that activity is slated towards the end of the year and it is really back loaded mostly in the Q4. So while we do anticipate getting to that $200,000,000 of revenue, it will be by the end of the year with the most of that to come in the Q4. And on the EBITDA contribution, we had put out a number in May about $30,000,000 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 2024, but the rest of that will roll into 2025.

Speaker 5

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 there. Obviously, 2022 and 2023 were both years where that was a pretty material headwind to revenues and earnings.

Speaker 5

How should you think about the opportunity on a, call it, 12 to 24 month basis if everything continues to go according to plan in rev cycle? What sort of what's is there any framework you can build out for how we should think about what that could mean on either a revenue or an EBITDA front?

Speaker 3

Yes. 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 2024. One thing we were clear about is 2024 was just going to be all about stabilization. The fact that between March of 2024 September of 2024 that we moved $1,600,000,000 of revenue $800,000,000 of AR with no material disruptions is a feat. So we're very pleased about the collaboration and now we're going to move to automation looking for ways we can improve performance while the guide house, our vendor staffing gets up to speed and fully trained and our teams are up to speed.

Speaker 3

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 5

Awesome. Thanks very much.

Operator

Thank you. And we do have a question from Pito Chickering with Deutsche Bank. Please go ahead.

Speaker 6

Hi there. This is Kieran on for Pito. Thanks for taking the question. I just wanted to ask if you've seen any improvement in maybe your ability to secure additional funding from hospitals, whether that be in the form of subsidies or something else? I know you've commented before that you don't get subsidies from the majority of your hospitals, but still sounds like to us, there's still a lot of specialty groups out there that are kind of asking for these and getting them in a lot of cases.

Speaker 6

So just wondering if you think that might be an opportunity in 2025?

Speaker 2

Yes, Karen, it's Jim. We know there's a lot of noise out there on other specialties, particularly on the adult side, for some of that contract revenue from the hospitals. Our relationship with our hospital partners has been very stable and where we have needed again because of inflation in wages or inflation in the needs of staffing, we've 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 in late 2022 and through the beginning of 2023. And again, if we believe we need those associated with increased costs, we will approach our hospital partners.

Speaker 2

If it's a new service line that would require us to have contract revenue, we always negotiate those fully at the beginning of the contract. So there's an opportunity there, but I don't think that we have the same requirements that some of the adult service lines have.

Speaker 6

Got it. That's helpful. Thank you. And then second, just one another good cash flow quarter, It seems like the cash flow generation should benefit from RCM and the divestitures. So just wanted to see how you're thinking about getting back into M and A in the near term now that you're under a 2x leverage?

Speaker 6

And any commentary you can provide on the pipeline would be great. Thank you.

Speaker 2

Yes. We're pretty happy with the pipeline we have on the core services. And so we think there's a real opportunity there coming up tail end of the year here and then into 2025. So our focus is really looking at both our inorganic and organic pipeline. We think there's 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 headwinds we are facing.

Operator

And does that answer your question?

Speaker 1

Yes, I'm all set. Thank you.

Operator

Thank you.

Speaker 1

Operator, can you

Speaker 2

take a question?

Operator

Yes, we do have a question from A. J. Rice with UBS. Please go ahead.

Speaker 7

Thanks. There's been a little echo there. But anyway, can you maybe just more broadly on the cash flow question. Obviously, there's a revenue cycle management that you've reworked and there's the portfolio restructuring. Do you have a sense of what a normalized cash flow either from operations or even free cash flow run rate is that you're generating at this point?

Speaker 1

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 GAAP operating cash flow has typically been in the kind of 60 percent to 2 thirds range. That's probably a good baseline to think about. Clearly, this year, we've had a lot of moving parts. But I think looking forward, that's probably a good kind of set of guardrails to think about.

Speaker 7

Okay. And then as you said, you've got a couple of things that are committed, the cash flow is committed to through the Q1 of 20 25. You just asked about M and A, but I wanted more broadly share repurchases, other things, capital deployment. Maybe just give a little update on your thinking about capital deployment strategy from here.

Speaker 3

Yes. So as we actually head into 2025, we of course expect to use all that cash on our balance sheet early in the year. But as we move into 2025 and we get our budget finalized and we see if we're in a place where we may have excess cash, we, of course, will look at all of the options available to us to deploy capital. We were talking a bit about M and A. We would look always at share repurchases, potentially paying down debt or some combination of those.

Speaker 3

But I think the message there is that we have optimal flexibility as to what we should do with our excess cash.

Speaker 7

Okay. And maybe just one final point of clarification. On the 30,000,000 dollars from the portfolio restructuring, is there any stranded overhead that or is that incorporate getting rid of any corporate expense that doesn't need to continue because of the downsizing of those practices. I guess I would yes, just see if the $30,000,000 is a hard number or is there maybe other opportunities over the next year or 2?

Speaker 3

I know the $30,000,000 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 costs that supported organization. We will always look for opportunities for additional efficiency as we move into 2025 and that's really part of what we're doing right now with our 2025 budget planning.

Speaker 7

Okay. Thanks a lot. Okay.

Speaker 2

Thanks a lot.

Operator

Thank you. And we have no further questions at this time. Please continue.

Speaker 2

Thank you, operator, and thank all of you for joining the call this morning. Have a great day.

Operator

Thank you. That does conclude our conference for today. Thank you for your participation and for using AT and T Executive Teleconference. You may now disconnect.

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Key Takeaways

  • Q3 results came in modestly ahead of expectations, driven by strong same unit revenue growth, a favorable payer mix tailwind and stable to positive patient volumes across core service lines including NICU, pediatric intensive care and maternal fetal medicine.
  • The company completed its final wave of the hybrid revenue cycle management transition with GuideHouse in Q3 without operational disruptions and will now focus on driving improved performance and automation.
  • Under its portfolio restructuring plan, Pediatrics is exiting businesses totaling $200 million in revenue to achieve approximately $30 million in annualized adjusted EBITDA improvements, with one-third realized in 2024 and the remainder in 2025 and beyond.
  • Management has narrowed full-year 2024 adjusted EBITDA guidance to a range of $205 million to $215 million, reflecting confidence in operating plan execution and cost management.
  • Pediatrics generated $96 million in operating cash flow in Q3 (vs. $81 million prior year), reduced net debt to $515 million (2.5x leverage), and is investing cash in high-yield deposits ahead of planned incentive payments and free cash flow generation in 2025.
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Earnings Conference Call
Pediatrix Medical Group Q3 2024
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