Pediatrix Medical Group, Inc.

Thank you for standing by. My name is Tammy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pediatrics Medical Group Inc. 4th quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. I would now like to turn the conference over to Charles Link. Please go ahead, Charles.

Thank you, operator. Good morning, everyone. Welcome to our 4th quarter earnings call. I'll quickly read our forward-looking statements and then turn the call over to Mark. 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 10Q and our annual report on Form 10K, and on our website at .pediatrics.com. That'll turn the call over to our CEO, Mark Orten.

Thank you, Charlie, and good morning, everyone. Also with me today is Cassandra Rossi, our chief financial officer. First, I want to thank Charlie, who will be departing at the end of this month. Charlie's contributions to our strategic goals and the communication of those goals to you will be missed. Please join me in wishing him well in his future endeavors. I want to begin by thanking our board of directors for reappointing me as chief executive officer after serving as executive chair. I'm excited to return to this role, and particularly at this point in time for the company, following a period of such significant change. As I'll explain in a few minutes, I returned out of optimism about our prospects. I will begin with our fourth quarter results and then spend time on our strategic priorities for 2025 and beyond. We finished 2024 with very strong fourth quarter and therefore year-end results. Our same unit revenue growth was strong, driven by continued favorable payer mix and positive volume. Our same unit cost trend continued down compared to the third quarter as well. As a result, adjusted EBITDA of 69 million was significantly above the expectations we provided in our updated guidance last year. From a strategic standpoint, we completed our portfolio restructuring on time, exiting practices that represented 200 million in annual revenue and a clear drag on earnings with their requisite overhead. I worked very closely with our operating teams who were incredibly focused on this goal. Their very hard work ensured that we were able to begin 2025 with a more focused portfolio and a more efficient operating team. Similarly, the successful transition of our revenue cycle management function to a hybrid model enables us to focus this year first on ensuring the stability of our now very improved RCM process and then on continued improvement in our performance. Next, I'll add my thoughts on our strategic priorities following our portfolio restructuring and RCM transition. First, we start with a sector leading balance sheet with net debt of about 1.7 times. This affords us with flexibility and opportunity, which is most important in turbulent times. We now have a smaller footprint resulting in a more focused and more efficient organization and our priorities are quite clear. We will first and foremost prioritize patient-centric care by providing optimal support to our clinicians and our practices. We will seek to strengthen our hospital and health system relationships and we will look to the stewards of our financial or improved financial position and our cash flow. I also fully believe that the net result of following these priorities can be consistent, visible and strong operating results. With that in mind and based on a robust budgeting process in which we focused on both the headwinds and opportunities we faced in 2025, this morning we provided a preliminary expectation of adjusted EBITDA of between 215 and $235 million. The Sandra will shortly provide some additional thoughts but we believe that this represents a rigorous yet realistic and achievable outlook for our business this year, which we will obviously revisit and update as appropriate coming quarters. I'd anticipate that some of you are wondering with the strength of our business and all that we accomplished why not guide to a higher number? Bear in mind that adjusted for the leap year 2024, adjusted EBITDA was roughly $220 million. So at midpoint of 2025 guidance of $225 million is of course an increase. As I began my remarks, I returned to pediatrics as CEO because I see a real opportunity to further transform the company through better hospital relationships, better recruiting, which by the way will report to me and growth and opportunities that both of these will afford. We are of course mindful that we are in a period of great uncertainty with headwinds in the healthcare provider space. These headwinds make us realistic about the year ahead but in no way do they counter our optimism. With that, I'll turn it over to Sandra.

