Pediatrix Medical Group Q2 2024 Earnings Call Transcript

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August 6, 2024

Key Takeaways

  • Our Q2 results beat expectations, driven by same unit revenue growth, operating efficiencies, and a one-time $3M payer settlement; we maintained our full-year adjusted EBITDA guidance of $200M to $220M.
  • A formalized portfolio restructuring will exit most office-based pediatric subspecialty and urgent care practices by year-end, narrowing focus to hospital-based services and maternal fetal medicine, and is expected to add ~$30M in annualized adjusted EBITDA.
  • We are on track transitioning revenue cycle management to a hybrid model with GuideHouse, with ~75% completed and no material disruptions, positioning us for enhanced future performance.
  • Q2 operating cash flow rose to $109M, DSOs improved to 49.5 days, net debt fell to ~$600M (~3x leverage), and 2024 CapEx is projected to decline to $16M–$20M.
  • Cassandra Rossi will succeed Mark Richards as CFO on October 1, supporting a smooth leadership transition during ongoing transformation efforts.
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Earnings Conference Call
Pediatrix Medical Group Q2 2024
00:00 / 00:00

There are 7 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Pediatric Medical Group 20 24 Second Quarter Earnings Conference Call.

Operator

At this time, all participant lines are in a listen only mode. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Charles Lynch. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. I'm going to quickly read our forward forward looking statements before we begin the call. Certain statements and information during this conference call may be deemed to be forward looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 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. 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 and Cassandra Rossi, our Senior Vice President of Financial Reporting and Assistant Treasurer. Our 2nd quarter operating results exceeded our expectations, driven by same unit revenue growth and operating efficiencies we created during the first half of this year. Our revenue benefited from strong payer mix as we detailed in our press release. While patient volumes remained stable overall, within our patient volumes NICU days declined slightly with hospital based volume growth driven by other subspecialties, including newborn nursery, pediatric intensive care and pediatric hospital services.

Speaker 2

On the office based side, maternal fetal medicine volume growth was strong, but was offset by volume declines in pediatric urgent care. During the quarter, we recognized revenue related to a one time settlement with a payer that favorably impacted the quarter's adjusted EBITDA by approximately $3,000,000 Even accounting for this item, however, results exceeded our expectations. We are maintaining our full year 2024 outlook for adjusted EBITDA of between $200,000,000 $220,000,000 And I'll focus this morning on our operating plans that are fully in motion, how we anticipate the execution of these plans will position us as we exit the year. As we discussed last quarter, we developed a broad based portfolio restructuring plan, which we believe will add roughly $30,000,000 in annualized EBITDA when completed. Under this plan, we have targeted exiting a meaningful number of office based pediatric subspecialty practices as well as our pediatric primary and urgent care clinics.

Speaker 2

This portfolio restructuring plan was formalized during the Q2. And as a result, we will be exiting almost all of our office based practices other than maternal fetal medicine during 2024. The goals of these strategic exits are to focus our attention on those service lines with solid financial underpinnings, solidify our margin profile and create meaningful operating efficiencies for pediatrics. From the standpoint of our revenue and geographical footprint, only a small portion of this restructuring was completed during the first half of twenty twenty four. Although, our operating results do reflect some of the cost benefits of increased efficiencies, including the reduction of our operating structure from 7 to 4 regions.

Speaker 2

However, our exit activity is now fully underway. Late in the Q2 and soon thereafter, we completed 2 transactions through which we divested of our roughly 2 dozen primary and urgent care clinics. And during the second half of this year, we plan to exit our remaining office based pediatric subspecialty practices. Our operating teams are moving quickly but thoughtfully to ensure that patient services are not disrupted during these transitions. We are working diligently on appropriate pathways for these exits, including transitions to private practice, new ownership or hospital partnerships.

Speaker 2

Many of our affiliated physicians have already found new homes with excellent partners and will continue to serve their communities with their world class care. Following the completion of these plans, we will have exited businesses that generated approximately $200,000,000 in revenue in 2023. Our refocused portfolio will consist of our core hospital based services including neonatology, pediatric intensive care and a number of other inpatient pediatric services and on the office based side of our maternal fetal medicine practices. Lastly, our revenue profile will be approximately 80% hospital based and 20% office based. As we have stated previously, we anticipate favorable impact of this portfolio restructuring will be approximately $30,000,000 of annualized adjusted EBITDA following the completion of these plans.

