Thank you for standing by. My name is Tammy, 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 speakers' 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. Thank you. I would now like to turn the conference over to Charles Lynch. Please go ahead, sir.

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 federal Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by Pediatrix Medical Group, Inc.'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 Medical Group, Inc. 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 Gordon.

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 to 2025 and beyond. We finished 2024 with very strong fourth quarter and year-end results. Our same unit revenue growth was strong driven by continued favorable payer mix and positive volume. 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've 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 are incredibly focused. 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 the RCM transition. First, we started 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 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 coming quarters. I'd 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 at midpoint of 2025 guidance of $225 million is, of course, an increase. As I began my remarks, I returned to Pediatrix Medical Group, Inc. as CEO because I see a real opportunity to further transform the company, to better hospital relationships, better recruiting, which by the way will report to me, and growth opportunities that both of these will afford. We are, of course, mindful that we are in a period of significant uncertainty and 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.

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. 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 salary, wages and benefits 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 continues to be above the average range of 2% to 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 created through the year via 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 items. 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 have our physician incentive compensation payment and other benefit payments, namely our 401(k) matching contribution, 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 to $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 to $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 on maintaining the stability of our performance under this hybrid model while looking for additional improvements 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. That trend remained above our historical range of 2% to 3%. This area is a key focus of our operating team and it's premature at this point to presume continued deceleration particularly given the still inflationary environment we're in and the significant amount of recruiting and retention activity required across our organization. With that, I will turn the call back over to Mark.

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

Thank you. We will now begin the question and answer session. To raise your hand and join the queue, press star one. To withdraw your question, simply press star one again. Your first question comes from the line of A.J. Rice with UBS. Your line is open.

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 called out. I wonder if you can 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 the underlying trends when you normalize for everything else that's going on.

Sure. For volume, we did have a bit of acceleration 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 and admission rate was slightly up. We are takers of volume for the most part, so we included flat volume in our outlook for 2025. For maternal-fetal medicine and related services we did see mid-single-digit growth for the year, driven by a little higher acuity resulting in additional visits to our clinics. But from a modeling perspective, we assumed volume would be flat for 2025. Looking at pricing, we discussed payer mix and we know that payer mix was a significant tailwind for us in 2024. We anticipate that will level off, and as we work our way through 2025 that comp will get a little bit tougher, so we assumed flat pricing overall. On the managed care side, we expect 2025 to be pretty stable, which we view as a positive given the tough environment where payers remain somewhat immobile. On the RCM side, collections were really strong in the back half of 2024 and the metrics are looking good. We did build in some improvement in 2025 into our outlook but are really focused on stabilization and then incremental improvement via automation and process improvement. The biggest line in our cost trends is salary, wages and benefits. We decelerated clinical comp expense for the third quarter in a row, getting that just above 3%, although still above our historical range of 2% to 3%. We see that flattening out, and if we can make additional headway we'll build that into guidance as we move through the year.

Okay. That's great. One follow-up: we heard a lot from hospital operators about professional fees and increased demand for subsidies and support, and it seems like it has expanded from emergency medicine to anesthesiology and more recently radiology. In your NICU management relationships, are you seeing any opportunities for improved economics? Any comment on what those discussions are like?

We have strong and continuous conversations with our hospital partners, and that's always been a part of what we do. We would expect going forward that those discussions will continue. However, we are not baking any incremental improvements from those discussions into our forecast today. We will report as developments occur.

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

Hey. Thanks. Good morning. Congrats on the quarter and thanks, Charlie, and welcome back, Mark. Just want to touch on the guide. Backing out the leap year and putting in the $30 million from the restructuring, you get to around a $240 million level. Given commentary on wage inflation and core trends, is it fair to think that wage inflation will outstrip other offsets assuming payer mix is flat, and is that the right way to think about the delta versus the higher starting point? Also, there is talk around potential positive tailwinds like IVF expansion. Is that something you see as a potential multi-year tailwind and have you looked at it?