Thanks Mark and good morning everyone. I'll provide some details of our fourth quarter results and then I'll discuss some of the parameters of our preliminary 2025 outlook. Our consolidated revenue growth of just over 1% reflected strong same unit growth of 8.7%, largely offset primarily by the impact of our portfolio restructuring activity. In total, this impact was just over $35 million, reflecting a large share of the annualized 200 million in revenue that are restructuring represented based on 2023 financials. On the cost side, the decline in practice level SW&B expenses also reflected our portfolio restructuring. On a same unit basis, the growth in these expenses continued to decelerate as compared to both the prior year period and on a sequential basis. I'll note that while this trend is encouraging, same unit salary expense growth continued to be above the average range of two to 3% that we saw pre-2022. The increase in our GNA expense on a year over year basis primarily reflected incentive compensation based on strong financial results. The additional staffing we added through most of 2024 as part of our hybrid RCM model was offset by efficiencies we have created through the year through staffing reductions across other shared services. Moving to cash flow, we rated $135 million in operating cash flow in the fourth quarter compared to $73 million in the prior year. Partially driving this strong cash flow was a sequential decline in our accounts receivable DSO, which ended the year at 47 1⁄2 days compared to 51 1⁄2 days at September 30th, which as you may recall, we attributed to RCM transition-related activities. Our capital expenditures were $3.5 million. As a result of this cash generation, we ended the year with cash of $230 million, reducing our net debt to $386 million from $515 million at September 30th. This reflects net leverage of just over 1.7 times based on our reported 2024 adjusted EBITDA. With respect to the cash on our balance sheet, we expect to use a good portion of that cash to fund position incentive compensation payments and other benefit payments, namely our 401K matching contribution that we always make during the first quarter of the year, and we will not have to draw on our revolver. As we move through 2025, we would expect to build cash again, and Mark and I will work with our board of directors to determine our best course. Turning to our preliminary 2025 outlook, as Mark said, this outlook is the result of a robust budgeting process and also reflects the finalization of our 2024 portfolio restructuring plan. From a modeling perspective, this outlook contemplates full-year revenue of approximately $1.8 billion. It also contemplates full-year GNA expense in the range of $220 to $230 million, compared to our 2024 GNA of $238 million. Lastly, I'll note the normal seasonality of our quarterly results. Within our expectations of full-year adjusted EBITDA of $215 to $235 million, we anticipate that our first quarter 2025 adjusted EBITDA will represent approximately 17% of that annual expected range. There are a number of known factors we incorporated into our 2025 outlook. The first of these is the expected EBITDA benefit of our portfolio restructuring plan. Recall that our total expected benefit is approximately 30 million on an annualized basis, roughly a third of which we realized during 2024. In addition, as Mark referenced, 2024 was a leap year, which contributed about $4 million in adjusted EBITDA last year, all else being equal. Finally, we have not factored any contribution to our results from M&A activity in 2025. While we are always pursuing a pipeline of additions to our core business, the timing and magnitude of any contribution is not incorporated into this outlook. There are also other factors that we contemplated. First, while we are very pleased with the RCM transition that we completed in September of 2024, our focus for the first half of this year is in maintaining the stability of our performance under this hybrid model, while looking for additional improvements in that performance through process improvement and automation initiatives. Second, payer mix proved to be a strong positive factor in our 2024 operating results. This is not a business driver that we can control. And as a result, we are not contemplating any trend change in 2025, which could impact our results in either direction. Finally, I noted that our underlying practice level cost trend improved throughout the second half of 2024. That trend remained above our historical range of 2 to 3%. This area is a key focus of our operating team, but it's premature at this point to presume continued deceleration, particularly given the still inflationary environment we're in and the significant amount of recruiting and retention activity required across our organization. With that, now I will turn the call back over to Mark.

Thank you, Cassandra. Operator, we will now open the call for questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue.

To withdraw your question, simply press star one again. And your first question comes from the line of Adrian Rice

with UBS. Your line is open.

Hi, everybody. Good luck, Charlie, and welcome back, Mark. First, maybe just to drill down a little bit more on the 25 outlook, there's a lot going on with the restructuring of the operations and some of the other things you've called out. I wonder if you could just speak to what sort of level of embedded same facility volume growth and pricing expectations are you baking in and any other same store metrics to give us a little better sense of what the underlying trends are when you normalize for everything else that's going on?

Sure, so for volume, I guess I'll take them one at a time. For volume, we did have a bit of acceleration of volume in the back half of 24, with NICU days coming in just under 3% and births were up about 30 basis points in Q4. The other stats for neonatology, length of stay was flat, admit rate was slightly up, but we are takers of volume for the most part, so we did include flat volume in our outlook for 2025. Talking about MFM, we did see -single-digit growth there all year and that was really based on a little bit of higher acuity resulting in some additional visits to our MFM clinics, but from a modeling perspective, we did assume that volume would be flat. Looking at pricing, we talked a little bit about payer mix and we know that payer mix was a massive tailwind for us in 24, but we do anticipate that that will level off and of course, as we work our way through 2025, that comp will get a little bit tougher, so we do have that flat. On the managed care side, we talked about the fact that we expect 2025 to be pretty stable, which actually will take us a win in the hard and tough environment that we're operating in where payers still are a bit immobile. And then on the RCM side, collections were really strong in the back half of 24 and the metrics are looking great, but we did build in some improvement in 2025 into our outlook, but we are really focused on stabilization and as we move through the year, we'll see if we can kick that up a bit with automation initiatives and process improvement. Of course, the biggest line in our cost trends are in the SW&B line and as we mentioned, we did decelerate clinical comp expense for the third quarter in a row, getting that just above 3%, although again, not in line with our historical trends of 2 to 3%, so we do see that flattening out, but if we can make some additional headway there, we'll build that in as we move through the year.

