MEDNAX Inc
NYSE:MD
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MEDNAX Inc
Earnings Call Analysis
Q2-2024 Analysis
MEDNAX Inc
Pediatrix Medical Group reported strong operational results for the second quarter of 2024, surpassing expectations driven by increased same-unit revenue and improved operational efficiencies. The company experienced stable patient volumes overall, with some positive momentum in hospital-based services like newborn nursery and pediatric intensive care, helping to mitigate a slight decline in NICU days. Notably, a one-time payer settlement contributed approximately $3 million to the adjusted EBITDA, showcasing Pediatrix's ability to capitalize on financial strengths even amidst challenges.
Despite a strong performance, Pediatrix maintained its full-year 2024 adjusted EBITDA guidance of $200 million to $220 million. This reflects management's views on the ongoing restructuring, which includes exiting a substantial portion of office-based pediatric subspecialty practices and urgent care clinics. These transitions aim to enhance overall company efficiency and refocus on core hospital services, with the restructuring expected to provide an additional $30 million in annualized adjusted EBITDA once fully implemented.
Pediatrix has formalized its portfolio restructuring plan, targeting the divestment of nearly all office-based practices except for maternal-fetal medicine by the end of 2024. The company anticipates exiting businesses that generated roughly $200 million in revenue in 2023. Post-restructuring, the revenue profile is expected to shift to approximately 80% hospital-based and 20% from office services, signifying a decisive pivot towards areas with solid financial foundations and operational efficiency.
As part of its transformation, Pediatrix is transitioning to a hybrid revenue cycle management model with Guidehouse, with approximately three-quarters of its practices already transitioned. This move is anticipated to streamline operations without significant disruptions. Moving forward, Pediatrix aims to focus on strategic growth opportunities in the hospital sector, intensified by the reduced operating footprint and enhanced cash flow generation capabilities.
Pediatrix showed solid operational cash flow of $109 million in Q2, compared to $93 million the previous year, which facilitated the reduction of net debt to around $600 million—about three times its adjusted EBITDA leverage ratio. The substantial decline in days sales outstanding (DSOs) from 52 days to 49.5 days supports the company's improved cash flow generation strategy, positioning it for future financial stability.
Looking beyond 2024, Pediatrix is focused on achieving growth beginning in 2025, particularly through its 80-20 mix where hospital-based services represent the majority of operations. The company acknowledges potential growth avenues in maternal-fetal medicine and aims to accelerate initiatives post-restructuring, ensuring that both operational efficiency and service quality are maintained as the core of its strategic vision.
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Ladies and gentlemen, thank you for standing by. Welcome to the Pediatrix Medical Group 2024 Second Quarter Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded.
I'd now like to turn the conference over to Charles Lynch. Please go ahead.
Thank you, operator, and good morning, everyone. I'm going to quickly read our forward-looking statements before we begin the call. 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 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, Dr. Jim Swift.
Thank you, Charlie, and good morning, everyone. Also with me today is Marc Richards, our Chief Financial Officer; and Kasandra Rossi, our Senior Vice President of Financial Reporting and Assistant Treasurer. Our second quarter operating results exceeded our expectations driven by same unit revenue growth and operating efficiencies we created during the first half of this year. Our revenue benefited from strong payer mix as we detailed in our press release. While patient volumes remained stable overall, within our patient volumes, NICU days declined slightly with hospital-based volume growth driven by other subspecialties, including newborn nursery, pediatric intensive care and pediatric hospital services.
On the office space side, maternal fetal medicine volume growth was strong but was offset by volume declines in pediatric urgent care. During the quarter, we recognized revenue related to a onetime settlement with a payer that favorably impacted the quarter's adjusted EBITDA by approximately $3 million. Even accounting for this item, however, results exceeded our expectations. We are maintaining our full year 2024 outlook for adjusted EBITDA of between $200 million and $220 million. And I'll focus this morning on our operating plans that are fully in motion how we anticipate the execution of these plans will position us as we exit the year.
As we discussed last quarter, we developed a broad-based portfolio restructuring plan, which we believe will add roughly $30 million in annualized EBITDA when completed. Under this plan, we have targeted exiting a meaningful number of office-based Pediatrix subspecialty practices as well as our pediatric primary and urgent care clinics. This portfolio restructuring plan was formalized during the second quarter and as a result, we will be exiting almost all of our office-based practices other than maternal fetal medicine during 2024. The goal of these strategic exits are to focus our attention on those service lines with solid financial underpinnings solidify our margin profile and create meaningful operating efficiencies for Pediatrix.
