Pediatrix Medical Group, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Pediatrics Medical Group's Q2 2025 earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct 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 the star one. And as a reminder, this conference is being recorded. I would now like to turn the conference over to Mary Ann Moore, EBP General Counsel and Chief Administrative Officer. Please go ahead.

Thank you, Operator, and good morning. Certain statements and information during this conference call may be deemed to be forward-looking statements within the meeting 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 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 and annual reports, and on our website at .pediatrics.com. With that, I will turn the call over to Mark Ordan, our Chief Executive Officer.

Thanks, Mary Ann, and good morning, everyone. Also with me

today is Cassandra Rossi, our Chief Financial Officer. Our second quarter results, including adjusted EBITDA of just over $73 million, exceeded our expectations. This was driven by same-unit revenue growth of over 6%, which in turn was a result of strong hospital-based volume, with NICU days up 6%, and favorable reimbursement factors, including higher acuity levels, strong RCM collections, and increased hospital administrative fees. Our ongoing cost management initiatives continue to control same-unit salary trends, partially offset by incentive compensation from higher results. These results, along with our second half disability, have prompted us to raise and narrow our full-year adjusted EBITDA range to $245 to $255 million. These results have also continued to raise our cash position, bolstering our balance sheet and adding options in a very turbulent hospital-based healthcare environment. Cassandra will now provide additional financial details, and then I'll discuss our view of where we are, our focus now, and looking forward.

Thanks, Mark, and good morning, everyone. I'll provide some additional details in a few areas. Our consolidated revenue decreased by just over 7%, driven by -same-unit activity, which declined by about $63 million, primarily related to the impacts from our portfolio restructuring activity. This decrease was partially offset by strong same-unit growth of over 6%. Same-unit pricing was up 3.5%, driven by increased patient acuity, primarily in neonatology, strong RCM cash collections, and an increase in contract administrative fees. Importantly, payer mix remained relatively stable as compared to both the prior year period and on a consecutive quarter basis. Same-unit patient service volumes increased by approximately 3%, driven by strong increases in hospital-based services, primarily neonatology, where NICU days were up over 6%, and within office-based services, where we saw a modest increase in maternal fetal medicine services. Practice-level SW&B expenses declined year over year, also reflecting portfolio restructuring activity. On a same-unit basis, we saw an increase in expenses as compared to prior year, but the increase was primarily related to higher incentive compensation based on practice results as well as salary increases. Salary growth has remained in a tight band, consistent with the ranges we have seen for the prior four quarters that averaged 3 to 3.5%. Our G&A expense decreased slightly year over year, primarily due to a net decrease in salary expense, reflecting the favorable impacts from the staffing reductions across shared services completed in the prior year, as well as modest decreases in other expense categories, including professional services and legal fees. These decreases were partially offset by an increase in incentive compensation expense based on overall company financial results. G&A expense declined to $5.3 million as compared to $8.8 million in the prior year, also primarily reflecting the impacts of the practice dispositions. Other non-operating expenses were $4.9 million as compared to $10 million for the prior year period, primarily reflecting an increase in interest income on cash balances as well as a decrease in interest expense on modestly lower average borrowings at slightly lower rates. Moving on to cash flow, we generated $138 million in operating cash flow in the second quarter, compared to $109 million in the prior year, driven by higher earnings and increases in cash flow from deferred taxes and accounts payable and accrued expenses. We ended the quarter with cash of $225 million and net debt of just over $380 million. This reflects net leverage of just above one and a half times, using the midpoint of our updated adjusted EBITDA Outlook range for 2025. Absent any other activities, we would expect our cash balance will be around $350 to $400 million at the end of 2025. Our accounts receivable DSO at June 30th of 46.4 days were down about 1.2 days from March 31st and December 31st, but they were down over three days year over year, primarily related to improved cash collections at our existing units. From an RCM standpoint, while we continue to work through additional automation and enhancements, we certainly have hit a stride. We consider the complex and lengthy transition to our hybrid model as a success, with our operating performance in a solid place. Finally, I'll touch briefly on our updated 2025 Outlook range, noting that the increase was primarily related to the top line revenue growth achieved during the second quarter versus our expectations, and the narrowing of our range reflects where we sit timing-wise in the year. For the second half of 2025, we expect that our adjusted EBITDA will be fairly ratable in the third and fourth quarters.

Thanks so much, Cassandra.

