Pediatrix Medical Group, Inc.

Your conference will begin momentarily. Please continue to hold. Ladies and gentlemen, thank you for standing by and welcome to the 2024 Third Quarters Earnings Conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you have a question, press 1 and then 0. If you should require assistance on today's call, please press star and then 0. And as a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Charles Lynch. Please go ahead.

Thank you, Operator, and good morning, everyone. I'll 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 Meeting on the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by pediatricians' management in light of their experience and assessments 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 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-GAP financial metrics. A reconciliation of these non-GAP financial measures and most comparable GAP measures can be found on this morning's earnings press release, our quarterly reports on Form 10Q, and our annual report on Form 10K, and on our website at .pediatrics.com. Val, turn the call over to our CEO, Dr. Jim Switz. Thank you, Charlie, and good morning, everyone. Also with me today is Cassandra Rossi, our Chief Financial Officer. Our third quarter operating results were modestly ahead of expectations, driven primarily by same-unit revenue growth. Similar to the second quarter, payer mix provided a tailwind to our top line, although this did moderate toward the end of the quarter. Patient values were stable to positive across all of our core service lines compared to the third quarter of last year. On the hospital-based side, our NICU days rose modestly, reflecting slightly positive total births, and we saw positive comparisons across newborn nursery, pediatric intensive care, and PEDS hospital services. On the office-based side, maternal-fetal medicine volume growth remained strong, as we have experienced throughout 2024. Looking at our exposure to hurricanes Helene and Milton during the end of September and early October, while we did experience some office closures, those were quite brief and we did not see any material disruptions to our hospital-based services. More importantly, all of our team members who were in harm's way are safe. Many of our affiliated hospital-based clinicians in affected areas remained in their facilities to care for their patients during storms, and those in office-based settings undertook great efforts, both to prepare for the storms and reopen as quickly as possible on behalf of their patients. I want to thank our teams for their dedication to patient care, and similarly, our hospital partners for their own such dedication. During the quarter, we successfully completed the final wave of our transition to a hybrid revenue cycle management structure, and I am pleased that not only is the transition behind us, but we were able to complete it without any meaningful disruption to our operating results. Our internal team has worked in full collaboration with our new vendor, Guidehouse, and we will now shift our focus from transition to driving improved performance. We also remained focused on completing our portfolio restructuring plan by the end of the fourth quarter. Under this plan, we are exiting businesses totaling $200 million in revenue, with an expectation of approximately $30 million in annualized improvement and adjusted EBITDA based on 2023 results. We expect to realize a portion of this in 2024 and a remainder in 2025 and beyond. As I discussed last quarter, our operating teams have moved quickly but thoughtfully to ensure that patient services are not disrupted during these transitions, and we have identified appropriate pathways for these exits, including transitions to private practice, new ownership, or hospital partnerships. Based on our third quarter results and the progress of our operating plans, we have narrowed our outlook of full year adjusted EBITDA to $205 and $215 million. 2024 has been and continues to be a period of significant change for pediatrics. Our goals, however, are unchanged. To focus our attention on those service lines with solid financial underpinnings, solidify our margin profile and create meaningful operating efficiencies for pediatrics. In turn, we believe that executing our plans will enable us to support highly collaborative and critical patient services and continued investments in clinical research and education. I'd like now to formally introduce Cassandra Rossi, our Executive Vice President, Chief Financial Officer and Treasurer. Cassandra has been with the company for more than 15 years, taking on increasing and more senior roles within our finance organization. I've had the pleasure of working with her throughout my own tenure here, and over the past several months, we have spent significant time ensuring that this leadership transition will be a smooth one. Cassandra leads a very experienced and dedicated finance organization, and all of us on the leadership team look forward to her continued contributions to the company. And with that, I'll turn the call over to Cassandra.