Speaker 2

Concurrent with these operating plans, we remain on schedule to complete the transition of our revenue cycle management functions to a hybrid model alongside our new third party RCM provider GuideHouse. As of today, roughly 3 quarters of our practices have been transitioned from our prior vendor with the remainder targeted for completion during the Q3. Thus far, this transition has not created any material disruptions to our RCM performance and we continue to believe that this structure will provide the opportunity for enhanced performance in the future. As it relates to our 2024 guidance, we are in the midst of an aggressive reshaping of our company, our service lines and our operational support. Mark will provide some additional financial details, but our unchanged outlook from the full year adjusted EBITDA of $200,000,000 to $220,000,000 reflects our best gauge of how all of these moving parts will flow through our results for the remainder of 2024.

Speaker 2

We remain steadfast in our goal to exit this year as a more focused and efficient operating company, comprising highly collaborative and critical patient services that we believe provide opportunities for strategic growth, with significant financial strength and cash flow generation. We also remain committed to supporting our company's long morning that our Board of Directors has appointed Cassandra Rossi, our Senior Vice President, Financial Reporting and Assistant Treasurer, as Executive Vice President, Chief Financial Officer and Treasurer effective October 1. Cassandra joined the organization in 2,009 and has served in various senior level accounting, finance and treasury roles with increasing responsibility, including her most recent role as Senior Vice President, Financial Reporting and Assistant Treasurer. Cassandra succeeds Mark Richards, who has played an instrumental role in our transformation activity since joining the company in 2020 and will remain in his position through a transition period this fall. I want to congratulate Cassandra on her new role.

Speaker 2

I particularly want to thank Mark for all of his contributions to pediatrics. Similarly, I want to thank all of our pediatrics associates, both clinical and non clinical, for their hard work and dedication to this organization, particularly during this time of significant change. We are confident that the operating plans we have in motion will enable pediatrics and our affiliated commissions, to effectively continue our mission to take great care of the patient. With that, I'll turn the call over to Mark Richards.

Speaker 3

Thanks, Jim. Good morning, everyone. I'll provide some additional details in a few areas. Within our P and L, our G and A expense declined year over year despite the additional staffing we have put in place as a part of our hybrid revenue cycle management structure. And we anticipate that full year 2024 G and A expense will be comparable to or lower than 2023 G and A on a dollar basis.

Speaker 3

First, you'll see we recorded long lived asset impairments and losses on disposals in our P and L. These all pertain to the formalization of our portfolio restructuring and the related accounting requirements and all were non cash expenses. Moving to cash flow, we generated $109,000,000 in operating cash flow in the 2nd quarter compared to $93,000,000 in the prior year. Our cash flow benefited from a reduction in DSOs, which declined from 52 days at March 31 to 49.5 days at June 30. Part of this decline reflects a catch up in collections following some minor disruptions during the Q1 of 2024 related to the change healthcare incident.

Speaker 3

From an RCM standpoint, I would characterize our performance as expected, which is notable given the magnitude of activity we have undertaken in transitioning to our new provider under our hybrid model. Our cash generation enabled us to pay down all of the revolver borrowings we utilized in the Q1 and we ended the quarter with $20,000,000 in cash on the balance sheet. As a result, our net debt position declined to roughly $600,000,000 atorbelow3x leverage based on our outlook of adjusted EBITDA for the year. We expect to generate additional free cash flow during the second half of twenty twenty four based on our normal conversion of EBITDA to cash flow. We also anticipate that our ongoing capital expenditure needs will decline following the completion of our portfolio restructuring.

Speaker 3

On a preliminary basis, we expect that our annual CapEx will be in the range of $16,000,000 to $20,000,000 significantly lower than our average output ways of $30,000,000 in the past several years. Finally, for modeling purposes, I'll reiterate that our 2nd quarter adjusted EBITDA includes approximately $3,000,000 related to a one time payer settlement that we do not expect to recur. For the second half of twenty twenty four, we expect that our adjusted EBITDA will be fairly ratable in the 3rd 4th quarters. With that, now 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

Thank you. And our first question is from A. J. Rice with UBS. Please go ahead.

Speaker 4

Hi, everybody. Thanks for the question. Just a couple of quick things. I may have this wrong, but it looks like to me you're now assuming about $40,000,000 of restructuring cost. And I thought we were at $25,000,000 before if I'm right.

Speaker 4

What's changed there? And any sense about how that's going to play out? How much have you already incurred and how much we incur as you progress through the rest of the year?

Speaker 3

It's Mark Richards. I'll jump in. Yes, you're right initially, our transformation and restructuring costs as a result of our first assessment of the portfolio restructuring was in that $20,000,000 range. Since then, we have added to the number of practices we'll be exiting and accordingly we've increased our estimate related to those exit costs that consist of both severance costs, lease termination and the like. So yes, that has increased.