Since returning as CEO in January, I have spoken about our concerted efforts to be the best possible partner to our hospitals and to be the employer of choice to clinicians who want their careers to be at a quality-driven, critical care provider. We continue to believe strongly that these efforts provide the best possible foundation for stability, resilience, and opportunity. In my career, I have looked for and usually found opportunities in areas where many see the headwinds most prominently. To capitalize on opportunities in a tougher environment, we believe you have to be the very best at what you do. If you're the best, you will attract the very best talent and be an invaluable partner. At Pediatrics, where we provide the most critical care to mothers, babies, and children, being the best means an intense focus on quality of care, having an organization dedicated to this, and having the resources needed to support this fully. We are the nation's leading research organization in neonatology. Our clinician leaders serve on boards of outside organizations dedicated to advancing care in neonatology and in maternal fetal medicine. We spoke about acuity earlier in the call, and we oversee more level 3 and level 4 NICUs than any other provider organization. Recently, Senator Cotton and other legislators introduced the Neonatal Care Transparency and we believe that we can assist anyone as thought leaders, since we know the intricacies of this as well or better than anyone. To be the best, we need to look for ways to be better partners with our hospital partners. We look for opportunities to grow with them while attending to the core of the care and the services we provide. To be the best, we must be resilient, and I've been a broken record about the importance of a strong balance sheet, especially in turbulent times. We spoke earlier about our relatively large cash balance sheet. This provides us flexibility to pay down debt

and

to employ other corporate finance strategies, including possibly share repurchases, and also enables us to take advantage of potential strengthening opportunities both inside and outside pediatrics. We announced today the to pediatric of my long-time colleague, Greg Knee, who over many years has collaborated with me and our colleagues to find ways to improve what we do, to reinforce quality efforts, and to help find financial and operational opportunities that benefit all stakeholders.

This includes, of course, you, our shareholders. We believe that Greg

is a great addition to a team that is equipped and poised to do just that. All of this is a natural segue to my thoughts about the big, beautiful bill in pediatrics. We believe that we can effectively manage through the effect of this legislation. Remember, it phases in over time. It has a very different impact on expansion versus non-expansion states where 60% of our volume resides, and it specifically addresses the urgent needs of expected mothers where, of course, we address the highest risk population. We, of course, hope that the premium tax credits that are set to expire at the end of this year will be extended, and we, like many others, have been using our voices and knowledge to urge that they be extended. This is yet another example of the headwinds that seem always to occur in healthcare, which require resilient, determined management with the resources and the will to steer through and find opportunities. And when you think about the challenges our clinicians face and meet every day of every year, this is what we believe uniquely defines pediatrics. With that, operator, I will turn the call over to people with questions.

Thank you. We will now begin the question and answer session. You have dialed in and would like to ask a question. Please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw a question, simply press star 1 again. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Our first question comes from Tito Chigaring from Doisheber. Please go ahead.

Hey, good morning, guys, and thanks for taking my question. Can you talk about the hospital admin fees? I think those are previously guided to be flatish. What percent of the pricing growth in the second quarter came from admin fees? Can you tell us how these negotiations are going and how we should think about these admin fees as we head into 2026?

Sure. So, late in 2024, we did say that we expected hospital admin fees to be in the flattish range. In queue one, we did see same unit growth there of just about 10% of pricing. This quarter, it was definitely north of that, and our admin fees made up about a third of our pricing growth. We talked to operations and they said they have certainly been targeting some key programs, both from a renewals perspective and certain asks. We've been able to work with our hospital partners to demonstrate the value we bring and substantiate the asks that are necessary to continue supporting their programs. I don't think in any way we're saying it's easy, but we are definitely having some success there.

Yeah, I would say this goes hand in hand with our efforts to really bolster our relationships with our hospital partners. We're not shy about looking for support where it's warranted, and we believe we operate very efficiently and we're providing an absolutely urgent service to our hospital partners. So, we feel comfortable in that area. You always have to justify what you're doing, but we think we're good at that.

Okay, and then a follow-up here, let's say you increase your admin fee by, let's say, 1%. What is the flow through on how much goes back into doctor compensation versus to corporate? Just trying to figure out the timing of when this to occur.

It's probably somewhere in the 30 to 40% range.

Is it pretty immediate to flow

through?

Yeah, pretty immediate.

Okay, next question. Nicky growth was exceptionally strong this quarter. Any color, what's driving the Nicky growth? Is it just large number of babies? Is market share circums? What drove that 6% Nicky growth this quarter?

It's really the factors that we talked about before. There's no one particular driver of it. And we mentioned one of the things we highlighted was that acuity is certainly up. It's hard to parse where it's all coming from. So, it was just overall strong in really every regard.

Okay, and the last one here for me, just looking at this big, beautiful bill, looking at the Medicaid impact for not, sorry, expansive states, how would that flow through into you guys? Just think about moms and kids versus changes of policy. How would that flow through to you guys? Thank you so much.

You're asking specifically about the expansion states?

Correct. Exactly. Just for the expansion

states. Well, it's not clear yet how

that will flow through. A lot of the details of how that's going to work are not clear. I stressed earlier that 60% of our volume is in the non-expansion states. So, we think that the effect will, and it phases in over time. So, we're not taking it lightly at all, but we think that as you see the rules around who's covered and who's not covered, because it specifically carves out pregnant women, we'll see how that flows through. And we think we have both the time and understanding to manage through it. As it becomes clearer.

Yeah, I mean, that's where my question, just as I think about your patients being pregnant moms and or kids, I guess I'm struggling to see how either of those are going to be the ones being cut from lives simply because it seems moms, kids, and old poor people are generally being held the same. It's much more about working males. And so, I'm trying to figure out why there would almost be any cuts to you guys coming from the big, beautiful bill.

