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spk08: Ladies and gentlemen, thank you for standing by. Your conference will be underway shortly. Please continue to hold. Your conference will begin momentarily. Please continue to hold. Ladies and gentlemen, thank you for standing by. Welcome to the Pediatrics Medical Group 2024 second quarter earnings conference call. At this time, all participant lines are in a listen-only mode. If you would like to ask a question during today's conference, you may press one, then zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Charles Lynch. Please go ahead.
spk06: Thank you, operator, and good morning, everyone. I'm gonna quickly read our 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 meeting of the Federal Private Security 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 410Q, and our annual report on 410K, and on our website at .pediatrics.com. With that, I'll turn the call over to our
spk04: CEO, Dr.
spk06: Jim Swipp.
spk04: 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 second 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 remain 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. 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 quarters of Justin Evita by approximately $3 million. Even accounting for this item, however, results exceeded our expectations. We are maintaining our full-year 2024 outlook for a Justin Evita of between $200 and $220 million. And I'll focus this morning on our operating plans that are fully in motion, and how we anticipate the execution 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 million in annualized Evita 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. This portfolio restructuring plan was formalized during the second quarter, 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 2024, although our operating results do reflect some of the cost benefits of increased efficiencies, including the reduction of our operating structure from seven to four regions. However, our exit activity is now fully underway. Late in the second quarter and soon thereafter, we completed two transactions through which we divested of our roughly two 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. 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 exit businesses that generated approximately $200 million 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, 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 million of annualized adjusted EBITDA following the completion of these plans. 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 three quarters of our practices have been transitioned from our prior vendor with the remainder targeted for completion during the third quarter. 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 to $220 million reflects our best gauge of how all of these moving parts will flow through our results for the remainder of 2024. 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, significant financial strength, and cash flow generation. We also remain committed to supporting our company's longstanding investments in clinical research and education, which are foundational to our mission. Lastly, we announced this morning that our board of directors has appointed Cassandra Rossi, our senior vice president, financial reporting, and assistant treasurer, as executive vice president, and chief financial officer and treasurer, effective October 1st. Cassandra joined the organization in 2009 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 activities 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. 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.
spk07: Thanks, Jim. Good morning, everyone. I'll provide some additional details in a few areas. Within our P&L, our GNA 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 GNA expense will be comparable to or lower than 2023 GNA on a dollar basis. First, you'll see we recorded long-lived asset impairments and losses on disposals in our P&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 million in operating cash flow in the second quarter, compared to $93 million in the prior year. Our cash flow benefited from a reduction in DSOs, which declined from 52 days at March 31st to 49.5 days at June 30th. Part of this decline reflects a catch-up in collections following some minor disruptions during the first quarter of 2024 related to the change healthcare incident. 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 first quarter, and we ended the quarter with $20 million in cash on the balance sheet. As a result, our net debt position declined to roughly $600 million, at or below three times leverage based on our outlook of adjusted EBITDA for the year. We expect to generate additional free cash flow during the second half of 2024 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. On a preliminary basis, we expect that our annual capex will be in the range of $16 to $20 million, significantly lower than our average outlays of $30 million in the past several years. Finally, for modeling purposes, I'll reiterate that our second quarter adjusted EBITDA includes approximately $3 million related to a one-time payer settlement that we do not expect to recur. For the second half of 2024, we expect that our adjusted EBITDA will be fairly rattleable in the third and fourth quarters. With that, now I'll turn the call back over to Jim.
spk04: Thank you, Mark. Operator, let's now open up the call for questions.
spk08: Thank you. And our first question is from AJ Rice with UBF. Please go ahead.
spk01: Hi, everybody. Thanks for the question. Just a couple quick things. I may have this wrong, but it looks like to me, you're now assuming about $40 million in restructuring costs, and I thought we were at $25 million before, if I'm right. What's changed there? In any sense about how that's going to play out, how much have you already incurred and how much we incur as you've arrested the rest of the year?
spk07: AJ, it's Mark Richards. I'll jump in. Yeah, you're right. Initially, our transformation and restructuring costs as a result of our first assessment of the portfolio restructuring was in that $20 million 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.
spk01: All right. And have you incurred much of that yet, or is that maybe later in the year? How does that lay out?
spk07: Yes, we have incurred a component of that through June 30th, as you'll note. We expect that will continue and, you know, come to a completion here towards the end of December. So, we're close to coming,
spk01: AJ. All right. I wondered if I could just ask about commercial contracting and so forth. I think you have a reference in the press release that says you're a -or-mix trend, commercial, was it up. I wonder, is that because of this $3 million settlement, or if you asked that out, would it still have been up, and anything to call out there? And any commentary on what you're seeing with this, you know, No Surprises Act arbitrage types of situations? Is there an uptick? Is it steady now at this point? And how are you doing on those cases?
spk06: Hey, Jay. AJ, it's Charlie. Take that in a couple of ways. The -or-mix improvement that we reported does not include a significant amount of the settlement that we referenced from one payer. It's more related to, as we look at our -or-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
spk01: we've done in the past. Okay, I just closed. Best wishes to you, Mark, and congratulations, Cassandra, on the appointment. Thank you, AJ. It's been a pleasure.
