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spk06: Ladies and gentlemen thank you for standing by. Your conference will be underway shortly. Please continue to hold.
spk07: Your conference will begin momentarily. Please continue to hold.
spk06: Ladies and gentlemen, thank you for standing by. Welcome to the Pediatrics Medical Group 2024 First Quarter Earnings Conference Call. At this time, all participant lines are in a listen-only mode. Later, there will be an opportunity for your questions. Instructions will be given at that time. As a reminder, this conference is being recorded for digitized replay. I would now like to turn the conference over to Charles Lynch. Please go ahead.
spk02: Thank you, Operator, and good morning, everyone. Welcome to our call. I'll quickly read through our forward-looking statements, and then we'll get into our content. 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.
spk04: Thank you, Charlie. Good morning, everyone. Also with me today is Mark Richards, our Chief Financial Officer. Our first quarter results were in line with our expectations. Our same unit revenue growth reflected positive volumes in our hospital-based services, with NICU days increasing 2.5%. On the office-based side, we saw ongoing volume strength in maternal fetal medicine, offset by declines in our primary and urgent care clinics, which I will touch on in my remarks this morning. Our practice-level operating expenses continue to reflect modestly elevated salary and group health insurance trends, partially offset by lower benefit and incentive compensation. Finally, G&A expense was largely unchanged year over year, despite the additional staffing we have added related to our internal front-end revenue cycle management team. We are reaffirming our full full year 2024 outlook of adjusted EBITDA between $200 and $220 million. And I will focus on this since we believe we are well on our way to enacting changes that will stabilize our margins as compared to 2023 and enable a lower cost structure going forward. First and foremost, while we have historically undertaken regular portfolio management decisions leading to certain practice exits, We have now pivoted and are in the process of an accelerated portfolio restructuring plan under which we are exiting a meaningful number of underperforming office-based practices now and before the end of 2024. This is in addition to steps we are taking toward performance improvement across our portfolio of practices, including restructuring and stipend renegotiations, which we believe will result in increased profitability for the organization. We've also made the strategic decision to exit our primary and urgent care clinic platform, which represents roughly two dozen clinics in Florida, Texas, and Colorado. This decision was based on our review of the cost and time required to build this platform to scale, an undertaking that no longer fits at a time when we are focused on stabilization of our margin profile. We intend to complete this exit during the second quarter of this year. All of this portfolio restructuring activity is targeted to address the components of our practice portfolio that have diluted our consolidated operating margins with the goal of either removing or remediating that dilution over the coming quarters. Importantly, we have created significant oversight of this restructuring through a strong internal project management team and with designated responsibilities, and our leadership is in a cadence of regular, frequent updates all focused on execution. Second, the transition of our RCM function to a hybrid model is going well. As you may have seen in our recent filing, we finalized a contract with GuideHouse, under which that organization will be our third-party RCM provider. We have been working with GuideHouse since late 2023 and have been very pleased with the resources dedicated to pediatrics, the quality of work, and a collaboration with our internal team, which we expect will be fully staffed over the coming several months. As Mark will detail, our RCM performance has not been negatively impacted by this transition, and we believe our hybrid structure is the most cost-effective way to fully support our practices. Finally, we remain intensely focused on efficiency. We believe that our portfolio restructuring activity will enable more effective non-clinical support in the future by emphasizing markets where we have significant infrastructure and system relationships. During the quarter, we also affected a number of position eliminations across operations and G&A, such that we are confident that we can maintain a G&A expense level in 2024 that is comparable to or lower than 2023 as a percent of revenue, despite the internal additions we have made to our RCM team. From a timing perspective, much of the impact of our portfolio restructuring will be felt as we move through the second half of the year, and Mark will give some comments about our expected cadence of quarterly adjusted EBITDA. We do believe that taken as a whole, these operating plans will put pediatrics in a position of far greater margin stability and operational efficiency, in addition to enhanced support of our practices and affiliated clinicians. I want to thank all of the pediatric associates, both clinical and non-clinical, for their hard work and dedication to this organization. We are confident that the operating plans we have in motion will benefit all stakeholders and will enable pediatrics to effectively continue its mission to take great care of the patient. And with that, I'll turn the call over to Mark Richards.
