Pediatrix Medical Group - Q1 2024

Executive Summary

• Q1 2024 landed in line with internal expectations: net revenue $495.1M (+0.8% YoY), GAAP diluted EPS $0.05, Adjusted EPS $0.20, and Adjusted EBITDA $37.2M; management reaffirmed FY24 Adjusted EBITDA guidance of $200–$220M.
• Mix and volume were constructive: NICU days +2.5% (≈+1.5 pts excluding leap day) and maternal-fetal medicine (MFM) volumes “about 3%,” while primary/urgent care volumes declined; commercial payor mix improved ~130 bps YoY.
• Strategic actions intensified: exit of ~two dozen primary/urgent care clinics to be completed in Q2, accelerated disposal of underperforming office-based practices, and formalization of a hybrid RCM model with Guidehouse; roughly one-third of practices had transitioned by the call with completion targeted by end of Q3.
• Cash usage was seasonally heavy (operating cash flow used: $122.6M), with DSO up ~1.5 days from 12/31 tied to Change Healthcare disruption and RCM transition timing; company expects Q2 Adjusted EBITDA to represent 24–25% of FY24 guidance, implying second-half weighting as restructuring benefits phase in.
• Wall Street estimate comparison (S&P Global) was unavailable due to data access limits; beat/miss cannot be assessed this quarter (see Estimates Context) [S&P Global data unavailable].

What Went Well and What Went Wrong

• What Went Well

  • Hospital-based volumes improved and mix helped: NICU days +2.5% YoY and commercial mix +130 bps; MFM volume “about 3%” despite no leap year boost to office days.
  • Reaffirmed FY24 Adjusted EBITDA guidance ($200–$220M); management emphasized margin stabilization via portfolio restructuring and hybrid RCM transition.
  • RCM execution tracking to plan: contract finalized with Guidehouse; ~1/3 of practices transitioned with no negative impact to RCM performance cited.

• What Went Wrong

  • Adjusted EBITDA fell YoY to $37.2M (from $40.1M), and seasonally weak Q1 used $122.6M in operating cash flow; DSO rose ~1.5 days due to external (Change Healthcare) and transition timing.
  • Office-based primary/urgent care volumes declined; management is exiting the primary/urgent care platform and accelerating disposals of underperforming office-based practices to address margin dilution.
  • Practice salaries & benefits remained elevated, reflecting salary and group health cost pressures; G&A rose modestly on internal staffing to build the hybrid RCM capability.

Transcript

Operator (participant)

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 (SVP of Finance and Strategy)

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 Pediatrix's 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. James Swift.

James Swift (CEO)

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.

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 restructurings and stipend renegotiations, which we believe will result in increased profitability for the organization. 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 Pediatrix, 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 non-clinical support in the future by emphasizing markets where we have significant infrastructure and system relationships.

During the quarter, we also effected a number of position 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 % 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 non-clinical, 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 patient. And with that, I'll turn the call over to Marc Richards.

Marc Richards (CFO)

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 $1,231, 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 utilized 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 1/3 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%-25% of our full-year outlook of $200 million-$220 million. With that, I'll turn the call back over to Jim.

James Swift (CEO)

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

Operator (participant)

Certainly. Ladies and gentlemen, if you would like to ask a question, you may press one, then zero on your telephone keypad. You will hear a tone indicating that you have been placed in queue. One moment, please, for the first question. We have a question from the line of Pito Chickering with Deutsche Bank. Please go ahead.

Pito Chickering (Analyst covering Healthcare Facilities and Medical Devices)

Hey, good morning. So I'm trying to do the math there, and so apologies, but I guess looking at all the practice disposition, for what % 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 (SVP of Finance and Strategy)

Hey, Pito, it's Charlie. We wanted to be clear on our expectations for the first half of this year. If you think about the math we've provided, given the first quarter adjusted EBITDA of 37 against that $200 million-$220 million, I think is in the range of 18% or so of the full year. 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 expect it. 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, that the normal seasonal pattern is such that the third quarter tends to be the strongest.

