Earnings Call Transcript - MD Q3 2025

Operator, Operator

Ladies and gentlemen, thank you for being here. Hello, my name is Dustin, and I will be your conference operator today. I would like to welcome you to the Third Quarter 2025 Pediatrix Medical Group, Inc. Earnings Conference Call. I would now like to turn the conference over to our Chief Administrative Officer, Mary Ann Moore. Please proceed.

Mary Ann Moore, Chief Administrative Officer

Thank you, operator, and good morning. Certain statements and information during this 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 pediatrics 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 Ordan, Chief Executive Officer

Thank you, Mary Ann, and good morning, everyone. Also with me today is Kasandra Rossi, our Chief Financial Officer, who is recovering from the flu. We didn't forecast that. Our third quarter results, including adjusted EBITDA of $87 million exceeded our expectations; a confluence of positive outcomes in pricing, collections and expense controls together led to another very strong quarter. 2025 year-to-date results have been strong, and we see no reason to expect a shift from normal seasonality in the fourth quarter. Because of practice bonus variability, our outlook for the full year's adjusted EBITDA is a wider-than-usual range at $270 million to $290 million. Note that we also disclosed in our Q filing that we bought back 1.2 million shares in the quarter. To date, that number is now 1.7 million shares. After Kasandra, I will speak about the big picture about where Pediatrix is today and where we are heading.

Kasandra Rossi, Chief Financial Officer

Thanks, Mark, and good morning, everyone. This is definitely not my real voice, so please forgive me. Our consolidated revenue decrease was driven by our portfolio restructuring activity of just under $54 million. This decrease was partially offset by strong same-unit growth of 8% and with same unit pricing up about 7.5% and patient service volumes up just under 40 basis points. Pricing was driven by solid RCM cash collections, increased patient acuity and neonatology, an increase in contract administrative fees and favorable payer mix. While volumes reflected modest growth in neonatology, where NICU days were up by 2%. Practice-level SW&B expenses declined year-over-year, also reflecting our portfolio restructuring activity. On a same-unit basis, we saw increases in salary expense, incentive compensation based on practice results and benefits expense. Salary growth for the third quarter was modestly below the ranges that we have seen for the prior 5 quarters that averaged 3% to 3.5%. Our G&A expense increased slightly year-over-year, driven by an increase in incentive compensation expense based on overall company financial results. Other non-operating income included a net gain on investments in divested businesses of $21 million, with the remaining net increase driven by higher interest income on cash balances and a decrease in interest expense on modestly lower average borrowings at slightly lower rates. Moving to cash flow. We generated $138 million in operating cash flow in the third quarter compared to $96 million in the prior year, driven by higher earnings and increases in cash flow from AR. We also used $21 million of cash during the quarter for share repurchases and used $19 million to acquire several neonatology, MFM and OB hospitalist practices in a single transaction. We ended the quarter with cash of $340 million and net debt of just over $260 million. This reflects net leverage of just under 1x using the midpoint of our updated adjusted EBITDA outlook range for 2025. Our AR DSO at September 30 of 43.1 days were down over 3 days from June 30, but were down almost 9 days year-over-year, driven by improved cash collections at our existing units.