spk05: Thank you, Jim. Good morning, everyone. I'll provide some additional details in a few areas. I'll start with cash flow. 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. During Q1, we used $123 million in operating cash flow compared to $101 million in Q1 of 23. This differential largely relates to accounts receivable where our DSOs declined in the first quarter of 23. For Q1 of 24, our accounts receivable DSO rose roughly a day and a half from 1231, reflecting a slight impact from the change healthcare incident and, to a lesser degree, our RCM transition process. Related to change, we expect this impact to be just a cash deferral. We utilize change primarily for insurance verification. and we were able to quickly pivot to two other vendors with minimal disruption. While this did have a slight timing effect for us during the first quarter, thus far in Q2, we believe that disruption is behind us based on cash receipts. Secondly, Jim noted that we have now finalized our contract with GuideHouse as our RCM provider, and we have been fully engaged in transitioning from our former vendor. we are undertaking this transition in stages, which will continue in a deliberate fashion over the coming months. As of today, we have transitioned roughly one-third of our affiliated practices to GuideHouse, with the expectation of completion by the end of the third quarter. Finally, I'll touch on our 24 outlook and our view of the quarterly progression of our adjusted EBITDA. As Jim noted, while our portfolio restructuring activity is already well underway, we anticipate that its financial impact will be largely weighted towards the second half of this year. As a result, we expect that adjusted EBITDA for the second quarter will contribute 24 to 25% of our full year outlook of $200 to $220 million. With that, I'll turn the call back over to Jim.
spk04: Thank you, Mark. Operator, let's now open up the call for questions.
spk06: Certainly. Ladies and gentlemen, if you would like to ask a question, you may press 1, then 0 on your telephone keypad. You will hear a tone indicating that you have been placed in queue. And one moment, please, for the first question. We have a question from the line of Peto Chickering with Deutsche Bank. Please go ahead.
spk03: Hey, good morning. So I'm trying to do the math there, and so apologies. But, you know, I guess looking at all the practice disposition, you know, for what percent of the annual EBITDA should we be modeling on the fourth quarter? I'm just trying to figure out what the exit rate. We should be modeling on core growth for 2025. Hey, Peter.
spk02: It's Charlie. You know, we wanted to – clear on our expectations for the first half of this year. And if you think about the math we've provided, given the first quarter adjusted EBITDA of 37 against that 200 to 220, I think is in the range of 18 or so percent of the full year. And with the second quarter, as Mark laid out, between 24% and 25%, that can give you a sense of the contribution from the first half of this year, as we expected. For the second half, keep in mind that our normal seasonal pattern of adjusted EBITDA, all else being equal, would yield our third quarter being the strongest contributor of the year, followed by the fourth quarter. Based on the timing of our activity, Some of that might be affected by that activity as it continues to contribute, but that's the baseline you should be thinking about that, you know, the normal seasonal pattern is such that the third quarter tends to be the strongest.
spk03: Okay. And on the practice disposition, I guess, you know, looking at the both office and urgent primary care, are these practices coming up for, you know, renewal or Or are you sort of exiting the contract sort of mid, I guess, contracting cycle just because of the margins? And then do you have the same success rate on renewing practices today as you've historically had? I just want to understand more about why now is the time to get rid of those assets.
spk04: This is Jim. Yeah, I don't think that there's anything related to, you know, contractual requirements. You know, we do have some of these practices may have some call contracts with some of our affiliated health systems, so there's some work around that, but we didn't envision the restructuring to coincide with any contracts, either employment agreements or service coverage obligations. We did this because these were practices that we felt were really negative in terms of their evit of competition and have, in the past, we've had some remediation we've done with them, but it was time to look at these effectively and dispose of them.
spk03: Okay, and then this last question, I'm going to get a couple inbound on this one. With the dispositions this year and the FOIA guidance you're reiterating, do you think you guys can grow in 2025 with sort of the revised asset base?
spk02: I think it's a little bit premature to think into 2025. The only thing I would comment, Peter, is that the financial impact that we anticipate from this activity, while it will affect our results, it should affect our results in the second half of this year, that would not reflect the full year impact of this restructuring activity. I think that's about as far as we're going to go related to 2025. All right. Great. Thanks so much.
spk06: Next, we have a question from Brian Tanquillit with Jefferies. Please go ahead.
spk01: Hi, this is Nora Roble in for Brian. Appreciate you taking my question. I'm just curious to know your outlook on the volume and rate side of the business. Just curious if there's anything we should know in terms of the cadence for those two KPIs for this year.
spk02: I'll give a quick comment and I'll turn it over to Jim. Just related to the first quarter and this might provide you a little bit of detail. Our office-based patient volumes, you know, we saw real strength in our maternal-fetal medicine volumes. They were up about 3% for the first quarter, keeping in mind that there was no leap year impact on our office-based services, effectively the same number of office days. So that's a solid number. The real offset on the office-based side in volumes was primary and urgent care. So for the rest of our business, things looked fairly stable. On the hospital-based side, our NICU days were up about 2.5%. The lead day effect is about a percentage point on that, so still growth in our NICU days. Underlying births were relatively stable, I would say, roughly flat with... rate of admission and length of stay up slightly, which is a phenomenon we have seen relatively consistently the last couple of years. So to put that together, I would say that our outlook for 2024, as we developed our budget and our forecast, was for a stable volume profile across our business line and stable demand. And I would say that, Jim, that's effectively what we experienced in the first quarter. Yeah, that's exactly what we saw.
