Pediatrix Medical Group - Q2 2024

Executive Summary

• Q2 net revenue was $504.3M; GAAP EPS was -$1.84 due to $192.9M non-cash goodwill and long-lived asset impairments; Adjusted EPS was $0.34 and Adjusted EBITDA was $57.9M; management said results exceeded internal expectations, aided by stronger payer mix and operating efficiencies.
• Same-unit revenue rose 2.8% YoY, driven by reimbursement-related factors (+2.4%) from payer mix improvement (+230 bps shift to commercial/non-government payors) and modest hospital contract admin fee gains; volumes were stable overall (hospital-based +1.0%, office-based -1.2%; NICU days -0.8%).
• Portfolio restructuring accelerated: exits of nearly all office-based practices (except maternal-fetal medicine) and completed divestiture of ~two dozen primary/urgent care clinics; these exited businesses generated ~$200M revenue in 2023; expected annualized Adjusted EBITDA uplift is ~$30M when complete.
• FY24 Adjusted EBITDA guidance maintained at $200–$220M; CFO noted Q3 and Q4 EBITDA should be fairly ratable, with capex expected to decline to $16–$20M annually post-restructuring and net leverage around ~3x based on outlook.
• Key potential catalysts: execution of practice exits and Guidehouse RCM transition (3/4 of practices transitioned, targeting Q3 completion), sustained payer mix tailwind, and clarity on FY25 growth pivot after portfolio refocus.

What Went Well and What Went Wrong

• What Went Well

  • Same-unit revenue growth (+2.8%) with a favorable payer mix shift (+230 bps) and modest hospital admin fee improvements; management: “operating results exceeded our expectations… improved payor mix, and operating efficiencies”.
  • Cash generation improved: cash from operations of $109.3M in Q2 (vs $92.6M in Q2’23) and DSOs fell from 52 to 49.5 days by quarter-end; revolver fully repaid with $19.4M cash on balance sheet at 6/30.
  • RCM transition progressing smoothly (roughly 3/4 practices transitioned to Guidehouse), with no material disruptions and expectation for enhanced future performance.

• What Went Wrong

  • Large non-cash impairment ($192.9M) associated with portfolio plan drove GAAP net loss of $153.0M (-$1.84 EPS), overshadowing Adjusted EPS of $0.34; adjusted EBITDA slightly below prior year ($57.9M vs $59.1M).
  • Office-based volumes declined (-1.2% YoY), and NICU days fell (-0.8%), offsetting hospital-based volume growth (+1.0%).
  • Estimated restructuring/exit costs increased to about $40M (from ~$20–25M), timing to complete by year-end; benefits largely a 2025 story per CFO.

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to the Pediatrix Medical Group 2024 Second Quarter Earnings Conference Call. At this time, all participant lines are in a listen-only mode. If you would like to ask a question during today's conference, you may press one, then zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to Charles Lynch. Please go ahead.

James Swift (CEO)

Thank you, operator, and good morning, everyone. I'm gonna quickly read our forward-looking statements before we begin 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 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. Jim Swift. Thank you, Charlie, and good morning, everyone. Also with me today is Marc Richards, our Chief Financial Officer, and Kasandra Rossi, our Senior Vice President of Financial Reporting and Assistant Treasurer.

Our second quarter operating results exceeded our expectations, driven by same unit revenue growth and operating efficiencies we created during the first half of this year. Our revenue benefited from strong payer mix, as we detailed in our press release. While patient volumes remained stable overall, within our patient volumes, NICU days declined slightly, with hospital-based volume growth driven by other subspecialties, including newborn nursery, pediatric intensive care, and pediatric hospital services.

On the office-based side, maternal-fetal medicine volume growth was strong, but was offset by volume declines in pediatric urgent care. During the quarter, we recognized revenue related to a one-time settlement with a payer that favorably impacted the quarter's Adjusted EBITDA by approximately $3 million. Even accounting for this item, however, results exceeded our expectations.

We are maintaining our full year 2024 outlook for Adjusted EBITDA of between $200 million and $220 million. But I'll focus this morning on our operating plans that are fully in motion, and how we anticipate the execution of these plans will position us as we exit the year. As we discussed last quarter, we developed a broad-based portfolio restructuring plan, which we believe will add roughly $30 million in annualized EBITDA when completed. Under this plan, we have targeted exiting a meaningful number of office-based pediatric subspecialty practices, as well as our pediatric primary and urgent care clinics.