Thanks, Jim, and good morning, everyone. First, I'd like to thank Jim, our board, and the pediatrics team for the opportunity to serve as Chief Financial Officer. As Jim noted, I've spent a considerable part of my career here, and it's an honor to continue to support such a valuable organization, particularly at such an important time in our evolution. I'm a true believer that our finance organization should play an important role, not only in strategic decision-making, but in decisions across our entire organization, all of which have financial implications. We have a talented group of dedicated employees that are part of the CFO organization. Accounting, finance, enterprise data analytics, information technology, and revenue cycle management. These functions overlap with every single part of the business, and I consider it my responsibility to ensure that we bring a full suite of financial data and analytics to the table, as well as identify innovation and automation opportunities so that our operators and shared services partners can make timely and informed decisions and ultimately work toward our shared goal of operating more efficiently. With that said, I'll provide some additional details on the quarter. Our consolidated revenue growth of just under 1% reflected strong same-unit growth, offset primarily by the impact of our portfolio restructuring activity. In total, this impact was just over $20 million during the quarter, reflecting both practice dispositions completed and the divestitures of our former primary and urgent care clinics. On the cost side, practice level FW&B expenses declined year over year, also reflecting our portfolio restructuring. On a same-unit basis, these expenses did increase year over year, but at a slower pace than same-unit revenue. And we did see a year over year deceleration in underlying salary growth, not only as compared to the prior year period, but on a sequential basis as compared to the first and second quarters of 2024. Our GMA expense increased modestly year over year, primarily reflecting the additional staffing we have put in place as part of our hybrid revenue cycle management structure and incentive compensation based on financial results. This was partially offset by efficiencies we've created through the year through staffing reductions across shared services as a result of our smaller footprint across fewer service lines. We continue to anticipate that full year 2024 GMA expense will be comparable to 2023 GMA on a dollar basis. For those of you keeping models, I'll note that our depreciation and amortization expense declined to $6.3 million compared to $9.2 million in the prior year. This decline primarily reflects lower depreciation expense related to our practice dispositions, and our third quarter level of DNA should be fairly consistent going forward, all else being equal. Moving to cash flow, we generated $96 million in operating cash flow during the third quarter compared to $81 million in the prior year. As Jim noted, we completed the final wave of our transition to a hybrid revenue cycle management structure during the quarter with no disruptions to cash generation. We ended the quarter with cash just over $100 million, reducing our net debt to $515 million from $600 million at June 30. This reflects net leverage of just under two and a half times based on the midpoint of our outlook of adjusted EBITDA for the year. With respect to the cash on our balance sheet, we are currently investing that cash in very attractive time deposit accounts at interest rates that are substantially similar to our debt service costs. We expect to use this cash and any cash accumulated during the fourth quarter of 2024, early in 2025, to make physician incentive compensation payments and other benefit payments, mainly our 401k matching contributions. Our intent is to reduce any potential borrowing needs in Q1 2025 before we turn to expected free cash flow generation in Q2 2025 and beyond. Finally, I'll reiterate that based on our results for the first nine months of the year, we have narrowed our expectation of full year 2024 adjusted EBITDA to a range of $205 million to $215 million. With that, now I will turn the call back over to Jim.

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

Thank you. If you wish to ask a question, please press 1 and then 0 on your telephone keypad. You may withdraw your question at any time by repeating the 1-0 command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you do have a question, please press 1 and then 0. And our first question will come from the line of Ryan Daniels with William Blair. Please go ahead.

Yeah. Hi, everyone. This is Jack Johnson, Brian. Thanks for taking the questions. You mentioned that you increased internal staffing, I believe, as part of the RCM transition. Are you at OK levels now, like as we look into the fourth quarter and into 2025, or is this still going to be an area that you'll want to bolster up, you know, kind of throughout the next year or so?

Yeah. So we actually believe we are fully staffed. I know when we initially moved to this hybrid revenue cycle management structure, we noted that we should add approximately 150 heads. We have actually been able to fully staff our teams up, and we are in the mid-130s, and we feel that that is appropriate moving forward. And of course, we will keep an eye on that as we gain additional efficiency as we move into 2025.

OK. Perfect. Thank you. And then just a quick follow-up. I know, like, in the release, you noted the same unit revenue from net reimbursement-related factors increased just from the improved payer mix and then modest improvements in hospital contract admin fees. On both of these fronts, are these two dynamics something we should expect going forward? I think the favorable payer mix was evident last quarter as well. So maybe just to clarify that. And then is, like, is the contract administration fees, like, is that improvement mainly from renegotiations, or is there something, you know, additional underlying there? Thanks.

