Earnings Call Transcript - MD Q1 2025

Operator, Operator

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 filing with the SEC, including the section 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 the 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, Pediatrix Medical Group’s Chief Executive Officer.

Mark Ordan, CEO

Thank you, Operator. Good morning, everyone. With me today is Kasandra Rossi, our Chief Financial Officer. Our first quarter results exceeded our expectations, driven by same-unit revenue growth of over 6%. This included strong volumes in our hospital-based services, with NICU days increasing by 2%, as well as more modest growth in maternal-fetal medicine, along with continued favorable pay remits. Our practice-level operating expenses continued to reflect the favorable impacts of our cost management initiatives, partially offset by higher incentive compensation based on our strong financial practice results. As a result, adjusted EBITDA of just over $49 million was significantly above our expectations. I’m particularly pleased with the continued sharp focus on same-unit salary expense trends that decelerated for the fourth consecutive quarter. As a result of our strong financial performance for the first quarter compared to our expectations, we are raising our full-year 2025 adjusted EBITDA outlook from a range of $215 million to $235 million to a range of $220 million to $240 million. While we are pleased with our first quarter results, we remain mindful that we continue to be in a period of great uncertainty, both in healthcare and throughout the economy. Our operating results for the first quarter include the effectiveness of our strategic approach to the portfolio management activities that we completed in 2024 and our commitment to creating value for our shareholders. This is a direct result of the hard work, collaboration, and dedication of our team, and we are excited to build upon these results. In February, I talked about our strategic priorities in 2025, and in particular, our focus on methodically reinvigorating the relationships that we have built over many years with our hospital and health system partners. I also spoke about all we are doing to reasonably be the employer of choice for physicians and other clinicians who provide the extraordinary critical care our patients require. I’m very pleased to report that I, along with our operating leadership team, are actively engaged here, and we are pleased with the early response. We recently contracted to acquire several NICU, MFM, and OB hospitals to operations in a part of a hospital systems portfolio, because we believe that the system views us as the best and most reliable partner in these areas. I believe this is directly tied to our renewed active engagement, both with our practices and with hospital system leadership. We won’t win every opportunity, and at times hospitals choose to bring things in-house, but we are hard at work to be the best and most responsive partner possible. At Pediatrix, we are our people, the women and men who provide the finest possible clinical care in a very difficult area. Here, too, we are very actively focused on our recruiting, onboarding, development, and retention efforts, and we are confident that this focus will meaningfully bolster our core. If this blocking and tackling strategic focus sounds a bit boring to you, you are probably getting my point. Pediatrix has always been at its best when we are focused passionately on our core, and that is exactly where we are today. This is now providing growth opportunities for us, and we believe strongly this will continue.

Kasandra Rossi, CFO

Thank you, 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 over 4.6%, driven by favorable payer mix shifts and modest improvements in contract administrative fees. This was combined with favorable impacts from strong RCM cash collections. On the cost side, practice-level salary, wages, and benefits expenses declined year-over-year, also reflecting our portfolio restructuring activity. On a same-unit basis, these expenses did increase year-over-year, but the increase was primarily related to higher incentive compensation based on strong practice results, as well as salary increases. Importantly, salary growth decelerated significantly year-over-year and on a sequential quarter basis as compared to the second, third, and fourth quarters of 2024. Our general and administrative expense decreased modestly year-over-year, primarily reflecting the favorable impacts from the staffing reductions across shared services that were completed in the prior year, partially offset by increases in other expenses, including billing and collection fees, certain professional services, and information technology. Depreciation and amortization expense declined to $5.3 million as compared to $10.3 million in the prior year, primarily reflecting the impacts of the practice dispositions. We expect our D&A expense will be fairly consistent going forward. Other expense was $4 million as compared to $8.1 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 lower average borrowings at slightly lower rates. Moving on to cash flow. As a reminder, we are a user of cash in the first quarter of each year as we pay out incentive compensation and other benefits, namely 401(k) matching contributions. We used $116 million in operating cash in the first quarter compared to $123 million in the prior year. The differential was primarily due to higher earnings and increases in cash flow from accounts receivable, partially offset by decreases in cash flow from accounts payable and accrued expenses, primarily related to those incentive compensation payments. We ended the quarter with cash of $99 million and net debt of $512 million. This reflects net leverage of just over 2.2 times using the midpoint of our updated adjusted EBITDA outlook range for 2025. Our accounts receivable DSO of just under 48 days were flat as compared to December 31, but down over four days year-over-year, primarily related to improved cash collections at our existing units. Finally, I’ll briefly touch on our updated 2025 outlook, noting that the increase was predominantly related to the topline revenue growth achieved during the first quarter versus our expectations. The comparisons for the remainder of 2025 become increasingly challenging and accordingly remain materially in line with our original 2025 expectations.

Mark Ordan, CEO

Thanks, Kasandra. Operator, we will now open the call to questions.

Operator, Operator

Your first question comes from the line of A.J. Rice with UBS. Your line is open.

