Pediatrix Medical Group, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Pediatrics Medical Group, Inc., third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session, and instructions will be given at that time. If you should require any assistance during today's call, please press star, then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Charles Lynch. Please go ahead.

Thank you, and good morning, everyone. I will 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 Security Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by pediatrics and 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 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-K, and on our website at www.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 disappointing results reflected relatively soft patient volumes and persistent practice-level cost inflation. We plan to take meaningful steps to address this shortfall, since we firmly believe that our current operating results do not reflect the full earnings potential of this great company. To go a step further, we believe that Pediatrics is a unique organization. We represent both the largest singular service provider for newborns in the U.S., as well as the largest group of maternal fetal medicine clinicians in the women's health sector. Our network of affiliated practices provides critical services to women, babies, and children, often in their times of greatest need. We have been successful in maintaining a predominantly in-network relationship structure, a key differentiator, as we have navigated the challenging implementation of the No Surprise Act. And against a rising interest rate environment, our debt structure is allowed for prepayment of floating rate borrowings, and more important, our cash flow profile has enabled us to do just that. With all of this in mind, we intend to take significant steps designed to support and bolster our core business to generate a stable gross margin profile as we continue to address cost trends and make any necessary changes to our service line footprint. Let me list our areas of focus first. We intend to make structural changes a priority in our ambulatory practices to enhance the earnings potential of the broader organization. There are wide variances in the financial performance across individual practices within our organization, whether viewed by geography, specialty or subspecialty, or any number of other perspectives. We have always taken a proactive but careful approach to portfolio management to ensure that we are dedicating the right resources to the right places to narrow these variances. We will expand these efforts, identify further actions we can take in the near term to improve practice performance where possible, and take these steps as quickly as we can. Second, we intend to confront the labor cost challenges we are facing head-on to mitigate costs while also remaining competitive in the clinician environment. We will continue to work with our affiliated practices to review overall staffing needs in order to ensure optimal models that first and foremost support the highest quality patient care, but also are aligned to the current needs of each practice. Third, given our financial strength and liquidity, we will focus our capital allocation priorities to build on our core, as we have communicated previously. Given the dislocation that has occurred across the physician service industry over the past several years, we believe that we are favorably positioned as the organization of choice for high-quality practices in need of a national platform in which to collaborate with peer clinicians. Lastly, as we disclosed this morning, we have made the decision to transition to a new vendor for revenue cycle management services. We did not make this decision lightly, given the importance of this function to our practices and to our overall operating performance. However, our experience over the past year underscores our conviction that a true hybrid model incorporating an internal team focused on front-end functions is the appropriate structure to generate optimal performance for pediatrics. Our decision to make this change reflects our need to migrate more quickly and completely to our hybrid model than we believe can be accomplished with our existing vendor. Additionally, we observed a regression in RCM performance during Q3 to pass challenges that we have seen in AR DSOs, and other metrics. We are focused on turning to a chapter where we rely on our own team, where it makes sense, and on an outside RCM partner for the areas where we simply cannot match their efficiencies, and we expect to begin this transition prior to the end of 2023. As we have discussed at length this year, we've been building our internal team, which we believe will help minimize any potential disruptions while we transition to a new third-party vendor. our current vendor will continue to provide services through a transition period as we make the switch to a new vendor. While this transition period will likely result in some duplicative costs, we believe this too will help mitigate potential transition risks. We will be as transparent as possible in terms of what expenses are temporary as compared to underlying and ongoing costs and performance of our go-forward revenue cycle management activities. All told, We believe these steps can meaningfully enhance our operating effectiveness, put us on a path to sustainable, improved gross margins, while ensuring that pediatrics can continue to provide best-in-class support services to our affiliated practices. With that, I'll turn the call over to Mark Richards.

Thank you, Jim, and good morning, everyone. I'll provide some additional details for the quarter. Our adjusted EBITDA for the quarter was roughly $15 million below our internal forecast, primarily driven by practice-level operating expenses and also impacted by soft patient volumes. Within our top line results, our same unit pricing growth primarily reflected year-over-year recovery in both revenue collection rates and payer mix against a very challenging quarter in 2022. At the practice level, our year-over-year expense growth was evenly divided between salaries on the one hand and incentive compensation and benefits on the other. This underlying salary growth accelerated by roughly 100 basis points as compared to the second quarter of this year when we saw some deceleration. Finally, our total G&A expense declined slightly year-over-year somewhat mitigating practice level cost growth. Based on our third quarter results and our updated forecast for the fourth quarter, we are updating our outlook for the full year adjusted EBITDA to a range of 200 to 210 million, which contemplates a similar contribution in the fourth quarter to what we reported for the third quarter. Finally, as Jim referenced, we continued to reduce our borrowings during the quarter. We generated just over $81 million in operating cash flow. We repaid the remaining $40 million in revolver borrowings during the third quarter with a full revolver capacity of $450 million available to us. And we ended the period with $21 million in cash. With that, I'll turn the call back over to Jim. Thank you, Mark.