spk08: And next we go to Brian Tenquillet with Jefferies. Please go ahead.
spk05: Hi, this is Noor Roblay 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 it's 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 even that.
spk07: Hey, it's Mark Richards. As we noted in the earlier discussion, the bulk of the office exits are slated here for the third and fourth quarters. We have seen traction in the second quarter and subsequent to June 30th. 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-fame store revenue numbers and the like that this will increase throughout the year. However, the full impact of both the exits and the offsetting costs associated with those exits will be realized in 25. So, looking at Q3 and Q4, we would see consistent quarters to the second quarter rolling out in Q3 and Q4, raritably, with the positive impact of these restructuring activities really coming in earnest in 2025.
spk05: Got it. Thank you very much for that. And just picking up on A.J.'s question, you know, the strong pricing growth this quarter, just curious if you all think there's positive momentum to run rate pricing from these current levels. If you could provide some context to that, that'd be helpful.
spk06: 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. So, as we look at our forecast for the remainder of the year, while we're certainly pleased with the payer mix trend that 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.
spk05: Awesome. Thank you very much.
spk08: And the next question is from Pito Chikarin with Deutsche Bank. Please go ahead.
spk03: 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 ,000,000 1X benefit you quantified earlier, 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 is there any additional color on how we feel about consensus in 3Q and 4Q would be super helpful? Thanks.
spk06: I would... Jim, you can jump in here as well, but a comment that I would give is that, yes, the second quarter was 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. So, to that end, we believe that looking at where consensus estimates are, for example, for the third quarter, that level looks appropriate to us. And as Mark mentioned earlier, that between the third and fourth quarters, our best view right now is that dollar-level EBITDA should be fairly comparable between those two quarters.
spk03: Thank you. That's super helpful. And then, just one on the NICU days, which declined 80 bips in the quarter, was this decline primarily volume, or was there also some length of stay impact as well? 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.
spk06: 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.
spk03: 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, 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?
spk06: Payor mix played a slightly greater role in overall saving of pricing versus contract and admin fees, and Jim, I'll let you... Yeah, and I think
spk04: on the... ..related to hospitals and our contractual relationship there, we were very successful in the tail end of last year into the first six quarters here, renegotiating some of those contracts with 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, but where we do, we obviously look at those in terms of the costs associated with our labour changes in the markets.
spk03: Super helpful, guys. Congrats again on a nice quarter. Thank
spk08: you. And, ladies and gentlemen, for any additional questions, you may press 1-0 at this time. And we have a question from Kevin Fishbeck with Bank of America. Please go ahead.
spk02: Great, thanks. You know, I think you guys made a comment that, you know, 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 25 and beyond, even if it's just, hey, we're 80% of the way, we're 100% 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.
spk04: I'll start just, again, I'll just start from the standpoint of what we're looking at across the environment, and Charlie can dovetail into it. I think, you know, what we talked a lot this year about is obviously stabilising the margins and stabilising 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 25. And we believe there are unique opportunities in that 80-20 mix of both ambulatory and our hospital-based service lines, including NICU. And so we have a number of those opportunities we're looking at, and I think our focus for 25 is going to be, you know, really focusing, moving past the disposal of practices and on RCM and really accelerating what we're doing on our growth trajectory. So I think that will be the main focus in 24 into 25.
spk06: The only thing I would add to that is we've made a lot of comments over the past several quarters related to maternal fetal medicine. You know, for the first half of this year, the 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, you know, we do think that, you know, structurally, strategically and geographically, you know, those practices providing MFM services are very well positioned. So it's maybe something to keep in mind as you think about that, you know, non-acquisitive growth algorithm, as opposed to what Jim mentioned, you know, that we can layer on top of related to strategic growth.
spk02: OK, that's helpful. I guess maybe just any colour on payer mix, I guess maybe post, like the 200 million that you're divesting, does that payer mix look similar to the overall company, or does that have an implication post, does that shift makes more towards commercial or more towards government?
spk06: No, it shouldn't have any meaningful implications.
spk02: All right, great, thanks.
spk08: And we have a follow-up from Pito Chickering's line. Please go ahead.
spk03: Hey, guys, sorry, just a couple of additional quick ones. Do you have any maybe incremental colour on any discussions you're having with managed Medicaid? And then for how should we think about for same store inflation versus pricing increases? Thank you.
spk06: For us, Medicaid managed care represents a significant portion of our governmental mix. That's how we classify it, because it 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, what we should be reimbursed.
spk03: Thank you. And then any... Yes, it was just on the same store labour inflation versus pricing.
spk06: But, yeah, we saw some modest deceleration during the second quarter, nothing that we would particularly call out, but some modest deceleration. You know, I think our focus here is, you know, with the portfolio restructuring that we're undertaking, you know, a lot of decision-making going into the next quarter, that did relate to cost trends within any number of ops-based practices leading to some of the decisions that we made.
spk03: Thanks, guys, super helpful.
spk08: And we have no other questions. You may continue.
spk04: Oh, thank you, operator, and thanks everyone for joining the call.
spk08: Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.
spk00: We're sorry, your conference is ending now. Please hang up.
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