Pediatrix Medical Group - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered solid execution: net revenue $502.4M (+1.2% YoY), GAAP EPS $0.36 vs $(1.50) YoY, Adjusted EPS $0.51, and Adjusted EBITDA $68.7M (+35% YoY), driven by +5.9% reimbursement/payer mix and +2.8% volume; portfolio restructuring completed and hybrid RCM stabilized.
• Operating cash flow of $134.8M and cash of $229.9M strengthened liquidity; management cited net debt of ~$386M (~1.7x net leverage) exiting Q4, positioning MD with balance sheet flexibility.
• 2025 preliminary outlook: Adjusted EBITDA $215–$235M; revenue ~ $1.8B; G&A $220–$230M; Q1 ~17% of full‑year EBITDA (conservative stance given payer mix may normalize and SW&B still above historical).
• Potential stock catalysts: restructuring benefits flow-through in 2025, continued payer mix resiliency, and improved RCM/DSO; management’s credible, conservative guide sets a bar that could be raised if tailwinds persist.

What Went Well and What Went Wrong

What Went Well

• Same‑unit growth accelerated: +8.7% same‑unit revenue in Q4 (5.9% reimbursement/payer mix, 2.8% volume), with commercial payor mix up ~200 bps YoY; NICU days +2.8%.
• Cash generation and working capital improved: CFO $134.8M; DSO improved to 47.5 days from 51.5 in Q3 as RCM stabilized; year‑end cash $229.9M.
• Strategic cleanup executed: completed exit of office‑based and primary/urgent care; management reiterates annualized ~$30M Adj. EBITDA lift (about one‑third realized in 2024).

“Adjusted EBITDA of $69M was significantly above the expectations we provided in our updated guidance last year.” — CEO Mark Ordan.

What Went Wrong

• Expense mix: G&A increased YoY on incentive compensation; transformational/restructuring costs $23.6M in Q4 weighed on GAAP earnings quality.
• SW&B trend still elevated: same‑unit salary growth “just above 3%” in Q4—improving but not yet back to the pre‑2022 2–3% range.
• Macro/provider headwinds persist; payer negotiations remain tough; 2025 outlook set conservatively given uncertainty and potential normalization of payer mix tailwinds.

Transcript

Operator (participant)

Thank you for standing by. My name is Demi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pediatrix Medical Group Inc. Fourth Quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 Lynch. Please go ahead, sir.

Charles Lynch (Head of Investor Relations)

Thank you, Operator. Good morning, everyone. Welcome to our fourth 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 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, Mark Ordan.

Mark Ordan (Executive Chairman and CEO)

Thank you, Charlie, and good morning, everyone. Also with me today is Kasandra 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 volumes. 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 both flexibility and opportunities, 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 be good stewards of our 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 million and $235 million. Kasandra 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 in the coming quarters.

I 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, our 2024 Adjusted EBITDA was roughly $220 million, so our midpoint of 2025 guidance of $225 million is, of course, an increase. As I began my remarks, I returned to Pediatrix 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 the call over to Kasandra.

Kasandra Rossi (EVP, Treasurer, and CFO)

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 our restructuring represented based on 2023 financials. On the cost side, the decline in practice-level SWB 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 2%-3% that we saw pre-2022.

The increase in our G&A 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 generated $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 47.5 days compared to 51.5 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 physician incentive compensation payments and other benefit payments, namely our 401(k) matching contributions 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 G&A expense in the range of $220 million-$230 million compared to our 2024 G&A of $238 million. Lastly, I'll note the normal seasonality of our quarterly results. Within our expectations of full-year Adjusted EBITDA of $215 million-$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, but that trend remained above our historical range of 2%-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 are 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.

Mark Ordan (Executive Chairman and CEO)

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

Operator (participant)

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 A.J. Rice with UBS. Your line is open.

A.J. Rice (Senior Health Care Equity Research Analyst)

Hi, everybody. Good luck, Charlie, and welcome back, Mark. First, maybe just to drill down a little bit more on the 2025 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.

Kasandra Rossi (EVP, Treasurer, and CFO)

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 2024 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 mid-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 2024, 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 as a win in the hard and tough environments 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 2024, 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.

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 SWB 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%-3%. 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.

A.J. Rice (Senior Health Care Equity Research Analyst)

Okay, that's great. Maybe just on the follow-up question, 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 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?

Mark Ordan (Executive Chairman and CEO)

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 going to continue to be part of what we do, but we're not baking any increase into our forecast, so we'll report as we go along.

A.J. Rice (Senior Health Care Equity Research Analyst)

Okay. All right. Thanks a lot.

Operator (participant)

Next question comes from the line of Jack Slevin with Jefferies. Your line is open.

Jack Slevin (Analyst)

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 want to touch back on the guidance, and I think you gave a lot of color. It's really helpful. I guess just backing out the leap year and putting in the $20 million from the restructuring, you get to a $240 level, right? And so taking all the rest of the commentary, I guess the expectation is that wage inflation is going to outstrip the core rate trend, assuming payer mix is flat and the guide, like you said, continues. Is that the right way to think about it and sort of to get to that sort of $5 million-$25 million hit versus a $240 sort of starting point when you adjust for those first two items?

