Earnings Call Transcript - MD Q2 2025

Operator, Operator

Ladies and gentlemen, thank you for joining us, and welcome to the Pediatrix Medical Group's Q2 2025 Earnings Conference Call. This conference is being recorded. I would now like to turn the call over to Mary Ann Moore, EVP, General Counsel and Chief Administrative Officer. Please proceed.

Mary Ann E. Moore, EVP, General Counsel and Chief Administrative Officer

Thank you, operator, and good morning. 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 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 and annual reports and on our website at www.pediatrix.com. With that, I will turn the call over to Mark Ordan, our Chief Executive Officer.

Mark S. Ordan, CEO

Thanks, Mary Ann, and good morning, everyone. Also with me today is Kasandra Rossi, our Chief Financial Officer. Our second quarter results, including adjusted EBITDA of just over $73 million exceeded our expectations. This was driven by same unit revenue growth of over 6%, which in turn was a result of strong hospital-based volume with NICU days up 6% and favorable reimbursement factors, including higher acuity levels, strong RCM collections and increased hospital administrative fees. Our ongoing cost management initiatives continue to control same-unit salary trends, partially offset by incentive compensation from higher results. These results, along with our second half visibility, have prompted us to raise and narrow our full year adjusted EBITDA range to $245 million to $255 million. These results have also continued to raise our cash position, bolstering our balance sheet and adding options in a very turbulent hospital-based healthcare environment. Kasandra will now provide additional financial details, and then I'll discuss our view of where we are, our focus now and looking forward.

Kasandra H. Rossi, CFO

Thanks, Mark, and good morning, everyone. I'll provide some additional details in a few areas. Our consolidated revenue decreased by just over 7%, driven by non-same unit activity, which declined by about $63 million, primarily related to the impacts from our portfolio restructuring activity. This decrease was partially offset by strong same-unit growth of over 6%. Same unit pricing was up 3.5%, driven by increased patient acuity, primarily in neonatology, strong RCM cash collections and an increase in contract administrative fees. Importantly, payer mix remained relatively stable as compared to both the prior year period and on a consecutive quarter basis. Same-unit patient service volumes increased by approximately 3%, driven by strong increases in hospital-based services, primarily neonatology, where NICU days were up over 6% and within office-based services, where we saw a modest increase in maternal fetal medicine services. Practice-level SW&B expenses declined year-over-year, also reflecting portfolio restructuring activity. On a same-unit basis, we saw an increase in expenses as compared to prior year, but the increase was primarily related to higher incentive compensation based on practice results as well as salary increases. Salary growth has remained in a tight band, consistent with the ranges we have seen for the prior 4 quarters that averaged 3% to 3.5%. Our G&A expense decreased slightly year-over-year, primarily due to a net decrease in salary expense, reflecting the favorable impacts from the staffing reductions across shared services completed in the prior year as well as modest decreases in other expense categories, including professional services and legal fees. These decreases were partially offset by an increase in incentive compensation expense based on overall company financial results. D&A expense declined to $5.3 million as compared to $8.8 million in the prior year, also primarily reflecting the impacts of the practice dispositions. Other nonoperating expense was $4.9 million as compared to $10 million for the prior year period, primarily reflecting an increase in interest income on cash balances as well as a decrease in interest expense on modestly lower average borrowings at slightly lower rates. Moving on to cash flow, we generated $138 million in operating cash flow in the second quarter compared to $109 million in the prior year, driven by higher earnings and increases in cash flow from deferred taxes and accounts payable and accrued expenses. We ended the quarter with cash of $225 million and net debt of just over $380 million. This reflects net leverage of just above 1.5x using the midpoint of our updated adjusted EBITDA outlook range for 2025. Absent any other activities, we would expect our cash balance will be around $350 million to $400 million at the end of 2025. Our accounts receivable DSO at June 30 of 46.4 days were down about 1.2 days from March 31 and December 31, but they were down over 3 days year-over-year, primarily related to improved cash collections at our existing units. From an RCM standpoint, while we continue to work through additional automation and enhancements, we certainly have hit a stride. We consider the complex and lengthy transition to our hybrid model as a success with our operating performance in a solid place. Finally, I'll touch briefly on our updated 2025 outlook range, noting that the increase was primarily related to the top line revenue growth achieved during the second quarter versus our expectations and the narrowing of our range reflects where we sit timing-wise in the year. For the second half of 2025, we expect that our adjusted EBITDA will be fairly ratable in the third and fourth quarters.

Mark S. Ordan, CEO

Thanks so much, Kasandra. Since returning as CEO in January, I have spoken about our concerted efforts to be the best possible partner to our hospitals and to be the employer of choice to leading clinicians who want their careers to be at a quality-driven critical care provider. We continue to believe strongly that these efforts provide the best possible foundation for stability, resilience and opportunity. In my career, I have looked for and usually found opportunities in areas where many see the headwinds most prominently. To capitalize on opportunities in a tougher environment, we believe you have to be the very best at what you do. If you're the best, you will attract the very best talent and be an invaluable partner. At Pediatrix, where we provide the most critical care to mothers, babies and children, being the best means an intense focus on quality of care, having an organization dedicated to this and having the resources needed to support this fully. We are the nation's leading research organization in neonatology. Our clinician leaders serve on boards of outside organizations dedicated to advancing care in neonatology and in maternal fetal medicine. We spoke about acuity earlier in the call, and we oversee more Level 3 and Level 4 NICUs than any other provider organization. Recently, Senator Cotton and other legislators introduced the Neonatal Care Transparency Act, and we believe that we can assist anyone as thought leaders since we know the intricacies of this as well or better than anyone. To be the best, we need to look for ways to be better partners with our hospital partners. We look for opportunities to grow with them while attending to the core of the care and the services we provide. To be the best, we must be resilient, and I've been a broken record about the importance of a strong balance sheet, especially in turbulent times. We spoke earlier about our relatively large cash balance sheet. This provides us flexibility to pay down debt and to employ other corporate finance strategies, including possibly share repurchases, and also enables us to take advantage of potential strengthening opportunities, both inside and outside Pediatrix. We announced today the addition to Pediatrix of my long-time colleague, Greg Neeb, who over many years has collaborated with me and our colleagues to find ways to improve what we do, to reinforce quality efforts and to help find financial and operational opportunities that benefit all stakeholders. This includes, of course, you, our shareholders. We believe that Greg is a great addition to a team that is equipped and poised to do just that. All of this is a natural segue to my thoughts about the Big Beautiful Bill and Pediatrix. We believe that we can effectively manage through the effects of this legislation. Remember, it phases in over time. It has a very different impact on expansion versus non-expansion states where 60% of our volume resides, and it specifically addresses the urgent needs of expectant mothers where, of course, we address the highest risk population. We, of course, hope that the premium tax credits that are set to expire at the end of this year will be extended. And we, like many others, have been using our voices and knowledge to urge that they be extended. This is yet another example of the headwinds that seem always to recur in health care, which require resilient, determined management with the resources and the will to steer through and find opportunities. And when you think about the challenges our clinicians face and meet every day of every year, this is what we believe uniquely defines Pediatrix. With that, operator, I will turn the call over to people with questions.

Operator, Operator

Our first question comes from Pito Chickering from Deutsche Bank.