Pediatrix Medical Group, Inc.

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 the listen-only mode. Later, there will be an opportunity for questions and answers with instructions given at that time. If you should require assistance during the conference call, please press star, then zero, and a specialist will assist you offline. And as a reminder, your call today is being recorded. I'll now turn the conference call over to your host, Charles Lynch. Please go ahead.

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 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. 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-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K, 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, quarterly reports on Form 10-Q, and our annual report on Form 10-K, and finally on our website at pediatrics.com. With that, I'll turn the call over to our CEO, Dr. Jim Swift.

Thank you, Charlie, and good morning, everyone. Also with me today is Mark Richards, our Chief Financial Officer. Our operating results for the second quarter continue to track very near our expectations. Patient volume trends decelerated somewhat from the first quarter, but remained 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. 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 ambulatory 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 re-acceleration in patient traffic as the school year begins. Turning to rate, our reported pricing was quite strong, which largely reflects the progress we've made in improving our revenue cycle operations. Our payer mix was also stable year over year. On the cost side, our practice level compensation and benefits expense reflected a deceleration in underlying salary growth as compared both to the first quarter and the fourth quarter of 2022. Additionally, our G&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 million 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 and 245 million. Now I'll touch on a number of business and strategic priorities. First, as I mentioned, our second quarter results reflect improved AR collections which in turn reflect the efforts we put forth to staff our front end activities internally. We remain focused on further improvement through the second half of this year. Second 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. As a good example of this, we finalized an arrangement with Blythedale 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 at the opportunity to work with the leadership of Blythedale and to help ensure that patients there receive the highest quality care possible. Within our primary urgent care platform, we're also expanding. In the Houston market, we opened our first de novo pediatrics 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. And lastly, during the second half of 2023, we are planning to open three de novo clinics in the Denver market. marking our entry into a third 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 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. 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 first and foremost benefits our patients, but also represents an economically appropriate level of compensation for for the critical services provided by our affiliated clinicians. With that, I'll turn the call over to Mark Richards.

Thanks, Jim. Good morning, everyone. I'll provide some additional details for the quarter. First, as Jim mentioned, we continued to decrease both our gross and net accounts receivable in the second quarter. Our net AR days at June 30th were 49, down from 51 at March 30th and 53 at December 31st for a four-day improvement year-to-date. In turn, this improvement supported the contribution to our revenue growth from the rate that we reported this morning. Quickly turning to our P&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 first quarter of this year and to Q4 of 22. Within our practice level SW&B line, 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&L, G&A expense remained under 60 million in the quarter. And within our financial outlook for the full year of 23, we continue to anticipate that our G&A will be less than 12% of revenue. Turning finally to our ballot sheet, we repaid roughly 73 million in revolver borrowings during the second quarter, and our total debt at June 30th was 675 million. for net leverage of three times based on trailing 12 adjusted EBITDA. Notably, over the past 12 months, we have repaid a total of 125 million 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 third quarter and begin to build a cash position following that. 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 million. With that, I'll turn the call back over to Jim. Thank you, Mark.

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

Thank you. Ladies and gentlemen, if you do have questions, please press 1 and 0 on your telephone keypad. You'll hear an indication you've been placed in the queue and you may remove yourself from the queue by repeating the one then zero command. If you're using a speaker phone, we ask that you please pick up your handset and to make certain your phone is unmuted before pressing any buttons. Again, for questions, press one then zero. We'll first go to the line of Peter Chickering with Deutsche Bank. Go ahead.

Hey, good morning, guys. Thanks for taking my questions. Can you help us bridge the EBITDA margins from 2Q into the back half a year? And then can we use the margins back half a year as a launchpad for 2024? Hey, how are you, Peter?

This is Mark Richards. Let me help you with that and unpack a couple of items that are within our margins, specifically in the second quarter of this year. You will note that same store rate growth quarter over quarter accounted for about $12.5 million, despite the fact that our compensation salary and benefits line item was up quarter over quarter by about $23 million. $13 million of that was related to salaries, wages, and comp, and the remainder, call it about $9.5 million, $10 million, was related to our incentive compensation plan. So rate, growth, same store, $12.5 million incentive, comp quarter over quarter increasing by about $10 million. 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. 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.

Okay, fair enough. DSOs have come down five quarters in a row. So is this all RCM? Is this just a chain of process? And also, have you been able to collect any of the receivables that have been previously written off?