Am I thinking about that the right way?

Mark Ordan (Executive Chairman and CEO)

Well, I think that when we thought about the appropriate range, think about the comments that Kasandra made and that 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 I 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 a negative trend or something specific like that. It was just being mindful of the environment that we're in and the uncertainty.

Jack Slevin (Analyst)

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 sort of nebulous headwinds. That totally makes sense.

Mark Ordan (Executive Chairman and CEO)

Really?

Jack Slevin (Analyst)

One follow-up here. Maybe taking a step back to 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 color 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?

Mark Ordan (Executive Chairman and CEO)

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.

Jack Slevin (Analyst)

Got it. Thanks, and congrats again on the quarter.

Mark Ordan (Executive Chairman and CEO)

Thank you.

Kasandra Rossi (EVP, Treasurer, and CFO)

Thank you.

Mark Ordan (Executive Chairman and CEO)

For the pleasantries.

Operator (participant)

Next question comes from the line of Whit Mayo with Leerink Partners. Your line is open.

Whit Mayo (Senior Managing Director of Equity Research)

Hey, thanks. Good morning. First, a two-part question. One, Kasandra, what do you think the earnings tailwind was in 2024 from the improving payer mix? And two, I don't think that that mix 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 in all the other areas? Thanks.

Kasandra Rossi (EVP, Treasurer, and CFO)

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 6% of that coming from pricing, payer mix is about a third of that. So it's a meaningful number for 2024.

Whit Mayo (Senior Managing Director of Equity Research)

Mark, I guess.

Mark Ordan (Executive Chairman and CEO)

Because of structural changes in the way payers there's been a migration toward exchanges, we don't see this necessarily as stopping or reversing. So this very well could hold, but we can't positively state that.

Kasandra Rossi (EVP, Treasurer, and CFO)

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.

Whit Mayo (Senior Managing Director of Equity Research)

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

Mark Ordan (Executive Chairman and CEO)

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.

Whit Mayo (Senior Managing Director of Equity Research)

Right. Okay. And maybe just one last one, Mark. Just you referenced in your prepared comments some things about the business that you see great opportunity, I think was your quote. Just what are some of the areas where you have the most optimism as you think about 2025? Thanks.

Mark Ordan (Executive Chairman and CEO)

Well, actually.

Whit Mayo (Senior Managing Director of Equity Research)

Where do you think?

Mark Ordan (Executive Chairman and CEO)

I think it's short-term. And where are they right now? There are two areas that I think are really key to our future success. One is really systematic work on our hospital relationships. 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 a prospective opportunity. The second is in recruiting. We are nothing but our people. And I think with another benefit of being more streamlined is that 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, and 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.

Whit Mayo (Senior Managing Director of Equity Research)

Okay. Thanks.

Operator (participant)

Again, if you would like to ask a question, press star one on your telephone keypad. Next question comes from the line of Pito Chickering with Deutsche Bank. Your line is open.

Benjamin Shaver (Research Analyst)

Hey, guys. You got Benjamin Shaver on for Pito. Just congrats on the nice quarter. Actually, a couple of questions on, 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 5.9% came from improvements in hospital contract admin fees. And then the second part of that question is price 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.

Kasandra Rossi (EVP, Treasurer, and CFO)

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 collections.

Benjamin Shaver (Research Analyst)

Gotcha. That makes sense. And then I just wanted to hit the exiting the primary and urgent care clinics. You mentioned that that was going to be roughly a $30 million 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 a tailwind for 2025?

Kasandra Rossi (EVP, Treasurer, and CFO)

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 2024, and the rest will come through in 2025, but it wasn't a discrete event. It was really an entire portfolio restructuring.

Mark Ordan (Executive Chairman and CEO)

Yeah, and most of it was not related to primary and urgent care. It was to the really broad array of ambulatory practice, and importantly.

Benjamin Shaver (Research Analyst)

Gotcha.

Mark Ordan (Executive Chairman and CEO)

The overhead that accompanied that.

Benjamin Shaver (Research Analyst)

Gotcha. That makes sense. That's super helpful. And then I just had a 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 going to 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.

Mark Ordan (Executive Chairman and CEO)

As I mentioned in my prepared remarks, 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 could include M&A. It's early in the year, and we'll watch how the year progresses, how the sector progresses. Then, as Kasandra said, we'll work with our board of directors to decide what our best course is. Certainly, if we think we should do something with paying down debt further or something else to return money to shareholders, we'll look at what the best use of our money is. This has been a sector that has not rewarded people for having high leverage. We anticipated that, and we also learned from it.

So we're very pleased to be where we are.

Benjamin Shaver (Research Analyst)

Yeah. That makes a lot of sense. Thanks. That's super helpful. That's all I have, but congrats again on the ninth quarter.

Mark Ordan (Executive Chairman and CEO)

Thank you.

Kasandra Rossi (EVP, Treasurer, and CFO)

Thank you.

Mark Ordan (Executive Chairman and CEO)

Check.

Operator (participant)

There are no questions at this time. I would now like to turn the call back over to Mark Ordan for closing remarks.

Mark Ordan (Executive Chairman and CEO)

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.

Operator (participant)

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