spk04: And I think we remain encouraged by the volumes that we've seen in maternal fetal medicine, which really carries over from the end of last year. So not that that's necessarily a leading indicator in terms of neonatal volume, but it is encouraging to us that that is a platform that's very important to the organization.
spk01: Got it. Thank you very much for that clarity. And then I guess just pivoting to the SWB line, I'm curious to know how you all think that's going to progress throughout the year. I know Q1 is usually high from a seasonal perspective, but curious if you could provide any color on that front.
spk02: I would say that there are a couple of components in there. As Jim mentioned, our underlying salary trend remains a little bit elevated versus our historical experience in salary inflation. offset, you know, this quarter by, you know, some lesser growth in the other components of that SWMD, particularly incentive compensation. The second point I would make is that as we affect our operating plans and the portfolio restructuring, that would necessarily have an impact on paper on our SWB as a percent of revenue because the, you know, the basket of practices and sites that are in our plans, as you would imagine, have a meaningfully higher percent of underlying SWB as a percent of revenue. Got it. Thank you.
spk06: And next we have a question from Kevin Fishbeck with Bank of America. Please go ahead.
spk00: Great, thanks. Can you help us from a revenue perspective, what the assets that you're looking to exit would represent? And just to be 100% clear, it sounds like you're saying that they have an absolute negative EBITDA margin. I just wanted to confirm that as well.
spk05: Yeah, Kevin, in terms of the... The total asset count, I would point you to a couple other pieces here with respect to call it some of the disposition activity that we're going through. If you look at kind of non-same unit revenue for the quarter, it's down about $6.8 million. The bulk of our Disposition functions right now are reflected in that non-same unit line item. So some of the components related to kind of the winding down of the losses you'll see coming through non-sane unit in the coming quarters. You know, in terms of all the pieces there, this effort remains fluid, so nailing down the various components right now is a little premature, but we'll be able to provide additional details in the coming quarters as these practices are unwound.
spk00: I guess maybe just to make sure I understand that comment, so you're saying that in Q1, You know, $7 million, so that would run right to $28 million, but it sounds like this is going to build as the year goes on. So it's going to be more than $28 million annualized, and we can track that pace. That's right. That number through the year, that's the way to think about it.
spk05: That's right. That's correct, Kevin. That number right now reflects, you know, in-process dispositions that will continue to grow as we continue to execute on our plan.
spk00: Okay, but there's no target for a run rate number at this point. still to be determined at this point, I'd say. Okay. And then there was a second part of this, and I missed it. It sounded like you said you were doing something about redoing stipends or something. What was the other area about the margin improvement?
spk04: No, I think in that setting, Kevin, you know, obviously we're always in discussions with our health system partners to the extent that there are services, whether those be ambulatory services, or inpatient services, if there's a requirement for us to provide coverage, we want to make sure that our services are adequately reflected in terms of the stipend support. So it's part of the discussion we have year over year with our health system partners, and that's just with regard to the coverage requirements of those ambulatory practices.
spk00: Okay, then maybe just my last one. I think that you guys had gotten into this kind of urgent care business with a view that it was going to add a leg of growth to the company. How do you guys think about when you're done with this portfolio restructuring? What is the right growth algorithm for pediatrics from a top-line perspective?
spk04: Yeah, I think for primary and urgent care, it is probably twofold. One, we acquired a couple of assets in primary and urgent care, and they're very good practices. The problem is that there were not a larger number of attractive acquisitions to do in primary and urgent care, and obviously then it becomes a heavy lift in terms of rolling out these independent practices, you know, in that portfolio across the country. So we just thought that the time to do that was distracting from what we need to do. Our focus, though, on growth would be in the core services that we continue to perform. If you look at it, you know, from the standpoint we didn't announce it specifically, you know, on a press release, we did acquire an MFM practice in California recently. That has been a great addition to our portfolio of MFM. So you'll see more of that activity both on our core and longstanding ambulatory services that fit with our inpatient services and our ability to execute on both organic and inorganic growth on the inpatient side.
spk00: All right, thanks.
spk06: And, ladies and gentlemen, for any additional questions, please press 1, then 0. on your telephone keypad. And we have no other questions. You may continue.
spk04: Thank you all for joining the call today. We'll talk to you next quarter.
spk06: Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.
spk07: We're sorry. Your conference is ending now. Please hang up.
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