We hope that's the case. And as you know, in any legislation, it's the details and how it's implemented that have not yet been announced. But given that in the very initial wording of the bill, these were pointed out, and I read it the same way you do, the intent of the bill was aimed at a different area of the population. It gives us somewhere between confidence and hope that we won't be targeted. So the fact that we're mostly in the non expansion states, and the fact that legislators are keenly aware, including in those expansion states that their voters depend on, on necessary care, it gives us, again, somewhere between hope and confidence. And we have, we punch above our weight in pointing these things out, I think, to the government, and we're active at that.

Great. Thanks so much. Next quarter.

Thank you. Thank you.

Our

next

question comes from Wood Mayo from Glee Ring Partners. Please go ahead.

Thanks. Mark, can you just elaborate more on buybacks, how you're thinking about the buyback strategy and the pace of buybacks?

Thanks.

Sure.

Well, what I said is we, what I said, I will sort of repeat it. We believe that in a turbulent time, and throughout my career, I've thought, you know, you really want to have a strong balance sheet. It provides you with a lot of opportunity. And at a time like this, when most people are scared about the provider world, where all they see are headwinds, and look at how, look at the multiple or our stock, say, hey, you know, it's a good time to have cash and to have flexibility. Now, it's not our job to hoard cash. We're not a mutual fund. So we want to be careful about what we do. The reason we added Greg and we've bolstered our team in this regard is we do think there are opportunities in a turbulent environment like this, and we want to be able to take advantage of those. Having said that, it's not like announcing some kind of big acquisition or something. So we think about our debt level, and we could pay down debt, and nobody's more incentivized than I am or Greg or anybody in our team to raise our share price if we think that the best strategy is to buy back shares. We have the ability to do it and still not push our leverage levels high, and that's something that we're very mindful of. You know, we're very pleased to have this flexibility, and we're not going to just sit around and watch it.

Okay, now that's helpful. My follow-up is just we can all see the activity with IDR and arbitration. Some of the payers, as you know, are talking about it. Just any update there? I mean, we can see you're winning claims. Is this not a favorable development? And maybe just comment on whether or not the plans are in fact paying you. Thanks.

Yes, that process, while painful for everybody, has gone well for us, and we've done very well in the process. And I would say, as you know, we're overwhelmingly in network. We continue to overwhelmingly be in network. In a few cases where we were out of network, people have wanted us back in network. We provide necessary service. So I would say certainly versus what people have feared and in some cases continue to fear, it's gone a lot better than we had

worried about. Okay, thanks. Our next question comes from Tao Kui from McQuire.

Please go ahead.

Thank you. Good morning. I just want to drill down a little bit on the guidance. If you realize the first half numbers, you reach the lower end of your guidance range. When we consider normal seasonality, that should push you above your current guidance range. I understand you mentioned the cautious view on the hospital landscape. I'm just curious. We were talking about potential headwind coming down the pike. Is it on the revenue expense or both? And maybe what is your outlook in terms of the cadence of margins for the balance of the year? Thank you.

So I think when we talked a little bit about our guidance and when we raised guidance last quarter, we talked about the fact that as we move through 2025, the comps do get a little bit tougher. We had that volume top line increase in Q1. That was our easiest comp of 2025. Got a little bit tougher in Q2, but we really did start to see growth in the back half of 2024. So the comps will be a bit tougher as we move through the year. So I think that's why when we moved our guidance up, it really was specifically related to what we saw in Q1 and Q2. But we do expect margins to be fairly stable as we move through the end of 2025.

Great. And then a follow up on the budget-built impact. A lot of your business originated from the hospitals. When we think about the regulatory and reimbursement changes, the hospital seems to be the biggest victim there. What is your contract discussion with hospitals like these days? Are they looking to contract their service lines down the line if this headwind persists?

No, we're not seeing that

at all. Again, we provided unbelievably necessary service and it's very important in the overall financial picture for hospitals. So we're not seeing people retreating from this. Now, I do fear that it will have an effect in rural areas and other underserved areas of the population if this isn't done with proper care. But we overwhelmingly are in level three and level four NICUs and even level one and level two NICUs provide an absolutely vital service which is really very important to the financial well-being of the hospital and to their patient outcomes. So we're not seeing that at all. What we are seeing is that we provide the necessary service. We spend our days and nights reinforcing that with hospitals. And hospitals look at the time like this. They're looking to take advantage of opportunities just the same we are with the headwinds I mentioned earlier that we are aggressively looking at hospital systems that are growing, that are thinking about like a hub and model for what they're doing and how we can be partners with them as they grow.

Excellent. Thank you. We have no further questions at this time. Please continue.

Well, if there are no more questions, I think we're set. I hope that you can tell that we are mindful of the challenges in front of us but I think we are very prepared to manage through them. We feel confident. We believe that investing in our operations is a very wise thing for today and going forward. And we appreciate

your support. Thank you. That does conclude our conference for today. Thank you for your participation. You may now disconnect.