Okay, that's great. Let me, maybe just on the follow-up question, we heard a lot, we're hearing a lot from the hospital operators about professional fees and seeing demand for more subsidies, more support, and it seems like it's gone from ER to anesthesiology and more recently, we've heard hospitals talk about radiology. I wonder, in your NICU management, relationships, are you seeing any opportunities for improved economics? Any comment on what those discussions are like?

We have strong and continuous conversations with our hospital partners and that's always been a part of what we do, so we would expect going forward that that's gonna continue to be part of what we do, but we're not baking into our forecast, any increase, so we'll report as we go along.

Okay, all right, thanks a lot.

Next question comes from the line of Jax Levin with Jeffries, your line is open.

Hey, thanks, good morning, congrats on the quarter and thanks to Charlie and congrats stepping back in to mark, hopefully that covers the pleasantries. I just wanted to touch back. And I think you gave a lot of color, it's really helpful. I guess just backing out the leap year, including in the 20 million from the restructuring, you get to like 240 level, right? And so taking all the rest of the commentary, I guess the expectation

is

that wage inflation is gonna outstrip high core rate trends, assuming payer mixes flat in the guide, like you said, Cassandra, is that the right way to think about it and sort of to get to that sort of five to $25 million kit versus a 240 sort of starting point when you adjust for those first two items? Am I thinking about that the right way?

Well, I think that when we thought about the appropriate range, think about the comment that Cassandra made and I made earlier. There are enough headwinds in the provider space that just make us cautious. And obviously throughout the economy, this is a time of real uncertainty. So that tempered our thinking. And importantly, it's mid February, that's why they say we'll update people. So there certainly is an opportunity to do better. We just wanted to be careful in our guidance. It wasn't because of the negative trend or something specific like that. It was just being mindful of the environment that we're in and the uncertainty.

Okay, got it. That makes sense and appreciate that given, I guess, how much all of us are checking Twitter on a daily basis for certain nebulous headwinds. That's so interesting. One follow up here. Maybe taking a step back is something that's perhaps positive that's coming out of that same sphere of influence. There's talk now that's a little more positive on IVF. I think it's something that's pretty clearly could be a large tailwind for you on a multi-year basis. Maybe if there's a seller in terms of, are you seeing any sort of benefit there? How should we think about that opportunity for you? Is this something you've looked at or something you're contemplating as you look out a few years?

But what I'd say is that we agree that it is a possible tailwind for us. We have not calculated that yet and it's not incorporated in our numbers, but we do think that is a potential strong tailwind.

Got it. Thank you, Grafton and the recorder. Thank you. Thank you. And for the pleasantries.

The next question comes from the line of Whit Mayo with Learing Partners.

Your line is open.

Hey, thanks. Good morning. First a two-part question. One, Cassandra, what do you think the earnings tailwind was in 2024 from the improving payer mix? And two, I don't think that that mixed development was incorporated within the initial plan that you developed last year. So I'm curious when you isolate that one factor, Mark, how do you think about the overall performance of the business and all the other areas?

Thanks. Sure. So on the payer mix tailwind, I think if you kind of take Q4 and you look at the same unit growth of about 9% with about six of that coming from pricing, payer mix is about a third of that. So it's a meaningful number for

2024. And Mark, I guess- Because the structural changes in the way, I

was gonna say, because the structural changes in the way payers, there's been a migration toward exchanges. We don't see this necessarily as stopping or reversing. But so this very well could hold, but we can't positively see that.

Yeah, this is about the fifth quarter in a row that we did see some tailwind in payer mix. And like Mark said, if it is a permanent shift, we would expect that to level off. But like we mentioned in our prepared remarks, it going either way can of course move our numbers in either direction.