This portfolio restructuring plan was formalized during the second quarter, and as a result, we will be exiting almost all of our office-based practices, other than maternal-fetal medicine, during 2024.

The goals of these strategic exits are to focus our attention on those service lines with solid financial underpinnings, solidify our margin profile, and create meaningful operating efficiencies for Pediatrix. From the standpoint of our revenue and geographical footprint, only a small portion of this restructuring was completed during the first half of 2024, although our operating results do reflect some of the cost benefits of increased efficiencies, including the reduction of our operating structure from seven to four regions. However, our exit activity is now fully underway.

Late in the second quarter and soon thereafter, we completed two transactions through which we divested of our roughly 24 primary and urgent care clinics. During the second half of this year, we plan to exit our remaining office-based pediatric subspecialty practices.

Our operating teams are moving quickly but thoughtfully to ensure that patient services are not disrupted during these transitions. We are working diligently on appropriate pathways for these exits, including transitions to private practice, new ownership, or hospital partnerships. Many of our affiliated physicians have already found new homes with excellent partners and will continue to serve their communities with their world-class care. Following the completion of these plans, we will have exited businesses that generated approximately $200 million in revenue in 2023.

Our refocused portfolio will consist of our core hospital-based services, including neonatology, pediatric intensive care, and a number of other inpatient pediatric services, and on the office-based side, our maternal-fetal medicine practices. Lastly, our revenue profile will be approximately 80% hospital-based and 20% office-based.

As we have stated previously, we anticipate the favorable impact of this portfolio restructuring will be approximately $30 million of annualized Adjusted EBITDA following the completion of these plans. Concurrent with these operating plans, we remain on schedule to complete the transition of our revenue cycle management functions to a hybrid model alongside our new third-party RCM provider, Guidehouse. As of today, roughly three-quarters of our practices have been transitioned from our prior vendor, with the remainder targeted for completion during the third quarter.

Thus far, this transition has not created any material disruptions to our RCM performance, and we continue to believe that this structure will provide the opportunity for enhanced performance in the future. As it relates to our 2024 guidance, we are in the midst of an aggressive reshaping of our company, our service lines, and our operational support.

Marc will provide some additional financial details, but our unchanged outlook for the full year Adjusted EBITDA of $200 million-$220 million reflects our best gauge of how all of these moving parts will flow through our results for the remainder of 2024. We remain steadfast in our goal to exit this year as a more focused and efficient operating company, comprising highly collaborative and critical patient services that we believe provide opportunities for strategic growth, with significant financial strength and cash flow generation.

We also remain committed to supporting our company's long-standing investments in clinical research and education, which are foundational to our mission. Lastly, we announced this morning that our board of directors has appointed Kasandra Rossi, our Senior Vice President, Financial Reporting, and Assistant Treasurer, as Executive Vice President, Chief Financial Officer, and Treasurer, effective October 1st.

Kasandra joined the organization in 2009 and has served in various senior-level accounting, finance, and treasury roles with increasing responsibility, including her most recent role as Senior Vice President, Financial Reporting, and Assistant Treasurer. Kasandra succeeds Marc Richards, who has played an instrumental role in our transformation activities since joining the company in 2020, and will remain in his position through a transition period this fall. I want to congratulate Kasandra on her new role.

I particularly want to thank Marc for all of his contributions to Pediatrix. Similarly, I want to thank all of our Pediatrix associates, both clinical and nonclinical, for their hard work and dedication to this organization, particularly during this time of significant change.

We are confident that the operating plans we have in motion will enable Pediatrix and our affiliated clinicians to effectively continue our mission: to take great care of the patient. With that, I'll turn the call over to Marc Richards.

Marc Richards (CFO)

Thanks, Jim. Good morning, everyone. I'll provide some additional details in a few areas. Within our P&L, our G&A expense declined year-over-year, despite the additional staffing we have put in place as a part of our hybrid revenue cycle management structure. We anticipate that full year 2024 G&A expense will be comparable to, or lower than, 2023 G&A on a dollar basis. First, you'll see we recorded long-lived asset impairments and losses on disposals in our P&L.