Mark Ordan, Chief Executive Officer

Thanks, Kasandra. I think that when we release stronger-than-expected results, people go straight to the components of those results and miss the core of who Pediatrix really is. Yes, we employ clinicians and hospitals in an ambulatory setting. And yes, there were strong components of our results that are out of our control, but that fact is hardly unique to us. Let me tell you the combination of some factors that do make us quite unique. At our recent medical directors meeting, we assembled over 250 practice medical directors, OB hospitalists, pediatric intensive care physicians, maternal fetal medicine physicians and neonatologists. Nobody else could assemble a group of clinician leaders like we can. This is the nation's largest assembly of practices in these most critical areas. Presenting to the group were our research clinicians who, in addition to their practice work, produce more research on neonatology than any other organization, including academic medical sectors. Let me give you some details. Our market-leading position. We have massive clinical scale. Our research activity is supported by our substantial neonatology clinical footprint of over 1,300 physicians and 1,170 advanced practice providers, serving patients in 322 locations across 33 states. We maintain the industry's most detailed comprehensive clinical data warehouse with 37 million patient days and 2 million NICU admissions. We drive industry standards. Our research productivity is evidenced by 1,395 peer-reviewed publications authored by our clinicians and researchers, including 62 publications in 2024. Our active research spans 39 sites conducting 72 clinical research studies. The portfolio is diversified across funding sources, including 16 federally funded studies, 19 industry-sponsored pharmaceutical studies and 7 foundation and international collaborations. As of October 31, we maintained 130 active research applications. We strongly believe that this commitment to research drives higher quality and safety, innovation and branding. Our results are also driven by our commitment to technology, and we view ourselves as the innovative technology leader in neonatology. As many of you know, we have a proprietary Pediatrix-developed system called BabySteps to support clinicians as they care for mothers and the frailest of babies. Let me elaborate. It was designed and curated by our physicians and developed by our technology team to address the needs of the highest-risk NICU patients. It specifically addresses the following: supports clinical decision-making, increases efficiency and accuracy in documentation, provides risk mitigation, including med mal and increases clinician well-being via reduced documentation and cognitive burden. It is constantly updated and evolving based on our quality and research team input. Let me give you a specific example, hypoxic ischemic encephalopathy. HIE is a condition that may occur when a newborn baby's brain does not receive enough oxygen and blood flow, with a high mortality rate in severe cases. BabySteps programming prompts timely specific intervention to assist our physicians in diagnosis and care, improving clinical outcomes. After surveying alternatives, we believe BabySteps is a clear differentiator for us and has no peer in the industry, and we are confident that our hospital partners view that as one of our many strengths. Going forward, we plan to increase our prioritization of enhanced technological support. Our clinicians don't just work in hospitals. They and we as an organization, are true partners to these hospitals. We don't just put up a sign to attract this very rare group of clinicians for our hospital partners. We have the largest and I believe the strongest recruiting team in these areas, ensuring we welcome the finest clinicians in our critical fields. Our results include an increase in acuity. Why? Because we lead more Level 3 and Level 4 NICUs than anyone else, and with the support of our research and quality teams and many others at Pediatrix, we provide more support in these fields than anybody else possibly could. This all results in miracles. I speak with and spend a great deal of time with our clinicians, and it is not at all uncommon for me to hear about 22-week-old babies being discharged home. Stop and think about what that means to have an organization that is at the forefront of such amazing care to the frailest patients anywhere, and likely does this more than anyone else. Our strong results, to a great degree, result from our focus on four areas of concentration. And while we restructured our portfolio to further that focus, we continue to build strength around the country in pediatric surgery, neurology, cardiac intensive care and other highly specialized areas. All of what I've described is to further our reputation as a leader in this immensely critical and vital field so that hospital systems know they could not internally do what we can do as a partner. I spoke in May about a portfolio of NICU, MFM and OBH operations we were planning to add. Very happy to report that we did this on schedule and quite successfully, welcoming great clinicians and providing a significant hospital partner with the support they needed. We expect to see more of this going forward. And even on a personal note, many of my administrator colleagues are clinicians or former clinicians and many of us are not, but I will assure you that what unites us is an unwavering dedication to the support of our clinicians so that by extension, we live up to our simple charge: take care of the patients. We have a lot happening here, and I'm grateful to and proud of the work that my colleagues are doing. I will end by returning to our results and outlook. While we have had a combination of positive factors propelling our strong results, we don't view it as being at a peak. While we are certainly in the midst of significant healthcare headwinds, we still see many opportunities to strengthen our operations and our results and we are working hard to enable a very strong future.

Operator, Operator

Operator, let's now open the call for questions.

A.J. Rice, Analyst

First, obviously, you're sitting on a large cash balance. Your leverage is about as low as we've seen it. Any updated thoughts on capital deployment? I know you've been fairly cautious up to this point. Any thoughts about being more aggressive on the share repurchase? Or is there other development or acquisition opportunities that are interesting?

Mark Ordan, Chief Executive Officer

Well, a few things. One, as we said, A.J., we have been fairly aggressively buying back shares, and we're very pleased that it's come at the same time as the results that we've been posting. We are looking at many different opportunities, both inside and possibly outside the company, but nothing to detail at this moment. We announced at our last call that we had welcomed a colleague, a long-time colleague of mine, Greg Neeb, who is working with me to look at ways that we can really expand what we do, both internally and possibly externally. As you know, and anybody who's been listening to these calls, we do favor low debt, especially at a time when we have the kind of headwinds that we are facing. So we'll continue to be cautious, and we look forward to reporting other opportunities as we move forward.

A.J. Rice, Analyst

Okay. Maybe one other follow-up. The restructuring of the portfolio has significantly improved the company's operating performance. I’m curious if it has altered the company's dynamics in the marketplace as you engage with new practices about potentially partnering with you. Does this restructuring make them hesitant, or has it shifted the competitive landscape in any way?

Mark Ordan, Chief Executive Officer

I believe that, on the contrary, both the new practices we’ve welcomed and our existing practices have experienced an obvious increase in the concentration of our efforts due to our smaller footprint. Our team is highly focused on collaborating with our hospital partners and clinicians, creating a much better environment than before. Additionally, our recruiting efforts are now able to concentrate on our specific areas of need, enhancing their effectiveness. While it is always difficult to say goodbye to great clinicians, this focus makes us stronger in many ways. We still have critical areas in various subspecialties, and if a hospital system requires that kind of support, we are committed to finding a way to provide it. Our recruiting team is here to assist us and support our hospital system partners as well.