From the standpoint of our revenue and geographical footprint, only a small portion of this restructuring was completed during the first half of 2024 although our operating results do reflect some of the cost benefits of increased efficiencies, including the reduction of our operating structure from 7 to 4 regions. However, our exit activity is now fully underway, late in the second quarter and soon thereafter, we completed 2 transactions through which we divested of our roughly 2 dozen primary and urgent care clinics. And during the second half of this year, we plan to exit our remaining office-based pediatrics subspecialty practices.
Our operating teams are moving quickly but thoughtfully to ensure that patient services are not disrupted during these transitions. We are working diligently on appropriate pathways for these exits, including transition to private practice, new ownership or hospital partnerships. Many of our affiliated physicians have already found new homes with excellent partners and will continue to serve their communities with their world-class care. Following the completion of these plans, we will have exited businesses that generated approximately $200 million in revenue in 2023 and our refocused portfolio will consist of our core hospital-based services, including neonatology, pediatric intensive care and a number of other inpatient pediatric services and on the office space side of our maternal fetal medicine practices.
Lastly, revenue profile will be approximately 80% hospital-based and 20% office space. As we have stated previously, we anticipate favorable impact of this portfolio restructuring will be approximately $30 million of annualized adjusted EBITDA following the completion of these plans. Concurrent with these operating plans, we remain on schedule to complete the transition of our revenue cycle management functions to a hybrid model alongside our new third-party RCM provider Guidehouse. As of today, roughly 3/4 of our practices have been transitioned from our prior vendor with the remainder targeted for completion during the third quarter. Thus far, this transition has not created any material disruptions to our RCM performance, and we continue to believe that this structure will provide the opportunity for enhanced performance in the future. As it relates to our 2024 guidance, we are in the midst of an aggressive reshaping of our company, our service lines and our operational support.
Marc will provide some additional financial details but our unchanged outlook for the full year adjusted EBITDA of $200 million to $220 million reflects our best gauge of how all of these moving parts will flow through our results for the remainder of 2024. We remain steadfast in our goal to exit this year as a more focused and efficient operating company, comprising highly collaborative and critical patient services that we believe provide opportunities for strategic growth with significant financial strength and cash flow generation. We also remain committed to supporting our company's long-standing investments in clinical research and education, which are foundational to our mission.
Lastly, we announced this morning that our Board of Directors has appointed Kasandra Rossi, our Senior Vice President, Financial Reporting and Assistant Treasurer, as Executive Vice President, Chief Financial Officer and Treasurer effective October 1. Kasandra joined the organization in 2009 and has served in various senior level accounting, finance and treasury roles with increasing responsibility, including her most recent role as Senior Vice President, Financial Reporting and Assistant Treasurer. As always Marc Richards, who has played an instrumental role in our transformation activities since joining the company in 2020 and will remain in his position through a transition period this fall. I want to congratulate Kasandra on her new role. I particularly want to thank Marc for all of his contributions to Pediatrix.
Similarly, I want to thank all of our Pediatrix associates, both clinical and nonclinical for their hard work and dedication to this organization, particularly during this time of significant change. We're confident that the operating plans we have in motion will enable Pediatrix or affiliated commissions to effectively continue our mission to take great care of the patient.
With that, I'll turn the call over to Marc Richards.
Thanks, Jim. Good morning, everyone. I'll provide some additional details in a few areas. Within our P&L, our G&A expense declined year-over-year despite the additional staffing we have put in place as a part of our hybrid revenue cycle management structure. And we anticipate that full year 2024 G&A expense will be comparable to or lower than 2023 G&A on a dollar basis. First, you'll see we recorded long-lived asset impairments and losses on disposals in our P&L. These all pertain to the formalization of our portfolio restructuring and the related accounting requirements and all were noncash expenses.
Moving to cash flow. We generated $109 million in operating cash flow in the second quarter, compared to $93 million in the prior year. Our cash flow benefited from a reduction in DSOs, which declined from 52 days at March 31 and to 49.5 days at June 30. Part of this decline reflects a catch-up in collections following some minor disruptions during the first quarter of '24 related to the Change Healthcare incident. From an RCM standpoint, I would characterize our performance as expected, which is notable, given the magnitude of activity we have undertaken in transitioning to our new provider under our hybrid model. Our cash generation enabled us to pay down all of the revolver borrowings we utilized in the first quarter, and we ended the quarter with $20 million in cash on the balance sheet.
As a result, our net debt position declined to roughly $600 million at or below 3x leverage based on our outlook of adjusted EBITDA for the year. We expect to generate additional free cash flow during the second half of '24 based on our normal conversion of EBITDA to cash flow. We also anticipate that our ongoing capital expenditure needs will decline following the completion of our portfolio restructuring. On a preliminary basis, we expect that our annual CapEx will be in the range of $16 million to $20 million, significantly lower than our average outlays of $30 million in the past several years.