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

Certainly. Ladies and gentlemen, if you'd like to ask a question, you may press 1, then 0 on your telephone keypad. You may remove yourself from that queue by repeating the 1-0 command. If you are using a speakerphone, we do ask that you please pick up the handset before pressing the numbers. Once again, to place yourself in a queue, you may press 1, then 0 at this time. We'll go to the line of Brian Tanquillit with Jefferies. Please go ahead. Hey, good morning, guys.

Thanks for all the color. I guess my first question, as I think about practice-level expenses and how you're looking to address that, are there levers that you can pull, whether it's adjusting clinician wage rates or subsidies that you can ask for from the hospitals that we should be looking for?

Yeah, Brian, I'll start with that. You know, from the subsidy standpoint, you know, it is one of the things we do look at, especially when we're looking at the OGI and new startups to make sure that we do have the available revenue to us when we bring clinicians on. So that's certainly something that we'll look at going forward. We always look at, you know, on an annual basis. As far as the, you know, the comp framework, you know, we have the fixed and variable comp, and I think, you know, we're trying to look at what the right mix of that is. As we've seen, you know, on the variable comp as we've recovered in the RCM areas through the year, We've seen some variable comp that's gone up, but we do need to look at it through the lens of which practices have both a variable comp structure and just a base comp structure. And we're going to look at all of those things together.

Got it. Okay. And then maybe as I think about the rev cycle side, what were your learnings from the RCM transition process? years back that you think will make this transition smoother as you look for a third-party vendor, bring in a third-party vendor, and go hybrid?

Yeah, I'll start, and all of us can speak to it, Ryan. I guess what I've learned is I know more about RevCycle now than I ever wanted to in my entire clinician career. So I think we understand very much, and probably it's rooted in what we've described. We believe that our services are unique. Our services are unique at the bedside for the patients in terms of finding out as simple as things like the name of the baby and the insurance of which parent. And so we just believe we need to have people closer to the bedside that start the process on the front end in a more complete fashion. That's why we've invested, you know, alongside our current vendor of having people here who are employed through pediatrics that are undertaking those tasks, and while we're adding in significant resources as we make this transition. So I think we're going in eyes wide open. Our entire leadership team, our entire operations team, you know, really is tightly involved in this transition.

Mark, I don't know if you have any other comments. No, I think that's well put, Jim. I would say that, you know, we certainly learned a lot from the last transition, and those lessons learned will be applied in spades to what we plan on doing over the next 12 months or so.

Jim, if I may just throw a quick follow-up. I mean, you've been there for a while, and before you transitioned this to an external vendor, things seemed to be working okay. It wasn't broken on the RevCycle side. So is it pretty much like just bringing it back to how you ran things prior to bringing RCM back in the day?

No, Brian, we're going to have, you know, an outside vendor for much of the back end. You know, the problem and what we identified when we made the decision to transition is that, you know, obviously the labor costs were an issue. The turnover with labor was always an issue. And then there was a big component that we expected in our current vendor that there was going to be a technology solution available to us because we were going to have to invest millions of dollars technology transition. That never happened. We do believe that there are vendors out there who can and will help us with that. But I think we looked at it through the cost of maintaining a workforce and a technology in the previous setting and knew that there were efficiencies by bringing in an outside vendor, hence the reason we made that change. Finally said, What we learned and what we believe and we will strongly stand by is that it has to be a hybrid model. We have to own the front end and what we do at the level of patient care and at the physician practice level and then have a vendor who has more efficiencies on the back end. Awesome.

Thank you. Thank you. As a reminder, you may place yourself into the queue by pressing 1, then 0 on your touch-tone phone. We'll go to the line of Kevin Fishbeck with Bank of America. Please go ahead.

Hi, this is Mian for Kevin Fishbeck. So the first question is just regarding non-same-store revenue. So it sounded like non-same-store revenue was a headwind to growth. So what drove that?

Hi, it's Charlie. You'll notice through the course of this year that that's largely been the case, not in a very material fashion, but in something of a fashion. And I think there's some comparability in that to what Jim mentioned around our review of our footprint and our portfolio. We have had some practice exits and the like through the course of this year as we've reviewed the portfolio and our footprint. And that's where you see that net negative in the non-same-unit side.

Okay, thank you. I guess I just have one follow-up. So we've been hearing from the hospital companies a lot about increased professional fees. Do you have an ability to go back and get subsidies to offset the margin pressure?

Well, sorry, you know, we have had great relationships with our hospital partners, and as it relates to those fees and the structure of those fees, we've done very well. to continue to place those fees when we need them. We're not somebody, and you need to understand that we're not reliant to a large extent on those contract fees. However, for those services that have smaller volumes but higher intensity, we do look at that, and so we will, whether it be on new opportunities and OGIs or whether current pressures result in increased costs, we will go back and see what we can do on those fees with our health systems.

All right, thanks.

Thank you. And with that, we've exhausted the queue at this time. Please continue.

All right, operator, thank you, and thank you, everyone, for being on the call. I am available with the team throughout the rest of today, and please reach out if you have additional questions.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Event Conferencing. You may now disconnect.