Speaker 4

All right. And have you incurred much of that yet? Or is that maybe later in the year? Or how does that lay out?

Speaker 3

Yes, we have incurred a component of that through June 30, as you'll note. We expect that will continue and come to a completion here towards the end of December. So, no cost to come, AJ.

Speaker 4

All right. I wondered if I could just ask about the commercial contracting and so forth. I think you have a reference in the press release that says your payer mix trend commercial was up. I wonder is that because of this $3,000,000 settlement or if you ex that out would it still have been up and anything to call out there and any commentary on what you're seeing with this No Surprises Act, arbitrage types of situations? Is there an uptick?

Speaker 4

It's steady now at this point and how are you doing on those cases?

Speaker 1

Hey, Jay. A. J, it's Charlie. I think that in a couple of ways. The payer mix improvement that we reported does not include a significant amount of the settlement that we referenced from one payer.

Speaker 1

It's more related to as we look at our payer mix being binary, just a greater mix of non governmental monies versus Medicaid. In terms of payer contracting, we didn't have a lot to comment on this quarter. We view the landscape across all of our managed care relationships as stable and rolling forward with normal course renewals as we've done in the past.

Speaker 4

Okay. Just to close, best wishes to you, Mark, and congratulations, Sandra on the appointment.

Speaker 5

Thank you, A. J.

Speaker 3

It's been a pleasure.

Operator

And next we go to Brian Tanquilut with Jefferies. Please go ahead.

Speaker 1

Hi, this is Noor Roble in for Brian. Thank you for taking my question. I was curious if you could provide some more insights on the office based practice exits. I appreciate the annual impact you all gave in the past. But given that this is supposed to occur prior to the end of the year, just curious if you could provide some quantification on Q4 or possibly Q3 impact to revenue and EBITDA?

Speaker 3

Hey, it's Mark Richards. As we noted in the earlier discussion, the bulk of the office exits are slated here for the 3rd and 4th quarters. We have seen traction, in the second quarter and subsequent to June 30. However, the bulk of those exits really are slated for the second half of the year. And the impact of which as this tails off, you'll see in both our non same store revenue numbers and the like that this will increase throughout the year.

Speaker 3

However, the full impact of both the exits and the offsetting costs associated with those exits will be realized in 2025. So looking at Q3 and Q4, we would see consistent quarters to the 2nd quarter rolling out in Q3 and Q4 ratably. With the positive impact of these restructuring activities really coming in earnest in 2025.

Speaker 1

Got it. Thank you very much for that. And just picking up on A. J. Question, the strong pricing growth this quarter.

Speaker 1

Just curious if you all think there is positive momentum to run rate pricing from these current levels. If you could provide some context to that, that'd be helpful. Hey, it's Charlie. I would say that we typically as we look at changes in payer mix, we take that as it comes because it can be very difficult to forecast those types of changes. And from an historical standpoint, our payer mix, while it does fluctuate quarter to quarter, tends to have a longer trend line to it than very brief.

Speaker 1

So as we look at our forecast for the remainder of the year, while we're certainly pleased with the impairment strength we've seen so far in the first half, it's not necessarily something that we're going to roll forward as persisting, but we'll take that as it comes.

Speaker 5

Awesome. Thank you very much.

Operator

And the next question is from Pito Chickering with Deutsche Bank. Please go ahead.

Speaker 5

Hey, guys. You got Benjamin Shaver on for Pito. Nice quarter. Just a couple of questions. So the first one is, 2Q is very strong even when you back out that $3,000,000 1x benefit you quantified earlier.

Speaker 5

And you said it was ahead of your expectations, but you only reiterated the guidance. So does that mean that The Street mismodeled 2Q? Or first, any additional color on how we feel about consensus in 3Q and 4Q would be super helpful? Thanks.

Speaker 1

I would Jim, you can jump in here as well. But a comment that I would give is that, yes, the second quarter a little bit ahead of our expectations at the EBITDA line. I want to reiterate Jim's comments that here in the second half of 2024, we have a significant amount of change going on. The completion of our RCM transition, the practice exits as effectively and efficiently as we can undertake them. And again, to reiterate, the full year outlook that we have not changed represents our best gauge of how all those moving parts move together through the next two quarters, but with an unchanged end goal of the benefits that we've talked about and are seeking.

Speaker 1

So to that end, we believe that looking at where consensus estimates are, for example, for the Q3, that level looks appropriate to us. And as Mark mentioned earlier that between the 3rd and 4th quarters, our best view right now is that dollar level EBITDA should be fairly comparable between those two quarters.

Speaker 5

Okay. Thank you. That's super helpful. And then just one on the NICU days, which declined 80 bps in the quarter. Was this decline primarily volume or was there also some length of stay impact as well?