Finally, for modeling purposes, I'll reiterate that our second quarter adjusted EBITDA includes approximately $3 million related to a onetime payer settlement that we do not expect to recur. For the second half of '24, we expect that our adjusted EBITDA will be fairly ratable in the third and fourth quarters.
With that, now I'll turn the call back over to Jim.
Thank you, Marc. Operator, let's now open the call for questions.
And our first question is from A.J. Rice with UBS.
Just a couple of quick things. I may heard this wrong, but it looks like to me you're now assuming about $40 million in restructuring cost and I thought we were at $25 million before, if I'm right, what's changed there? And any sense about how that's going to play out? How much have you already incurred? And how much we incur that as you progress through the rest of the year?
A.J. it's Marc Richards. I'll jump in. Yes, our -- you're right, initially, our transformation and restructuring costs as a result of our first assessment of the portfolio restructuring was in that $20 million range since then we have added to the number of practices we'll be exiting. And accordingly, we've increased our estimate related to those exit costs that consist of both severance costs, lease termination and the like. So yes, that has increased. .
All right. And have you incurred much of that yet? Or is that maybe later in the year? Or how does that lay out?
Yes. We have incurred a component of that through June 30, as you'll know. We expect that will continue and come to completion here towards the end of December. So that has to come.
All right. I wondered if I could just ask about the commercial contracting and so forth. I think you have a reference in the press release that says your payer mix trend. Commercial was up I wonder, is that because of this $3 million settlement or if you ex that out, would it still have been up and anything to call out there? And any commentary on what you're seeing with No Surprises Act, arbitrage types of situations. Is there an uptick? It's steady now at this point? And how are you doing on those cases?
A.J., it's Charlie. I'll take that in a couple of ways. The payer mix improvement that we reported does not include a significant amount of the settlement that we referenced from 1 payer. It's more related to as we look at our payer mix being binary, just a greater mix of nongovernmental monies versus Medicaid. In terms of payer contracting, we didn't have a lot to comment on this quarter. We view the landscape across all of our managed care relationships as stable. And rolling forward with normal course renewals as we've done in the past. .
Okay. Just to close, best wishes to you, Marc. And congratulations to Kasandra on the appointment.
Thank you, A.J. It's been a pleasure.
And next, we go to Brian Tanquilut with Jefferies.
This is Nur Robleh in for Brian. I was curious if you could provide some more insights on the office-based practice exits. I appreciate the annual impact you all gave in the past. But given that if you're supposed to occur prior to the end of the year, just curious if you could provide some quantification on Q4 or possibly Q3 impact to revenue and EBITDA.
It's Marc Richards. As we noted in the earlier discussion, the bulk of the office exits are slated here of the third and fourth quarters. We have seen traction in the second quarter and subsequent to June 30, however, the bulk of those exits really are slated for the second half of the year. And the impact of which, as this tails off, you'll see in both our non-same store revenue numbers and the like that this will increase throughout the year. However, the full impact of both the exits and the offsetting costs associated with those exits will be realized in '25. So looking at Q3 and Q4, we would see consistent quarters to the second quarter rolling out in Q3 and Q4 ratably. With the positive impact of these restructuring activities really coming in earnest in 2025.
Got it. And just picking up on A.J.'s question on the strong pricing growth this quarter. Just curious if you all think there's positive momentum to run rate pricing from these current levels? If you could provide some context to that, that would be helpful.
It's Charlie. I would say that we -- typically, as we look at changes in payer mix, we take that as it comes because it can be very difficult to forecast those types of changes. And from a historical standpoint, our payer mix, all it does fluctuate quarter-to-quarter tends to have a longer trend line to it than very brief. So as we look at our forecast for the remainder of the year, while we're certainly pleased about the payer mix trend we've seen so far in the first half, it's not necessarily something that we're going to roll forward as presenting but we'll take that as it comes.
And the next question is from Pito Chickering with Deutsche Bank.
You got Benjamin Shaver on for Pito. A nice quarter. Just a couple of questions. So the first 1 is 2Q was very strong even when you back out that $3 million 1x benefit you quantified earlier. And you said it was ahead of your expectations, but you only reiterated the guidance. So does that mean that the Street mismodeled 2Q? Or first, any additional color on how you feel about consensus in 3Q and 4Q would be super helpful.
I would -- Jim, you can jump in here as well, but a comment that I would give is that, yes, the second quarter was a little bit ahead of our expectations at the EBITDA line. I want to reiterate Jim's comments that here in the second half of 2024, we have a significant amount of change going on. The completion of our RCM transition the practice exits as effectively and efficiently as we can undertake them. And again, to reiterate, the full year outlook that we have not changed represents our best gauge of how all those moving parts move together through the next 2 quarters, but with an unchanged end goal of the benefits that we've talked about and are seeking.