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

And then, like, have you guys been able to recover any of the, you know, those written off last year?

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

Perfect. Great. Thanks so much.

Certainly.

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

Thanks for taking the question. I guess, Jim, you guys called out same unit salary, you know, 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 that specific cost item cross-line?

You want to stop and I'll follow up? Sure, sure. 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 we're having some of those conversations just internally across the practices to make sure that we're number one, 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.

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

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 first quarter. Therefore, in the first quarter of the year, we were a net borrower. But I would think about that as the year tails on. that borrowing coming down to zero here in the third quarter with free cash flow then building up as we approach the end of the year.

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. How should we be thinking about the margin differential between the legacy businesses and this? this new strategy of yours. Thanks.

Hey, Brian. It's Charlie. I think your best rule of thumb is as these clinics are mature, they're pretty comparable to or a little bit accretive to our overall margin profile. Keep in mind we've got experience in two markets, in Houston and 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. And then obviously with the new openings, another opening in Houston this year, and a few in Denver, you know, there'll be a ramp period where we'll sustain some startup losses as we get those clinics opened, staffed, and then build patient traffic.

Yeah, and Brian, it's Jim. I just add that, you know, it's an important market for us with our presence, you know, 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.

Awesome. Thank you, guys. As a reminder, if you do have questions, please take this opportunity now to press 1 then 0 on your keypad. We'll go next to the line of Kevin Fishbeck with Bank of America. Go ahead. Mr. Fishbeck, we've accidentally released your line. If you could please press 1, then 0 again. Meanwhile, we have a follow-up question. I'm sorry. Kevin Fishbeck's line has recued. We will open up that line. Go ahead.

Hi. I'm 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 collection versus rate updates and comps?

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 play. So it's primarily a reversion to a normalized reserve rate, which is still ongoing.

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 to the industry?

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

Yeah, I think that, you know, what we believe, unfortunately, the industry, you know, 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 in markets, and not really this ghost contracting piece with some of these QPAs that are drawn down a bit by the payers. So we think it's a robust process 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.

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

Hey, 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 the 11% bridge into 2024, kind of where are the headwinds and tailwinds for next year that we should be thinking about?

No, I think heading into next year, of course, rate continues to be a concern despite the improvements that we have seen. We're not in a position at this point to provide 24 guidance. Obviously, where we end up this year with our RCM efforts and the related financial impact of that will be heavily impacted

driving uh our 24 forecast and related guidance and pedo just one one last piece and it's a little bit more related to q uh to uh 23 than 24 but maybe helpful you know as we've as we talked the last couple quarters about um overall uh compensation trends um particularly on the salary side and as mark referenced on on the incentive compensation and how that closes this quarter One thing to think about is the way we view it, which is here in the second quarter, we've kind of passed something of a high watermark in the delta between overall competition trend and top-line trend, which educates us about our outlook for the remainder of this year and hopefully you as you think about exiting and going into 24.

Okay, great. And then you guys have been shrugging off the – the risk around, you know, NSA, which has been crippling other, you know, practices. And I appreciate your commentary around, you know, kind of network exposure. I guess, you know, as you look at sort of contracting with managed care for next year, I mean, can you sort of talk about kind of what you're seeing for rate increases versus historical number, you know, ranges? That'd be helpful.

Well, I'll start, and then Charlie can follow on. I think one of the things, we're not shrugging off anything related to No Surprises Act. Obviously, 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, you know, we certainly want to participate and remain a network, and more importantly, we are having substantive conversations 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 process. So the goal is largely to be in-network. Charlie, do you want to follow on that?

Yeah, Peter, I would say our visibility in terms of contracted rates into next year is not dissimilar from what you hear from other providers. You know, we have a very broad-based and diversified book of managed care contracts that typically have a multi-year 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, excluding distortions from things like RCM factors or payer mix, is in the 1% and 2% range. And that is inclusive of what tends to be relatively flat Medicaid pricing. So that's probably your best guidepost to think about as we look into 24. With the caveat that Jim mentioned, that there are unknowns around the NSA that we don't want to just glide past.

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

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 – you know, some of the unknowns around how the NSA components can be wielded on the payer side. 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.

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

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

Thank you, operator. Thank you all for joining the call. We'll see you in the third quarter.

Ladies and gentlemen, that will conclude your conference call for today. Thank you for your participation and for using AT&T event teleconferencing. You may now disconnect. We're sorry. Your conference is ending now. Please hang up.