Pediatrix Medical Group, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the 2023 fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the 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, operator, and good morning, everyone. I'll quickly read our forward-looking statements and then turn the call over to Jim. 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 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 fourth quarter results were within the revised expectations we provided in November. Our overall same unit volumes reflected strength within our office-based maternal field medicine services, partially offset by lower volumes in our hospital-based services. Notably, these comparisons are against very strong volumes in the prior year quarter. Our underlying same unit pricing was also stable, absent certain distortions from last year's fourth quarter that Mark will detail. Turning to 2024, we provided this morning our preliminary outlook for adjusted EBITDA of between $200 and $220 million. This outlook reflects clear progress in three priorities. Effectively transitioning to a strong, sustainable revenue cycle management program, generating continued efficiencies across our support structure, and maintaining strong payer relationships and a high in-network status. It assumes also stabilizing our practice level margin profile against the headwinds we face. I'll give details on each of these priorities. First, we have moved forward with our transition to a hybrid RCM model. We've continued the expansion of our internal team and expect that we will soon be fully staffed and we have worked closely with a new vendor under an interim transition engagement that we intend shortly to shift to a long-term relationship. Thanks to this combination of robust resources, we have not encountered any significant disruptions to our RCM activities through the fourth quarter and to date in 2024. Second, while this hybrid RCM model does necessitate additional internal staffing within our G&A line, we continue to identify efficiencies within our nonclinical infrastructure such that in 2024, our expected total G&A expense will remain at a comparable percent of revenue as compared to 2023. Although our in-network status has typically been above 95%, we entered this year with an even higher in-network position, following successful negotiations with two payers in three states where we previously had been out of network. As we've discussed in the past, we believe that these renegotiations were made possible by our ability to effectively navigate the arbitration process for out-of-network claims under the No Surprises Act, through which we've been able to demonstrate the value of the critical services our affiliated clinicians provide to their patients. We are very pleased that patients and their families now have in-network access to these services, and we are gratified to have a broad recognition by payers of our essential role in the market. Finally, as I noted last quarter, we are also focusing on narrowing the range of financial performance across individual practices in our organization. We have identified and initiated specific plans for a wide range of affiliated practices, and these plans themselves encompass an array of structural, tactical, and strategic steps. As we have been executing on these plans, we expect that activity will accelerate through the year. As a result, we believe that the financial impact of these improvements will build cumulatively through 2024. Overall, I'm confident that our focus on the operating priorities that are critical to our success will benefit all stakeholders. And I firmly believe that this focus in no way detracts from our mission to take great care of the patients. We look forward to executing on these priorities throughout the remainder of the year. Before turning the call over to Mark, I want to emphasize that above all else, we are a clinically focused organization, and we take very seriously the critical role we play in the improvement and quality of patient care for the most fragile patients. This week, pediatrics will be hosting two concurrent conferences, our 12th annual specialty review in neonatology and our 45th annual NEO, the conference for neonatology. It is a testament to our mission that we have hosted these important events for so long with strong attendance that goes well beyond pediatrics-affiliated clinicians.

With that, I'll turn the call over to Mark Richards. Thank you, Jim. Good morning, everyone. I'll provide some details for the quarter. Our same unit volumes were mixed in the quarter with hospital-based volumes declining somewhat offset by strong office-based volumes, specifically maternal-fetal medicine. Notably, these comparisons were against strong volumes in the prior year fourth quarter. On the pricing side, there are two key items to call out for you to make an appropriate year-to-year comparison. First, in the fourth quarter of 22, we recorded revenue from our prior RCM vendor for financial support related to age receivables, which did not recur in the 2023 fourth quarter. This reduced our same unit pricing growth by roughly 2% in Q4 of 23. Additionally, we recorded a modest amount of CARES dollars in Q4 of 22, which also did not recur, reducing our same unit pricing growth in Q4 of 23 by an additional 40 basis points. These items clouded what we view as a stable and positive pricing comparison, which included favorable payer mix and a growth in contract and administrative fees. On the cost side, our practice level expenses declined slightly year over year, largely reflecting lower incentive compensation and malpractice expense, partially offset by increases in salaries and group insurance expenses. As Jim noted, underlying pricing level salary growth remained elevated in the mid-single digits. Lastly, G&A increased slightly year over year. partially reflecting staffing increases as we continue to build our internal RCM team. We generated $73 million in operating cash flow for the fourth quarter, resulting in full year operating cash flow of $146 million. As Jim noted, we're pleased that our RCM transition did not cause any material disruptions in billing and collections in the fourth quarter. And our DSOs were basically flat at year end compared to the end of Q3. We ended the year with total borrowings of $628 million and cash of $73 million for net leverage at year end of just under 2.8 times. As a reminder, we are a user of cash in the first quarter of each year as we pay out incentive compensation and other benefits. And this cash balance will reduce any potentially borrowings needed before we turn to expected free cash flow generation in Q2 and beyond. I'll add some details to our 24 outlook. We expect net revenue of 2 to 2.1 billion or modest growth over 23. And as Jim touched on, we anticipate that our G&A expense as a percentage of revenue will be comparable in 24 versus 23, with additions to our RCM team offset by continued efficiencies across our corporate infrastructure. Finally, in terms of quarterly earnings progression, we anticipate that our first quarter adjusted EBITDA will represent 17 to 19% of full year adjusted EBITDA, largely reflecting the normal seasonality of our financial results. With that, I'll turn the call back over to Jim. Thank you, Mark.