When we thought about the appropriate range, and in light of Kasandra's comments, there are enough headwinds in the provider space that made us cautious. Throughout the economy this is a time of real uncertainty, and that tempered our thinking. It's mid-February and we'll update guidance as the year progresses. There's certainly opportunity to do better, but we wanted to be careful in our guidance. On IVF, we agree it could be a meaningful tailwind for us over time. We have not calculated that contribution yet and it is not incorporated into our current numbers, but we see it as potential upside.

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

Hey. Thanks. Good morning. 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 when you isolate that one factor, Mark, how do you think about the overall performance of the business in all the other areas?

On the payer mix tailwind, if you take Q4 and look at the same unit growth of about 9%, roughly 6 percentage points of that came from pricing, so it was meaningful for 2024.

I would add that some of this is structural. There have been changes in the way payers operate, including migration toward exchanges. We don't see that necessarily stopping or reversing, but we can't be definitive. If this is a permanent shift, we would expect it to level off. As Kasandra mentioned, it being a driver in either direction can move our results.

This is about the fifth quarter in a row that we saw some tailwind in payer mix. If it is a permanent shift, we would expect it to level off, but it could move our numbers either direction as we noted in our prepared remarks.

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

We don't have a specific number for the percent of commercial revenues coming from exchange plans. We generally can't validate that through our data to the level of specificity you asked for. We believe exchange migration is a driver but we can't truly validate it through our systems.

Mark, you referenced in your prepared comments some areas that give you optimism. What are the areas where you have the most optimism as you think about 2025?

There are two areas that I think are key to our future success. First, systematic work on our hospital relationships. It's old-fashioned grinding, blocking and tackling. We're going to be very focused on going hospital system by hospital system to make sure we have the strongest relationships, both with ones where we already enjoy strong relationships and with prospective opportunities. Second is recruiting. We are nothing but our people. Being more streamlined allows us to focus on attracting and retaining outstanding clinicians. We've been a good home for people and we want to maximize that advantage. That may seem amorphous, but it's the core of what we do.

Next question comes from the line of Pito Chickering with Deutsche Bank. Your line is open.

Hey. Benjamin Shaver on for Pito. Congrats on the nice quarter. I have a couple questions on pricing. First, how much of that 5.9% pricing in Q4 came from improvements in hospital administrative fees and contract adjustments? And second, does that strong price performance in the second half of 2024 carry into the first half of 2025 in your comps?

On the hospital administrative fees and contract admin revenue component, it was probably just under a third of the pricing improvement. On how that flows into 2025, we are modeling flat pricing overall between payer mix, managed care, contract admin fees, and then a little bit of a bump from RCM collections. So we modeled stability in pricing in 2025.

Got it. That makes sense. Then on exiting the primary and urgent care clinics, you mentioned that was part of the portfolio restructuring and would be a favorable EBITDA tailwind. Can you break out how much of that lift you recognized in 2024 and how much will flow through in 2025?

We considered the primary and urgent care exits as part of the entire portfolio restructuring. That's included in the approximately $30 million lift in EBITDA of which we realized about a third in 2024 and the remainder will come through in 2025. It wasn't a discrete event; it was part of a broader set of ambulatory practice exits.

Yes, and to reinforce Kasandra's point, most of the $30 million was not related solely to primary and urgent care. It was a broad array of ambulatory practice actions across the portfolio.

Gotcha. That makes sense. One last question on capital allocation: you finished the quarter with a strong cash balance and are generating cash. You mentioned no specific M&A in 2025 in the outlook. Can you provide any clarity on leverage targets and how you're thinking about returning cash to shareholders?

As I mentioned earlier, in a period like this with turbulence, having a strong balance sheet is very helpful and provides flexibility and opportunities, which could include M&A. It's early in the year. We'll watch how the year and the sector progress and then Kasandra and I will work with the board to decide the best course. That could include paying down debt further or other uses to return money to shareholders. We'll evaluate what's the best use of our cash as the year evolves.

Yeah, that makes sense. Thank you. Congrats again on the quarter.

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

Thank you all for tuning in today and for your support and your good questions. Again, Charlie, we wish you all the best along with our thanks. Have a great day.

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