Pito Chickering (Analyst covering Healthcare Facilities and Medical Devices)

Okay. 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 the margins? Do you have the same success rate on renewing practices today as you've historically had? Just want to understand more about why now is the time to deliver those assets.

James Swift (CEO)

This is Jim. Yeah, I don't think that there's anything related to contractual requirements. We do have some of these practices may have some call contracts with some of our affiliated health systems, so some work around that, but we didn't envision the restructuring to coincide with any contracts, either employment agreements or service coverage obligations. We did this because these were practices that we felt were really negative in terms of their EBITDA contribution. In the past, we've had some remediation we've done with them, but it was time to look at these effectively and dispose of them.

Pito Chickering (Analyst covering Healthcare Facilities and Medical Devices)

Okay. Then just last question. I'm going to get a couple inbounds on this one. With the dispositions this year and the full-year guidance you are reiterating, do you think you guys can grow in 2025 with sort of the revised asset base?

Charles Lynch (SVP of Finance and Strategy)

I think it's a little bit premature to think into 2025. The only thing I would comment, Pito, is that the financial impact that we anticipate from this activity, while it will affect our results, it should affect our results in the second half of this year. That would not reflect the full-year impact of this restructuring activity. I think that's about as far as we're going to go related to 2025.

Pito Chickering (Analyst covering Healthcare Facilities and Medical Devices)

All right. Great. Thanks so much.

Operator (participant)

Next, we have a question from Brian Tanquilut with Jefferies. Please go ahead.

Nur Robleh (Equity Research Associate)

Hi. This is Nur Robleh in for Brian. Appreciate you taking my question. Just curious to know your outlook on the volume and rate side of the business. Just curious if there's anything we should know in terms of the cadence for those two KPIs for this year.

Charles Lynch (SVP of Finance and Strategy)

Mr. Charlie, I'll give a quick comment, and I'll turn it over to Jim just related to the first quarter, and this might provide you a little bit of detail. On our office-based patient volumes, we saw real strength in our maternal fetal medicine volumes. They were up about 3% for the first quarter, keeping in mind that there was no leap year impact on our office-based services, effectively the same number of office days. So that's a solid number. The real offset on the office-based side in volumes was primary and urgent care. So for the rest of our business, things looked fairly stable. On the hospital-based side, our NICU days were up about 2.5%. The leap day effect is about a percentage point on that. So still growth in our NICU days.

Underlying births were relatively stable, I would say, roughly flat with rate of admission and length of stay up slightly, which is a phenomenon we have seen relatively consistently the last couple of years. So to put that together, I would say that our outlook for 2024 as we developed our budget and our forecast was for a stable volume profile across our business line and stable demand. And I would say that, Jim, that's effectively what we experienced in the first quarter.

James Swift (CEO)

Yeah, that's exactly what we saw. I think we remain encouraged by the volumes that we've seen in maternal-fetal medicine, which really carries over from the end of last year. So not that that's necessarily a leading indicator in terms of neonatal volume, but it is encouraging to us that that is a platform that's very important to the organization.

Nur Robleh (Equity Research Associate)

Got it. Thank you very much for that clarity. And then I guess just pivoting to the SWB line, curious to know how you all think that's going to progress throughout the year. I know Q1 is usually high from a seasonal perspective, but curious if you could provide any color on that front?

Charles Lynch (SVP of Finance and Strategy)

I would say that there are a couple of components in there. As Jim mentioned, our underlying salary trend remains a little bit elevated versus our historical experience in salary inflation, offset this quarter by some lesser growth in the other components of that SWB, particularly incentive compensation. The second point I would make is that as we affect our operating plans and the portfolio restructuring, that would necessarily have an impact on paper on our SWB's percent of revenue because the basket of practices and sites that are in our plans, as you would imagine, have a meaningfully higher percent of underlying SWB as percent of revenue.