Kieran Ryan, Analyst

You've got Kieran Ryan on for Pito this morning. So I wanted to start and see if you can maybe break out the different buckets of the strong pricing in the quarter. It sounds like it's a lot of the same stuff you saw in Q2 around collections, acuity, admin fees and some payer mix. So any color you can provide on how that kind of split out in Q3 and your thoughts on the durability and how those factors look as we go into next year?

Kasandra Rossi, Chief Financial Officer

Sure. This is Kasandra. Regarding pricing, over one-third of the increase was due to strong collections activity in Revenue Cycle Management. We observed some of the same factors from previous quarters regarding acuity, which contributed about 20% to the pricing increase. Additionally, contract administrative fees from our hospitals rose by approximately 10%. The payer mix, which had remained stable last quarter based on the favorable conditions we experienced in 2024, actually showed a bit more favorability this quarter of around 10%. This constitutes the majority of what led to a strong pricing quarter. As many of these factors are variable, we expect payer mix to remain somewhat stable. Acuity has been strong in recent quarters, but it is also variable. We've been clear that obtaining increases in contract admin fees has been challenging. While we've had some success, we anticipate it becoming more difficult due to the pressures faced by hospitals. Looking ahead to 2025, I view it as a reset year. We have discussed our transition frequently, and it has gone exceptionally well. I believe we have now found our rhythm in that area.

Kieran Ryan, Analyst

That's helpful. And then I guess just going back to the guidance. I appreciate the commentary on the spread and the seasonality. I was wondering if you could kind of maybe just parse that out a little bit more on the seasonality as well as any other factors that you'd note between the high end and the low end, particularly maybe on volumes because I mean you may have a pretty big office space comp this quarter.

Mark Ordan, Chief Executive Officer

There's nothing on volumes. We're working on several things in the fourth quarter as the company normally does towards the end of the year, and that could create some variability there. We'll report back later if, of course, if anything materializes from that. But that's the reason to have a slightly wider than normal, nothing else.

Jack Slevin, Analyst

Congrats on the really awesome quarter. Mark, I just want to dig in a little bit on some of your comments about the longer term and sort of where you can drive things. Just wondering if you can unpack those a little bit? And then maybe more specifically, as we think about a key topic for some investors has been these enhanced subsidies on the exchange plans and what that might mean for your business, not asking necessarily for you to comment on what seems to still be a period of uncertainty in Washington, but more just wanted to hear if you've had any conversations maybe on the OB side or things that you're hearing in MFN that might sort of give a lead on sort of where expecting mothers could be leading, even if they're facing premium step-ups next year, if it's something that they might be looking to sort of retain coverage on?

Mark Ordan, Chief Executive Officer

We previously discussed this and remain optimistic about the continuation of exchange credits, which appear to be beneficial. While we cannot precisely assess the impact on our operations, we believe this situation is favorable for us, and we maintain hope as there have been no changes so far. The broader landscape is in a wait-and-see mode regarding developments in this area. Regarding our future prospects, we aim to focus intently on the needs of hospital systems, which we believe will create additional opportunities. I am personally engaged in numerous conversations with organizations that haven't achieved the desired internal results and are seeking a specialized partner in these critical areas. In this challenging environment, our financial stability is likely to open up further opportunities, allowing us to collaborate with hospital partners in ways others may not be able to. This positions us well moving forward, especially since many companies are not as well-financed as we are, which could also present opportunities for us.

Jack Slevin, Analyst

Got it. Okay. That's really helpful. And then maybe one just piggybacking on A.J.'s question around capital allocation. Would just love to hear sort of if you can go back over some of the details on the deal that you completed in the quarter and sort of how that's going to feather its way into the business and into the numbers? And then secondly, just thinking about what the environment looks like out there as far as deals at the hospitals, as we expect hospitals to have a couple of years of headwinds here. Are there any acceleration of conversations for some of those practices to sort of pull their way out of hospitals or for hospitals to look to monetize?

Mark Ordan, Chief Executive Officer

We haven't observed any shifts in how hospitals are trying to monetize. We are fortunate to collaborate with hospital systems that are thriving and expanding in this environment, and we aim to grow alongside them. Regarding our recent acquisition, it was not significant enough to warrant detailed disclosure. We tend to keep acquisition specifics under wraps. The reason we mentioned it was that the hospital system had the option to manage these units internally but chose us because we believe we can provide a better service. We plan to remain proactive with our hospital partners, encouraging them to collaborate with us if they are experiencing growth and need assistance. I take great pride in my team, who work tirelessly for our partners. Our quality and research initiatives benefit our hospital system partners, which they couldn't achieve on their own. We reduce risk for the most vulnerable patients, and for any hospital system, partnering with a group that can minimize risk is a significant advantage. Many hospitals seem to agree with this perspective.

Operator, Operator

There are no further questions. I will now pass the call back over to our CEO, Mark Ordan, for closing remarks.

Mark Ordan, Chief Executive Officer

Great. Well, thank you very much, everybody, for your support, and we look forward to updating you on our future progress. Have a great day.

Operator, Operator

The meeting has now concluded. Thank you all for joining. You may now disconnect.