These all pertain to the formalization of our portfolio restructuring and the related accounting requirements, and all were non-cash expenses. Moving to cash flow, we generated $109 million in operating cash flow in the second quarter, compared to $93 million in the prior year.

Our cash flow benefited from a reduction in DSOs, which declined from 52 days at March 31 to 49.5 days at June 30. Part of this decline reflects a catch-up in collections following some minor disruptions during the first quarter of 2024 related to the Change Healthcare incident. From an RCM standpoint, I would characterize our performance as expected, which is notable given the magnitude of activity we have undertaken in transitioning to our new provider under our hybrid model.

Our cash generation enabled us to pay down all of the revolver borrowings we utilized in the first quarter, and we ended the quarter with $20 million in cash on the balance sheet. As a result, our net debt position declined to roughly $600 million, at or below 3x leverage based on our outlook of adjusted EBITDA for the year.

We expect to generate additional free cash flow during the second half of 2024, based on our normal conversion of EBITDA to cash flow. We also anticipate that our ongoing capital expenditure needs will decline following the completion of our portfolio restructuring. On a preliminary basis, we expect that our annual CapEx will be in the range of $16 million-$20 million, significantly lower than our average outlays of $30 million in the past several years. Finally, for modeling purposes, I'll reiterate that our second quarter adjusted EBITDA includes approximately $3 million related to a one-time payer settlement that we do not expect to recur.

For the second half of 2024, we expect that our adjusted EBITDA will be fairly ratable in the third and fourth quarters. With that, now 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)

Thank you. Our first question is from A.J. Rice with UBS. Please go ahead.

A.J. Rice (Analyst)

Hi, everybody. Thanks for the question. Just a couple quick things. I may have this wrong, but it looks like to me, you're now assuming about $40 million in restructuring costs, and I thought we were at $25 million before, if I'm right. What's changed there? And any sense about how that's gonna play out, how much have you already incurred and how much will you incur as you progress through the rest of the year?

Marc Richards (CFO)

A.J., it's Marc Richards. I'll jump in. Yeah, you're right. Initially, our transformation and restructuring costs as a result of our kind of first assessment of the portfolio restructuring was in that $20 million range. Since then, we have added to the number of practices we'll be exiting, and accordingly, we've increased our estimate related to those exit costs that you know consists of both severance costs, lease termination, and the like. So yes, that has increased.

A.J. Rice (Analyst)

All right. Have you incurred much of that yet, or is that maybe later in the year, or how, how does that lay out?

Marc Richards (CFO)

Yes, we have incurred a component of that through June thirtieth, as you'll note. We expect that will continue, and, you know, come to a completion here towards the end of December. So-

A.J. Rice (Analyst)

Okay.

Marc Richards (CFO)

More costs to come, A.J.

A.J. Rice (Analyst)

All right. I wondered if I could just ask about, commercial contracting and so forth. I think you have a reference in the press release that says your, payer mix trend commercial, was it up? I wonder, is that because of this $3 million settlement, or if you exit that out, would it still have been up? And anything to call out there, and any commentary on what you're seeing with this, you know, No Surprises Act, arbitrage types of situations? Is there an uptick? It's steady now at this point, and how are you doing on those cases?

Charles Lynch (Head of Investor Relations)

Hey, A.J., it's Charlie. Take that in a couple of ways. The payer mix improvement that we reported does not include a significant amount of the settlement that we referenced from one payer. It's more related to as we look at our payer mix being binary, just a greater mix of non-governmental monies versus Medicaid. In terms of payer contracting, we didn't have a lot to comment on this quarter. You know, we view the landscape across all of our managed care relationships as stable and rolling forward with normal course renewals as we've done in the past.

A.J. Rice (Analyst)

Okay. Just to close, best wishes to you, Marc, and congratulations to Kasandra on the appointment.

Marc Richards (CFO)

Thank you, A.J. It's been a pleasure.

Operator (participant)

Next, we go to Brian Tanquilit with Jefferies. Please go ahead.

Noor Roble (Analyst)

Hi, this is Nur Roble in for Brian. Thank you for taking my question. I was curious if you could provide some more insights on the office-based practice exits. Appreciate the annual impact you all gave in the past, but given that this is supposed to occur prior to the end of the year, just curious if you could provide some quantification on Q4 or possibly Q3 impact to revenue and EBITDA.