A.J. Rice, Analyst

Thanks. Hi, everybody. Maybe just on the updated thoughts on guidance. I know coming into the year, I think the basic base case was flat volumes and flat pricing for the year. Obviously, you were up 1.6% on volumes and 4.6% on pricing in the first quarter. I know you’re saying comparisons get tougher, but does the flat pricing and flat volumes look conservative in light of what you’ve seen so far this year?

Mark Ordan, CEO

Well, when we gave our initial guidance, we said we were intentionally being a little bit on the conservative side, given the uncertainty that prevailed. Since that uncertainty is probably only accentuated in healthcare and around the economy, we continue to have a conservative stance. It’s simply that the first quarter, A.J., exceeded our expectations by enough that we said it doesn’t make mathematical sense to stay at the old level. Certainly, the amount of EBITDA that we already have in the till is what gave rise to the increase. Is it still conservative? I think only for the same reason as it was before. We still see headwinds in healthcare and the uncertainty in the economy. But that’s why we raised it as we did.

A.J. Rice, Analyst

And just speaking to that uncertainty, I know to some degree, people can make decisions about expanding a family based on what’s happening in the economy. Is that what you’re mainly talking about? When you look at the things that they’re specifically looking at in Washington around budget reconciliation, I wouldn’t assume that those were addressing changes with the expansion population, etc. Some things that would potentially, I guess, limit supplemental payments, which you don’t directly benefit from. Are there things that you’re watching that are of concern or is it more just that general sense of ebb and flow on a burst that happens sometimes in economic ups and downs?

Mark Ordan, CEO

It’s not because of that specifically or anything specific. I would say that right now, my view is not a partisan view, is that there are a lot of changes that are swirling in the economy and through the administration. And we don’t know how they’ll fall out. So there are a lot of things that are being considered in the budget today. But there’ll be a lot of horse trading and we’ll see how things work out. So I just think it’s a more difficult economic time because of that uncertainty. We all hope it’ll work out well. And in a time like that, I think it’s harder to say with the same clarity where we think we’ll end up. Nothing more than that.

A.J. Rice, Analyst

Okay. All right. Thanks a lot.

Mark Ordan, CEO

Sure. Thank you.

Operator, Operator

Your next question comes from the line of Philip Chickering with Deutsche Bank. Your line is open.

Philip Chickering, Analyst

Hey. Good morning, guys. Mark, good talking to you again. Can you talk about the hospital contracted subsidies? If we go back to pre-COVID, did hospitals get any subsidies? Are they getting subsidies today? And just talk about that dynamic in your business.

Mark Ordan, CEO

Yeah. Subsidies have always been part of the business and they continue to be. Part of being a partner with a hospital is working together to figure out what’s best. And if we’re a good partner, then subsidies, in many times, are called into play. We have a very good relationship with our hospital system. So that’s just part of the overall relationship that we have. It’s a normal business. Nothing’s changed.

Philip Chickering, Analyst

Have the amount of subsidies been increasing in the last year or so, or are they as percent of your total revenue still relatively flat?

Mark Ordan, CEO

We don’t break it out separately, but I’d say that if there were a notable change, we would probably mention it.

Philip Chickering, Analyst

Okay. Fair enough. And then to A.J.’s question around just guidance for the year, looking at seasonality, is there anything different this year that we should think about from seasonality, whether it’s what you guys see in the pipeline or as you think about the payer mix changes that would impact seasonality or should we be expecting a fairly normal seasonality as you look at sort of first quarter EBITDAs percent of what your normal? Is there any reason why that would be different this year versus other years?

Mark Ordan, CEO

No, we don't anticipate any changes in seasonality for 2025. Regarding the points you've raised, we are not predicting any changes or are worried about any factors that might impact the 2025 figures; we simply don't have enough information at this time.

Philip Chickering, Analyst

Okay. Right. And the last one here is collections, looking at the DSOs, those sort of continue to get better, but there’s still sort of elevated levels, I guess. When you look at the aging of the buckets within those receivables, are there any areas there that could be a risk for taking charges or are collections continuing to improve across the board and ensure there’s no risk of collections at this point, looking at your receivables?

Mark Ordan, CEO

I will let our Collector in Chief answer that call.

Kasandra Rossi, CFO

Hey, Pito. No. So we don’t see anything that concerns us there from a DSO or accounts receivable in certain buckets. And again, like you said, DSO is flat right around 48 days, and that’s actually a level we think makes a lot of sense for the business right now. So everything’s going well in the revenue cycle management area. And we hope at some point not to have to talk about it every quarter.

Philip Chickering, Analyst

Great. Thank you so much, guys. Nice job.

Kasandra Rossi, CFO

Thanks.

Operator, Operator

Your next question comes from the line of Jack Levin with Jefferies. Your line is open.