Nur Robleh (Equity Research Associate)

Got it. Thank you.

Operator (participant)

Next, we have a question from Kevin Fischbeck with Bank of America. Please go ahead.

Kevin Fischbeck (Managing Director and Senior Equity Research Analyst)

Great. Thanks. Can you help size from a revenue perspective what the assets that you're looking to exit would represent? And just to be 100% clear, it sounds like you're saying that they have an absolute negative EBITDA margin. Just want to confirm that as well.

James Swift (CEO)

Yeah. Kevin, in terms of the total asset count, I would point you to a couple other pieces here with respect to, call it, some of the disposition activity that we're going through. If you look at kind of non-same unit revenue for the quarter, it's down about $6.8 million. The bulk of our disposition functions right now are reflected in that non-same unit line item. So some of the components related to kind of the wind down of the losses, you'll see coming through non-same unit in the coming quarters. In terms of all the pieces there, this effort remains fluid. So nailing down the various components right now, it's a little premature, but we'll be able to provide additional details in the coming quarters as these practices are unwound.

Kevin Fischbeck (Managing Director and Senior Equity Research Analyst)

I guess maybe just to make sure I understand that comment. So you're saying that in Q1, it's $7 million, so that would run right to $28 million, but it sounds like this is going to build as the year goes on. So it's going to be more than $28 million annualized, and we can track that pace as we see that number through the year. That's the way to think about it.

James Swift (CEO)

That's right. That's correct, Kevin. That number right now reflects in-process dispositions, and we'll continue to grow as we continue to execute on our plan.

Kevin Fischbeck (Managing Director and Senior Equity Research Analyst)

Okay. But there's no target for run rate number at this point?

James Swift (CEO)

Still to be determined at this point, I'd say.

Kevin Fischbeck (Managing Director and Senior Equity Research Analyst)

Okay. And then there was a second part of this, and I missed it. It sounded like you said you were doing something about redoing stipends or something. What was the other area about the margin improvement?

James Swift (CEO)

No, I think in that setting, Kevin, obviously, we're always in discussions with our health system partners to the extent that there are services, whether those be mandatory services or inpatient services. If there's a requirement for us to provide coverage, we want to make sure that our services are adequately reflected in terms of the stipend support. So it's part of the discussion we have year-over-year with our health system partners, and that's just with regard to the coverage requirements of those mandatory practices.

Kevin Fischbeck (Managing Director and Senior Equity Research Analyst)

Okay. And then maybe just my last one. I think that you guys had gotten into this kind of urgent care business with a view that it was going to add a leg of growth to the company. How do you guys think about when you're done with this portfolio restructuring? What is the right growth algorithm for pediatrics from a top-line perspective? Thanks.

James Swift (CEO)

Yeah. I think for primary and urgent care, it's probably twofold. One, we acquired a couple of assets in primary and urgent care, and they're very good practices. The problem is that there were not a larger number of attractive acquisitions to do in primary and urgent care. And obviously, then it becomes a heavy lift in terms of rolling out these independent practices in that portfolio across the country. So we just thought that the time to do that was distracting from what we need to do. Our focus, though, on growth would be in the core services that we continue to perform. If you look at it from the standpoint we didn't announce it specifically on a press release, we did acquire an MFM practice in California that has been a great addition to our portfolio of MFM.

So you'll see more of that activity both on our core and long-standing mandatory services that fit with our inpatient services and our ability to execute on both organic and inorganic growth on the inpatient side.

Kevin Fischbeck (Managing Director and Senior Equity Research Analyst)

All right. Thanks.

Operator (participant)

Ladies and gentlemen, for any additional questions, please press one, then zero on your telephone keypad. We have no other questions. You may continue.

James Swift (CEO)

Thank you all for joining the call today. We'll talk to you next quarter.

Operator (participant)

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.