Marc Richards (CFO)

Hey, it's Marc Richards. As we noted in the earlier discussion, the bulk of the office exits are slated here for the third and fourth quarters. We have seen traction in the second quarter and subsequent to June thirtieth. However, the bulk of those exits really are slated for the second half of the year. And the impact of which, as this tails off, you'll see in both our non-same store revenue numbers and the like, that this will increase throughout the year. However, you know, the full impact of both the exits and the offsetting costs associated with those exits will be realized in 2025.

So looking at Q3 and Q4, we would see, you know, consistent quarters to the second quarter rolling out in Q3 and Q4 ratably. But the positive impact of, of these restructuring activities really coming in earnest in 2025.

Noor Roble (Analyst)

Got it. Thank you very, thank you very much for that. Just picking up on A.J.'s question on, you know, the strong pricing growth this quarter. Just curious if you all think there's positive momentum to run rate pricing from these current levels. If you could provide some context to that, that'd be helpful.

Charles Lynch (Head of Investor Relations)

Hey, it's Charlie. I would say that we typically, as we look at changes in payer mix, we take that as it comes because it can be very difficult to forecast those types of changes. And from a historical standpoint, our payer mix, while it does fluctuate, you know, quarter to quarter, tends to have a longer trend line to it than, you know, than very brief. So as we look at our forecast for the remainder of the year, while we're certainly pleased about the payer mix trend we've seen so far in the first half, it's not necessarily something that we're going to roll forward as persisting, but we'll take that as it comes.

Noor Roble (Analyst)

Awesome. Thank you very much.

Operator (participant)

The next question is from Pito Chickering with Deutsche Bank. Please go ahead.

Benjamin Shaver (Analyst)

... Hey, guys, you got Benjamin Shaver on for Pito. Nice quarter. Just a couple of questions. So the first one is, so the 2Q is very strong, even when you back out that $3 million one-time benefit you quantified earlier, and you said it was ahead of your expectations, but you only reiterated the guidance. So does that mean that the Street mismodeled 2Q, or sort of any additional color on how we feel about consensus in 3Q and 4Q would be super helpful. Thanks.

Charles Lynch (Head of Investor Relations)

I would, Jim, you can jump in here as well, but a comment that I would give is that, yes, the second quarter was a little bit ahead of our expectations at the EBITDA line. I wanna reiterate Jim's comments that here in the second half of 2024, we have a significant amount of change going on.

The completion of our RCM transition, the practice exits as effectively and efficiently as we can undertake them. And again, to reiterate, the full year outlook that we have not changed represents our best gauge of how all those moving parts move together through the next two quarters, but with an unchanged end goal of the benefits that we've talked about and are seeking.

So to that end, you know, we believe that looking at where consensus estimates are, for example, for the third quarter, that level looks appropriate to us. And as Marc mentioned earlier, that between the third and fourth quarters, our best view right now is that dollar level EBITDA should be fairly comparable between those two quarters.

Benjamin Shaver (Analyst)

All right. Thank you. That's super helpful. And then just one on the NICU days, which declined 80 basis points in the quarter. Was this decline primarily volume, or was there also some length of stay impact as well? And if there was any length of stay impact, was it driven at all by sort of pressure from the payers? And how should we think about it going forward? Thanks.

Charles Lynch (Head of Investor Relations)

No, in terms of both rate of admission into the NICU and length of stay, we didn't see any meaningful changes, year-over-year for this quarter, so that NICU days comparison is roughly comparable to what we've seen in overall births for the quarter year-over-year.

Benjamin Shaver (Analyst)

All right. That's super helpful. And then just one last one on pricing, a little similar to the previous questions, but could you sort of quantify how much the payer mix versus the hospital contract admin fees contributed to that increase year-over-year? And then also on the hospital contract admin fees, is this just a renegotiation of subsidies from the hospitals? And if so, are you in the early innings of being able to get more increases from the rest of the hospitals across your network?