Do you know what percent of your commercial revenues are coming from patients on the exchanges now?

We don't have that

number.

Yeah, we usually can't see that with any specificity. So it's a primary reason why we can't truly validate that the exchange migration is the key driver. We don't disagree with it, but we just can't validate it through our data. Right,

okay. And maybe just one last one. Mark, just you referenced in your prepared comments some things about the business that give you UC grade opportunity, I think was your quote. What are some of the areas where you have the most optimism as you think about 2025, thanks?

Actually, two that I followed out.

Yeah, well, I think it's short and long term. And where are they right now? There are two areas that I think are really key to our future success. One is really, really systematic work on our hospital relationships. And I mean, it's old fashioned, called grinding or blocking and tackling, but that's what we're going to be very focused on. Really going hospital system by hospital system to make sure we have the strongest relationships. And that's both with ones where we enjoy a relationship now and also with our perspective opportunities. The second is in recruiting. You know, we are nothing but our people. And I think with another benefit of being more streamlined is we can really focus on how we do the best job possible in attracting and retaining amazing clinicians. We have for a long time had a happy home for people. We want to make sure that we really maximize what that can provide. So that might seem amorphous, but it is the core of what we do. And we're going to

be all over it, we already are. Okay, thanks.

Next question comes from the line of Pito Chikaring with Dolce Bank. Your

line is open.

Hey guys, you got Benjamin Shaver on for Pito. Just congrats on the night's quarter. I actually got a couple of questions on all the questions I guess I'll hit pricing first. So obviously very, very strong in the fourth quarter. I was just wondering sort of how much of that .9% came from improvements in hospital contract admin fees. And then the second part of that question is pricing was very strong in the second half of this year. And I was wondering if that sort of comps into the first half of 2025, thanks.

So on the contract revenue hospital admin fees for the pricing component, it was probably just under a third there as well. And then on the payer mix as how that flows into 2025, we're really just looking at flat pricing overall between payer mix managed care contract admin fees, and then a little bit of a bump up in RCM

collection.

So that makes sense.

And then I just wanted to hit the on exiting the primary and urgent care clinics. You mentioned that that was gonna be roughly a $30 million like favorable EBITDA tailwind. And I was wondering if you could break out the split of how much you guys recognized of that in 2024 and how much of that tailwind is going to be in the tailwind to 2025,

thanks. Yeah, so really we considered the primary and urgent care exit as part of the entire portfolio restructuring. So that's included in that $30 million lift in EBITDA of which we realized about a third of that in 24, and the rest will come through in 25, but it wasn't a discrete event. It was really an entire portfolio restructuring.

And most of it was not related to primary and urgent care. Right. It was to the really broad array of ambulatory practices.

And importantly, the overhead that accompanied

that. Gotcha, that makes sense. That's super helpful. And then I said the last question on sort of your capital allocation. You mentioned that you obviously finished the quarter with a lot of cash on the balance sheet. You guys are generating cash as well. You mentioned you had no real plans for M&A and you're gonna mainly be using that cash to just support and continue to invest in your business. I assume that most of the stuff that you mentioned happens every year, right? So I was just wondering if you could add any clarity on maybe any leverage targets that you're looking at and sort of how you're thinking about returning cash to shareholders.

Thanks. Well, as I mentioned in my prepared remarks, you know, and we all know it, in a period like this with a lot of turbulence, we think having an incredibly strong balance sheet is very, very helpful. It provides us with opportunities in a lot of areas and that can include M&A. But, you know, it's early in the year and we'll watch how the year progresses, how the sector progresses. And then as Cassandra said, we'll work with our board of directors to decide what our best course is. Certainly, if you think we should do something paying down debt further or something else to return money to shareholders, we'll look at what the best use of our money is. But, you know, this has been a sector that has not rewarded people for having high leverage. And we anticipated that and we also learned from it. So we're very pleased to be

where we are.

Yeah, that makes a lot of sense. Thanks, that's super helpful. That's all I have,

but congrats again on the next quarter. Thank you. Thank you. Thanks, Jack.

There are no questions at this time. I would now like to turn the call

back over to Mark Ordan for closing remarks.

Thank you all for tuning in today and for your support, your good questions. And again, Charlie, we wish you all the best along with our thanks. Have a great day.

This concludes today's conference call. You may now disconnect.