Speaker 5

And if there was any length of stay impact, was it driven at all by sort of pressure from the payers? And how should we think about it going forward? Thanks.

Speaker 1

No. In terms of both rate of admission into the NICU and length of stay, we didn't see any meaningful changes year over year for this quarter. So that NICU days comparison is roughly comparable to what we've seen in overall births for the quarter year over year.

Speaker 5

Very good. Super helpful. And then just one last one on pricing, a little similar to the previous questions. But could you sort of quantify how much the payer mix versus the hospital contract admin fees contributed to that increase year over year? And then also on the hospital contract admin fees, is this just a renegotiation of subsidies from the hospitals?

Speaker 5

And if so, are you in the early innings of being able to get more increases from the rest of the hospitals across your network?

Speaker 1

Payor mix played a slightly greater role overall same unit pricing versus contract and admin fees. And Jim, I'll let you.

Speaker 2

Yes. And I think on the related to hospitals and our contractual relationship there. We were very successful in the tail end of last year into the 1st 2 quarters here on renegotiating some of those contracts at the hospital and the pricing there. And we're always looking at what we need to do on pricing related to the hospital relationships. But again, remember, largely, we do not have stipends in most of our hospital contracts.

Speaker 2

But where we do, we obviously look at those in terms of cost associated with our labor changes in the markets.

Speaker 5

Super helpful guys. Congrats again on a nice quarter. Thank you.

Operator

And we have a question from Kevin Fischbeck with Bank of America. Please go ahead.

Speaker 6

Great, thanks. I think you guys made a comment that after this portfolio restructuring, you guys are going to be positioned for strategic growth. Is there some way to help us think about what the company looks like from a growth perspective in 2025 and beyond, even if it's just, hey, we're 80% inpatient, 20% physician, then what the growth rates historically of those two businesses are? Just to give us a sense because it's not 100% clear to me what the implications are for growth from this restructuring? Thanks.

Speaker 2

I'll start just again, I'll just start from the standpoint of what we're looking at across the environment. Charlie can dovetail into it. I think what we talked a lot this year about is obviously stabilizing the margins and stabilizing the business. And I think, yes, the pivot to growth is paramount in our mind of where we're going starting really at the tail end here and in 'twenty five. And we believe there are unique opportunities in that eightytwenty mix of both ambulatory and our hospital based service lines, including NICU.

Speaker 2

And so we have a number of those opportunities we're looking at. And I think our focus for 2025 is going to be really focusing moving past the disposal of practices and on RCM and really accelerating what we're doing on our growth trajectory.

Speaker 1

So I think that will be

Speaker 2

the main focus into 'twenty four, into 'twenty five.

Speaker 1

Only thing I would add Kevin is, we've made a lot of comments over the past several quarters related to maternal fetal medicine. For the first half of this year, same unit volume growth across our MFM practices was quite strong, approaching the mid single digits. And that has been persistent going back into 2023 as well. So we do think that structurally, strategically and geographically, those practices providing MFM services are very well positioned. Mentioned that we can layer on top of opposed to what Jim mentioned that we can layer on top of related to strategic growth.

Speaker 6

Okay. That's helpful. And I guess maybe just any color on payer mix? I guess maybe post like the $200,000,000 that you're divesting, is that payer mix looks similar to the overall company? Or does that have an implication post that shift mix more towards commercial or more towards government?

Speaker 1

No, it shouldn't have any meaningful implications.

Speaker 6

All right, great. Thanks.

Operator

And we have a follow-up from Pito Chickering's line. Please go ahead.

Speaker 5

Hey guys, sorry. Just a couple of additional quick ones. Could you give any maybe incremental color on any discussions you're having with Managed Medicaid? And then sort of how should we think about for same store inflation versus pricing increases? Thank you.

Speaker 1

For us, Medicaid Managed Care represents a significant portion of our governmental mix. That's how we classify it. This is ultimately Medicaid as the payer. So and for the most part, that's largely a pass through from whatever state's Medicaid schedule is to what we should be reimbursed. Thank you.

Speaker 1

And then

Speaker 5

any Yes. It was just on the same store labor inflation versus pricing?

Speaker 1

Yes. We saw some modest deceleration during the Q2, nothing that we would particularly call out, but some modest deceleration. I think our focus here is with the portfolio restructuring that we're undertaking, a lot of decision making going into that did relate to cost trends within any number of office based practices leading to some of the decisions that we made.

Speaker 5

Thanks guys. You were helpful.

Operator

And we have no other questions. You may continue.

Speaker 2

Thank you, operator, and thanks, everyone, for joining the call.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank

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