Pediatrix Medical Group, Inc. (NYSE:MD) Q1 2024 Earnings Call Transcript

Pediatrix Medical Group, Inc. (NYSE:MD) Q1 2024 Earnings Call Transcript May 7, 2024

Pediatrix Medical Group, Inc. misses on earnings expectations. Reported EPS is $0.1395 EPS, expectations were $0.18. MD isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Pediatrix Medical Group 2024 First Quarter Earnings Conference Call. At this time, all participant lines are in a listen-only mode, later there will be an opportunity for your questions. Instructions will be given at that time. As a reminder, this conference is being recorded for digitized replay. I would now like to turn the conference over to Charles Lynch. Please go ahead.

Charles Lynch: Thank you, operator, and good morning, everyone. Welcome to our call. I’ll quickly read through our forward-looking statements and then we’ll get into our content. 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 Pediatrix 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 10-Q and our annual report on Form 10-K and on our website at www.pediatrix.com. With that, I’ll turn the call over to our CEO, Dr. Jim Swift.

James Swift: Thank you, Charlie. Good morning, everyone. Also with me today is Marc Richards, our Chief Financial Officer. Our first quarter results were in line with our expectations. Our same unit revenue growth reflected positive volumes in our hospital based services, with NICU days increasing 2.5%. On the office based side, we saw ongoing volume strength in maternal fetal medicine offset by declines in our primary and urgent care clinics, which I will touch on in my remarks this morning. Our practice level operating expenses continue to reflect modestly elevated salary and group health insurance trends, partially offset by lower benefit and incentive compensation. Finally, G&A expense was largely unchanged year-over-year despite the additional staffing we have added related to our internal front end revenue cycle management team.

We are reaffirming our full year 2024 outlook of adjusted EBITDA between $200 million and $220 million, and I will focus on this since we believe we are well on our way to enacting changes that will stabilize our margins as compared to 2023 and enable a lower cost structure going forward. First and foremost, while we have historically undertaken regular portfolio management decisions leading to certain practice exits, we have now pivoted and are in the process of an accelerated portfolio restructuring plan under which we are exiting a meaningful number of underperforming office based practices now and before the end of 2024. This is in addition to steps we are taking toward performance improvement across our portfolio of practices, including restructuring and stipend renegotiations, which we believe will result in increased profitability for the organization.

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Q&A Session

We’ve also made the strategic decision to exit our primary and urgent care clinic platform, which represents roughly two dozen clinics in Florida, Texas and Colorado. This decision was based on our review of the cost and time required to build this platform to scale, an undertaking that no longer fits at a time when we are focused on stabilization of our margin profile. We intend to complete this exit during the second quarter of this year. All of this portfolio restructuring activity is targeted to address the components of our practice portfolio that have diluted our consolidated operating margins, with the goal of either removing or remediating that dilution over the coming quarters. Importantly, we have created significant oversight of this restructuring through a strong internal project management team and with designated responsibilities, and our leadership is in a cadence of regular, frequent updates, all focused on execution.

Second, the transition of our RCM function to a hybrid model is going well. As you may have seen in our recent filing, we finalized a contract with Guidehouse under which that organization will be our third party RCM provider. We have been working with Guidehouse since late 2023 and have been very pleased with the resources dedicated to pediatrics, the quality of work, and the collaboration with our internal team, which we expect will be fully staffed over the coming several months. As Marc will detail, our RCM performance has not been negatively impacted by this transition, and we believe our hybrid structure is the most cost effective way to fully support our practices. Finally, we remain intensely focused on efficiency. We believe that our portfolio restructuring activity will enable more effective nonclinical support in the future by emphasizing markets where we have significant infrastructure and system relationships.

During the quarter, we also affected a number of physician eliminations across operations and G&A, such that we are confident that we can maintain a G&A expense level in 2024 that is comparable to or lower than 2023 as a percent of revenue, despite the internal additions we have made to our RCM team. From a timing perspective, much of the impact of our portfolio restructuring will be felt as we move through the second half of the year, and Marc will give some comments about our expected cadence of quarterly adjusted EBITDA. We do believe that taken as a whole, these operating plans will put Pediatrix in a position of far greater margin, stability and operational efficiency in addition to enhanced support of our practices and affiliated clinicians.

I want to thank all of the Pediatrix associates, both clinical and nonclinical, for their hard work and dedication to this organization. We are confident that the operating plans we have in motion will benefit all stakeholders and will enable Pediatrix to effectively continue its mission to take great care of the patients. With that, I’ll turn the call over to Marc Richards.

Marc Richards: Thank you, Jim. Good morning, everyone. I’ll provide some additional details in a few areas. I’ll start with cash flow. As a reminder, we are a user of cash in the first quarter of each year as we pay out incentive compensation and other benefits. During Q1, we used $123 million in operating cash flow compared to $101 million in Q1 of 2023. This differential largely relates to accounts receivable, where our DSOs declined in the first quarter of 2023. For Q1 of 2024, our accounts receivable DSO rose roughly a day and a half from 1231, reflecting a slight impact from the change healthcare incident and to a lesser degree, our RCM transition process. Related to change, we expect this impact to be just a cash deferral.

We utilize change primarily for insurance verification and we were able to quickly pivot to two other vendors with minimal disruption. While this did have a slight timing effect for us during the first quarter, thus far in Q2, we believe that disruption is behind us based on cash receipts. Secondly, Jim noted that we have now finalized our contract with Guidehouse as our RCM provider and we have been fully engaged in transitioning from our former vendor. We are undertaking this transition in stages, which will continue in a deliberate fashion over the coming months. As of today, we have transitioned roughly one third of our affiliated practices to Guidehouse with the expectation of completion by the end of the third quarter. Finally, I’ll touch on our 2024 outlook and our view of the quarterly progression of our adjusted EBITDA.

As Jim noted, while our portfolio restructuring activity is already well underway, we anticipate that its financial impact will be largely weighted towards the second half of this year. As a result, we expect that adjusted EBITDA for the second quarter will contribute 24% to 25% of our full year outlook of $200 million to 220 million. With that, I’ll turn the call back over to Jim.

James Swift: Thank you, Marc. Operator, let’s now open up the call for questions.

Operator: Certainly. [Operator Instructions] We have a question from the line of Pito Chickering with Deutsche Bank. Please go ahead.

Pito Chickering: Hey, good morning. So I’m trying to do the math there, and so apologies, but I guess looking at all the practice disposition, so what percent of the annual EBITDA should we be modeling on the fourth quarter? I’m just trying to figure out what the exit rate we should be modeling on core growth for 2025.

Charles Lynch: Hey Pito, it’s Charlie. We wanted to be clear on our expectations through the first half of this year. And if you think about the math we’ve provided, given the first quarter adjusted EBITDA of 37% against, that $200 million to $220 million I think is in the range of 18% or so of the full year. And with the second quarter, as Marc laid out, between 24% and 25%, that can give you a sense of the contribution from the first half of this year as we expected for the second half. Keep in mind that our normal seasonal pattern of adjusted EBITDA, all else being equal, would yield our third quarter being the strongest contributor of the year, followed by the fourth quarter. Based on the timing of our activity, some of that might be affected by that activity as it continues to contribute. But that’s the baseline you should be thinking about the normal seasonal pattern is such that the third quarter tends to be the strongest.

Pito Chickering: Okay. And on these practice disposition, I guess looking at both the office and urgent primary care, are these practices that are coming up for renewal or are you sort of exiting these contracts sort of mid, I guess, contracting cycle just because of all the margins? And then do you have the same success rate on renewing practices today, that you historically have? Just want to understand more about why now is the time to deliver those assets.