So to that end, we believe that looking at where consensus estimates are, for example, for the third quarter, that level looks appropriate to us. And as Marc mentioned earlier that between the third and fourth quarters our best view right now is that dollar level EBITDA should be fairly comparable between those 2 quarters.
That's super helpful. And then just 1 on the NICU days, which declined 80 bps in the quarter. Was this decline primarily volume? Or was there also some length of stay impact as well. I mean if there was any length of stay impact, was it driven at all by sort of pressure from the payers? And how should we think about it going forward?
No. In terms of both rate of admission into the NICU and length of stay, we didn't see any meaningful changes year-over-year for this quarter. So that NICU days comparison is roughly comparable to what we've seen in overall periods for the quarter year-over-year.
Very good. Super helpful. And then just 1 last 1 on pricing, a little similar to the previous questions, but could you sort of quantify how much the payer mix versus the hospital contract admin fees contributed to that increase year-over-year? And then also on the hospital contract admin fees. Is this just a renegotiation of subsidies from the hospitals? And if so, are you in the early innings of being able to get more increases from the rest of the hospitals across your network?
Payer mix played a slightly greater role in overall same unit pricing versus contract and admin fees. And Jim, I'll let you...
Yes. I think on the -- related to the hospitals and our actual relationship there. We were very successful in the tail end of last year into the first, second quarters here, renegotiating some of those contracts at the hospital and the pricing there. And we're always looking at what we need to do on pricing related to the hospital relationships. But again, remember, largely, we do not have stipends in most of our hospital contracts, but where we do, we obviously look at those in terms of cost associated with our labor changes in the markets.
Super helpful, guys. Congrats again on a nice quarter.
Thank you.
[Operator Instructions] And we have a question from Kevin Fischbeck with Bank of America.
Great. I think you guys made a comment that after this portfolio restructuring, you guys are going to be positioned for strategic growth, is there some way to help us think about what the company looks like from a growth perspective in '25 and beyond even if it's just, hey, we're 80% in-patient, 20% position than what the growth rates historically of those 2 businesses are, just to give us a sense because it's not how much 100% clear to me what the implications are for growth from this restructuring?
I'll start just -- again, I'll just start from a standpoint of what we're looking at across the environment, Charlie can dovetail into it. I think what we talked a lot this year about is obviously stabilizing the margins and stabilizing the business. And I think, yes, the pivot to grow is paramount in our mind of where we're going, starting really at tail end here and in '25. And we believe there are unique opportunities in that 80-20 mix of both ambulatory and our hospital-based service lines, including NICU and so we have a number of those opportunities we're looking at. And I think our focus for '25 is going to be really focusing -- moving past the disposal of practices and on RCM and really accelerating what we're doing on our growth trajectory. So I think that will be the main focus in '24 into '25.
The only thing I would add, Kevin is, we've made a lot of comments over the past several quarters related to maternal-fetal medicine. For the first half of this year, same unit volume growth across our MSM practices was quite strong, approaching the mid-single digits and that has been persistent going back into 2023 as well. So we do think that structurally, strategically and geographically those practices providing MSM services are very well positioned. So it's maybe something to keep in mind as you think about that, nonacquisitive growth algorithm as opposed to what Jim mentioned that we can layer on top of related to strategic growth. .
Okay. That's helpful. And I guess maybe just any color on payer mix, I guess, maybe post like the $200 million that you're divesting, is that payer mix looks similar to the overall company? Or does that have an implication cost to that shift mix more towards commercial or more towards government?
No. It shouldn't have any meaningful implications. .
And we have a follow-up from Pito Chickering's line.
Just a couple of additional quick ones. Could you give any maybe incremental color on any discussions you're having with managed Medicaid? And then sort of how should we think about for same-store inflation versus pricing increases?
For us, Medicaid managed care represents a significant portion of our governmental mix. That's how we classified because it's ultimately Medicaid as the payer. So -- and for the most part that's largely a pass-through from whatever state's Medicaid schedule is to what we should be reimbursed.
Yes. So it was just on the same-store labor inflation versus pricing?
Yes. We saw some modest deceleration during the second quarter, nothing that we would particularly call out, but some modest deceleration. I think our focus here is with the portfolio restructuring that we're undertaking a lot of decision-making going into that did relate to cost trends within any number of office-based practices leading to some of the decisions that we made.
And we have no other questions. You may continue.
Thank you, operator, and thanks, everyone, for joining the call.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.