Charles Lynch (Head of Investor Relations)

Payer mix played a slightly greater role in overall same unit pricing versus contract and admin fees. And Jim, I'll let you-

James Swift (CEO)

Yeah, and I think on the related to hospitals and our contractual relationship there, you know, we were very successful in the, you know, tail end of last year into the first, second quarter this year on renegotiating some of those contracts with the hospital and the pricing there. And we're always looking at what we need to do on pricing related to the hospital relationships. But again, remember, largely, you know, we do not have stipends in most of our hospital contracts, but where we do, we obviously look at those in terms of cost associated with our labor changes in the markets.

Benjamin Shaver (Analyst)

Super helpful, guys. Congrats again on a nice quarter.

Charles Lynch (Head of Investor Relations)

Thank you.

Operator (participant)

Ladies and gentlemen, for any additional questions, you may press one zero at this time. We have a question from Kevin Fischbeck with Bank of America. Please go ahead.

Kevin Fischbeck (Analyst)

Great, thanks. You know, I think you guys made a comment that, you know, after this, portfolio restructuring, you guys are gonna be positioned for strategic growth. Is there some way to help us think about what the company looks like from a growth perspective in 25 and beyond? Even if it's just, "Hey, we're 80% inpatient, 20%, you know, physician," then, what the growth rates historically of those two businesses are, just to give us a sense, because it's not a 100% clear to me what the implications are for growth from this restructuring. Thanks.

James Swift (CEO)

I'll start just again, I'll just start from the standpoint of what we're looking at across the environment, and Charlie can dovetail into it. I think, you know, what we talked a lot, a lot this year about is obviously stabilizing the margins and stabilizing the business. And I think, yes, the pivot to growth is paramount in our mind of where we're going, starting really at the tail end here and in 25.

And we believe there are unique opportunities in that 80/20 mix of both ambulatory and our hospital-based service lines, including NICU. And so we have a number of those opportunities we're looking at, and I think our focus for 25 is going to be, you know, really focusing, moving past the disposal of practices and on RCM and really accelerating what we're doing on our growth trajectory.

So I think that will be the main focus, end of 2024 into 2025.

Charles Lynch (Head of Investor Relations)

The only thing I would add, Kevin, is, we've, we've made a lot of comments over the past several quarters related to maternal-fetal medicine, you know, for the first half of this year, same-unit volume growth across our MFM practices was quite strong, approaching the mid-single digits, and that has been persistent going back into 2023 as well.

So, you know, we do think that, you know, structurally, strategically, and geographically, you know, those practices providing MFM services are very well positioned. So it's maybe something to keep in mind as you think about that, you know, non-acquisitive growth algorithm as opposed to what Jim mentioned, you know, that we can layer on top of related to strategic growth.

Kevin Fischbeck (Analyst)

Okay, that's helpful. I guess maybe just any color on payer mix. I guess maybe post, like, the $200 million that you're divesting, is that payer mix looks similar to the overall company, or does that have an implication post? Does that shift mix more towards commercial or more towards government?

Charles Lynch (Head of Investor Relations)

No, it shouldn't have any meaningful implications.

Kevin Fischbeck (Analyst)

All right, great. Thanks.

Operator (participant)

We have a follow-up from Pito Chickering's line. Please go ahead.

Benjamin Shaver (Analyst)

Hey, guys. Sorry, just a couple of additional quick ones. Could you give any maybe incremental color on any discussions you're having with managed Medicaid? And then sort of how should we think about sort of same-store inflation versus pricing increases? Thank you.

Charles Lynch (Head of Investor Relations)

You know, for us, Medicaid managed care represents a significant portion of our governmental mix. That's how we classify it, because it is ultimately Medicaid as the payer. So, and for the most part, that's largely a pass-through from whatever state's Medicaid schedule is to what we should be reimbursed.

Benjamin Shaver (Analyst)

Thank you. And then any... Yes, it was just on the same-store labor inflation versus pricing.

Charles Lynch (Head of Investor Relations)

Yeah, we saw some modest deceleration during the second quarter. Nothing that we would particularly call out, but some modest deceleration. You know, I think our focus here is, you know, with the portfolio restructure that we're undertaking, a lot of decision-making going into that did relate to cost trends within any number of office-based practices leading to some of the decisions that we made.

Benjamin Shaver (Analyst)

Thanks, guys. Super helpful.

Operator (participant)

We have no other questions. You may continue.

Charles Lynch (Head of Investor Relations)

Oh, thank you, operator, and thanks, everyone, for joining the call.

Operator (participant)

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