Jack Levin, Analyst

Good morning. Thank you for taking my questions and congratulations on a strong quarter. I would like to learn more about the potential hospital contract wins you mentioned. It seems like the market has been relatively stable, although you have indicated that this is a focus area. I'm curious about the nature of your conversations regarding these contracts. Is there a chance we might see an increase in hospitals looking to outsource due to the various challenges they are facing, whether regulatory or fundamental at this time? Thank you.

Mark Ordan, CEO

Our belief is that our strength from the beginning, and no pride of authorship here, has been to be the best partner for hospitals in women’s and children’s services. We’re very strong. I think we believe that by really focusing on those relationships, making sure that we are really reliable counterparties, that we’re working on issues, positive issues and accentuating them, and problems, and nipping them in the bud, that we’re very good at that. So what we’re talking about doing is focusing on those areas. Also, to have a good partnership, you have to be a very good recruiter. We are only our people. So we think there again, if we focus on that, that gives us additional strength. We believe, obviously, that if we are the best in women’s and children’s services, and we focus on both these areas, that we believe we will gain from that. We will grow because of that. Because we think hospital systems will say, gee, why would we do this ourselves when we can work with a partner that’s as reliable as they are, that provides the best-in-class service for women and children and babies?

Jack Levin, Analyst

Got it. Really helpful color. And then just a couple things to close the loop on the model here for you, Kasandra. Just on the understand there’s sort of moving pieces on the dispositions, but that practice supplies and other operating expense lines flagged as being quite low, I guess, relative to what I was expecting, I think what you was expecting. Is there, I guess, is that the right level to think about going forward as we cast things or is there any additional color you can give on that metric? And then the other piece just being, can you talk a little bit about the components of the NICU volume growth and what sort of births and length of stay look like in the quarter? Thanks.

Kasandra Rossi, CFO

Sure. So first on the supplies and other, I think that, yeah, that reflects the practice disposition activity and it is a good way to look about that line going forward. Nothing material that should flex there. And on the NICU stack, so yeah, NICU days, of course, were up 2%. Births were also up just over 2%. And of course, those births are just in the hospitals in which we provide services. I’d say admits were up just a touch, probably less than a percent there. Length of stay was also up just a touch, maybe just a touch over 1%. And the admit rate itself was a bit flattish in the mid-14% range.

Jack Levin, Analyst

Got it. Very helpful and congrats again on a strong quarter.

Mark Ordan, CEO

Thanks very much.

Kasandra Rossi, CFO

Thanks, Jack.

Operator, Operator

Your next question comes from the line of Philip Chickering with Deutsche Bank. Your line is open.

Philip Chickering, Analyst

I think it's okay to wrap this up early. Could you provide an update on the divestitures? How is that progressing? Looking at your portfolio today, are you satisfied with the assets you currently have? Do you see any potential for additional divestitures? Also, regarding the acquisition market, are you noticing any normalization in multiples, and are you starting to deploy capital for deals? Can you discuss both sides of the business? Thank you.

Mark Ordan, CEO

We initially believed we were ahead of schedule on ending earlier, but we'll address your question regardless. We are confident in our current portfolio. Every well-managed organization constantly seeks ways to optimize operations. However, we are satisfied with the broad restructuring we've implemented, as it achieved our intended goals. We will continue to look for ways to enhance our processes, but we don't expect any major changes. The core areas of neonatology, maternal-fetal medicine, OB hospitalists, and pediatric intensive care are essential to us and will remain unchanged. Additionally, we have important hospital subspecialties in select areas that are also crucial. Therefore, we anticipate no changes in those areas. I believe there was another aspect of your question as well.

Philip Chickering, Analyst

On…

Mark Ordan, CEO

Oh! In several ways, yes.

Philip Chickering, Analyst

Yeah.

Mark Ordan, CEO

We believe that the current environment is quite favorable for us as an acquirer due to multiple acquisitions. This may be a result of recent turbulence in the market and the fact that others may not have the strong balance sheet we possess. As a result, we see potential opportunities arising from this situation.

Philip Chickering, Analyst

That’s sort of kind of, what I was sort of leaning into is as you think about all the headlines coming out of D.C. around Medicaid cuts, and the business being such a Medicaid-focused business, that wouldn’t now be a pretty great time for any weaknesses to sell into you guys. You guys could take advantage of that sort of near-term volatility.

Mark Ordan, CEO

Could be. Could be. So our phone lines are open.

Philip Chickering, Analyst

Okay. Fair enough. And then last, a quick model question, investments and other income was quite strong this quarter, I guess, what drove that and how should we be thinking about that for the rest of the year? Thank you so much.

Kasandra Rossi, CFO

Sure. So that is really from the interest income that we’re earning on that cash that sat in our balance sheet. We have those parked in pretty attractive rate vehicles right now, and so as we continue to build cash and continue to earn interest income, that line will look favorable.

Philip Chickering, Analyst

Great. Thanks so much.

Mark Ordan, CEO

Thank you.

Kasandra Rossi, CFO

Thank you, Pito.

Operator, Operator

I’m not showing any further questions in the queue. Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.