We'll split this up a little bit. This is Jim. I'll handle the contract revenue with our hospital partners. We spent a fair amount of time, end of 22, end of 23, renegotiating some of those contracts and feel that we're at levels that are appropriate for the services we provide. On a go-forward basis, obviously, what we see is pretty stable pricing. And remember, we're not an organization that relies on a lot of contract revenue. However, if a hospital wants to increase a service or looks for additional services, that's always in play. So again, we need to look at those judiciously as we move forward, which will be the same pace in 2025.

And I can take the payer mix question. I think you could say we've pretty much seen about a four-quarter reset of sorts for payer mix. I know that we've been very transparent in the past that we know what is happening. It's a little bit tougher for us to put our fingers on the why. I think we're going to need to watch this and see how it plays out over the next couple of quarters. We think it's probably some type of a reset that will level off.

Okay, understood. Thanks for the color. And then if I could just flip one final question in there. The same unit revenue increased again at a pretty decent clip this quarter. I think it was a little over 5%. Can you just maybe talk about what is in your control to keep the same unit revenue steady and kind of stabilized going forward? Or is this kind of more like a function of just market growth and what's happening in terms of volume? Thanks.

Yeah, so I mean, of course, on our volumes, for our neonatology business, we are pretty much takers of volume. So it is really what's happening in the market. I think in the one area we have had some strength is MFM. We have seen a little bit, acuity is a bit higher there. We have had some additional visits and we do expect that that will hold as we head into 2025.

Okay, perfect. Thank you again,

guys. Thank you. We do have a question from Jack Slevin with Jeffreese. Please go ahead.

Hey, good morning. Welcome to Cassandra and congrats to everyone on the quarter. Couple things I want to touch on here. Probably just the two biggest moving pieces, I think, that are in folks' minds on the restructuring plan and then on the RCM front. On the restructuring plan, the commentary pretty clear. I guess two things on that. How do you think about modeling that into the fourth quarter on the revenue line? Are we approaching that sort of run rate around the $200 million that you think on a quarterly basis? Or is it still a little below that trend like it was in the third quarter? And then in terms of EVTA contribution, can you confirm if there was any benefit in the third quarter or if you'd expect any benefit in the fourth quarter that's embedded in the guidance on that front?

So I think on the practice dispositions and on the revenue topic, you will see that the impact of the practice dispositions in our non-same unit activity, we mentioned that during the quarter that was about $20 million. And if you look at the year to date on that, it's about $50 million. We did last quarter let you know that most of that activity is slated toward the end of the year. And it is really backloaded mostly in the fourth quarter. So while we do anticipate getting to that $200 million of revenue, it will be by the end of the year with the most of that to come in the fourth quarter. And on the EVTA contribution, we had put out a number in May about $30 million is our expectation of what would flow through from the full suite of our portfolio restructuring. We do expect that we will see about a third of that in 24, but the rest of that will roll into 25.

Okay, got it. That's really helpful. And then maybe on the RCM front, it sounds like everything is going according to plan there. Obviously, 22 and 23 were both years where that was a pretty material headwind to revenues and earnings. How should you think about the opportunity on a call it 12 to 24 month basis if everything continues to go according to plan in RebCycle? Is there any framework you can build out for how we should think about what that could mean on either a revenue or an EBITDA front?

Yes, so we're a little early on being able to quantify what we expect we will have in terms of improved performance as we move out of 24. One thing we were clear about is 2024 was just going to be all about stabilization. The fact that between March of 2024 and September of 2024 that we moved $1.6 billion of revenue and $800 million a day are with no material disruptions is a feat. We're very pleased about the collaboration and now we're going to move to automation, looking for ways we can improve performance while the guide house, our vendor staffing gets up to speed and fully trained and our teams are up to speed. We're looking to the future. We absolutely expect there will be improved performance, but we're really not ready to quantify what that may be and when.

Awesome. Thanks very much.

Thank you. As a reminder, press one and then zero for questions. We do have a question from Pito Chikarin with Deutsche Bank. Please go ahead.

