Pediatrix Medical Group, Inc.

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 meaning of the Federal Private Securities 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 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 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 on this morning's earnings press release, our quarterly reports on Form 10Q and our annual report on Form 10K, and our website at www.pediatrics.com. I'll 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 Hurricane 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'm 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 remain 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 the 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 Lee is 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 SW&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 24. 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 G&A expense will be comparable to 2023 GNA 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 30th. 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 24 early in 2025 to make physician incentive compensation payments and other benefit payments, mainly our 401 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.