Hi there. This is Kieran on for Pito. Thanks for taking the question. I just wanted to ask if you've seen any improvement in maybe your ability to secure additional funding from hospitals, whether that be in the form of subsidies or something else? I know you've commented before that you don't get subsidies from the majority of your hospitals, but still sounds like to us there's still a lot of specialty groups out there that are kind of asking for these and getting them in a lot of cases. So just wondering if you think that might be an opportunity in 2025?

Yeah, Kieran, it's Jim. We know there's a lot of noise out there on other specialties, particularly on the adult side, for some of that contract revenue from the hospitals. Our relationship with our hospital farm has been very stable and where we have needed, again, because of inflation in wages or inflation in the needs of staffing, we've been successful in negotiating increases to those. Again, as I said earlier on the call, we've largely got a number of those done in late 2022 and through the beginning of 2023. Again, if we believe we need those associated with increased costs, we will approach our hospital partners. If it's a new service line that would require us to have contract revenue, we always negotiate those fully at the beginning of the contract. So there's an opportunity there, but I don't think that we have the same requirements that some of the adult service lines have.

Got it. That's helpful. Thank you. Then second, just another good cash flow quarter. It seems like the cash flow generation should benefit from RCM and the divestitures. So just wanted to see how you're thinking about getting back into M&A in the near term now that you're under two times leverage and any commentary you can provide on the pipeline would be great. Thank you.

Yeah, we're pretty happy with the pipeline we have on the core services. So we think there's a real opportunity there coming up in the tail end of the year here and then into 2025. So our focus is really looking at both our inorganic and organic pipeline. We think there's a meaningful number of acquisitions that we can start down the path on now that we've righted the ship in terms of some of these other

headwinds we're facing.

Does that answer your question?

Yep, I'm all set. Thank you.

Thank you.

Do we have a question?

Yes, we do have a question from AJ Rice with UBS. Please go ahead.

Thanks. There seems to be a little echo there. But anyway, can you maybe just more broadly on the cash flow question? Obviously, there's the revenue cycle management that you've reworked and there's the portfolio restructuring. Have a sense of what a normalized cash flow either from operations or even pre-cash flow run rate is that you're generating at this point?

Hey AJ, it's Charlie. I can give some historical reference which is that our experience in general has been our conversion of EBITDA to operating gap operating cash flow has typically been in a kind of 60% to two-thirds range. That's probably a good baseline to think about. Clearly, this year we've got a lot of moving parts but I think looking forward that's probably a good baseline to think of. Okay,

and then as you said, you've got a couple things that are committed, the cash flow is committed to through the first quarter of 2025. You just asked about M&A but I wanted more broadly share repurchases, other things, capital deployment. Maybe just give a little update on thinking about capital deployment strategy from here.

Yeah, so as we actually head into 2025, we of course expect to use all that cash on our balance sheet early in the year but as we move into 2025 and we get our budget finalized and we see if we're in a place where we may have excess cash, we of course will look at all of the options available to us to deploy capital. We were talking a bit about M&A. We would look always at share repurchases, potentially paying down debt or some combination of those but I think the message there is that we have optimal flexibility as to what we should do with our excess cash.

Okay, maybe just one final point of clarification on the 30 million from the portfolio restructuring. Is there any stranded overhead that or is that a corporate getting rid of any corporate expense that doesn't need to continue because of the downsizing of those practices? I guess I would, yeah, just see if the 30 million is a hard number or is there maybe other opportunities over the next year or two?

I know the 30 million was our estimate. I wouldn't call it a hard number. There is, you know, we have the potential for that to actually come out a little bit better when we get through all of this activity but it is intended to be the full suite of costs that supported the practices that are exiting the organization. We will always look for opportunities for additional efficiency as we move into 25 and that's really part of what we're doing right now with our 25 budget planning.

Okay, thanks a lot.

Okay, thanks a lot. Thank you. As a reminder, press one and then zero for questions. And we have no further questions at this time. Please continue.

Oh, thank you, operator, and thank all of you for joining call this morning. Have a great day.

Thank you. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.