Pediatrix Medical Group, Inc. (MD) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Morgan Stanley Global Healthcare Conference. Pleased to have with us today the senior management team of MEDNAX. We've got Mark Ordan, the President and CEO; Jim Swift, the Executive Vice President, responsible for Corporate Development; and Charlie Lynch, EVP of Finance and Strategy. We do have a disclaimer I have to read, and I will do that first. And I would also remind the audience that we have a Q&A portal. You can submit questions into the Q&A porta at any time. And so please do that. The disclaimer, for important disclosures, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Mark, Jim, Charlie, thank you very much for participating in our conference. We've already got some questions. So I'm going to start off here.

Obviously, Mark, the underlying business has changed pretty dramatically. Since you became CEO, you've divested various business, but the core business seems to have stabilized very nicely. What do you see as the additional avenues for growth going forward when you think about this? Where do you see MEDNAX going in the future?

Well, we're already seeing a lot of benefits from our focus after selling anesthesiology and then radiology. Restoring our balance sheet and having a full company-wide focus on women's and children's health is already bearing fruit. So we're expanding our relationships with our hospitals. We're deepening those relationships. We are able to acquire practices in other pediatric subspecialties that were always part of MEDNAX before, but we're doing it in a more focused and in a more rapid fire way than we did before. And we announced that we're making -- we're going to make assertive entrance into primary and urgent care, well, in pediatrics, of course, which we think is going to -- all in concert going to really meaningfully change our company.

Great. Great. And a question, I guess, for both you and Jim. From your hospital partners, the folks you partner with on the neonatal business, what are they looking for? What are they asking in terms of services? What are you hearing from them in terms of things, other things they'd like to see you do potentially?

I'll take that. We're seeing really that the core services we continue to provide them inside the 4 walls of hospital remain vibrant focus for them. But on top of that, it goes back to the subspecialty strategy. They know that there's some leakage sometimes of patients who have to leave a particular medical center because there may not be a specialist involved. So they turned to us to really look at those subspecialties in pediatrics and women's care for that matter that we can help support them with. So a great example is pediatric neurology, an acquisition we recently did in Austin. Again, those children, both in the neonatal intensive care unit and the pediatric intensive care unit, oftentimes, need support services from those specialists. So it gives us a footprint outside the hospital, but it's relevant to the patients we're taking care of inside the hospital as well.

By the way, Jim Forbes, I'd remind everybody who's listening that -- or participating that Jim Swift is a doctor and a pediatric intensive care physician for many years, who ran a very large practice before joining MEDNAX. Jim enjoys a very close relationship with many of the nation's largest hospital systems. So we kind of know what's going on inside basically.

Great. And just, I guess, a follow-up to that. In terms of thinking about, for example, pediatric neurology and some of these other areas, what -- I got question [indiscernible], what type of EBITDA multiples are you seeing out there for those types of businesses or pediatric urgent care or primary care? What sort of range of multiples are you seeing these days?

Well, I don't want to get too specific, but I will say that we know where we trade, and we're not entertaining anything that's close to dilutive. These are subspecialties, which uniquely fit with us. So they're not the kind of thing that a typical PE firm or other outside buyer would be looking at. So we're able to do these in the mid-single digits in a very comfortable range. We also bring a lot of advantages to those practices when they join us. So nothing that we're looking at pushes the envelope of being dilutive.

Great. One of the constant themes in this conference has been the impact of the pandemic, impact of COVID-19. And maybe, obviously, just an update. I don't know what you can say. Obviously, the Delta variant has reared its ugly head here over the last couple of months. And obviously, you were mentioning that volumes had improved in your business over the last couple of quarters. Anything you can say in terms of what you're seeing in terms of utilization right now?

I'll start, and then I'll ask Jim to comment from a physician's point of view. Our business is strong a lot because we had already seen that recovery that you spoke about in both payer mix and in overall volume. Jim was one of the many doctors in our country that were predicting that because kids have not been exposed to things last year that there would be a resurgence in demand. And then, unfortunately, the Delta variant has been taking aim at children. So that's increased our business in other pediatric subspecialties. I'd say, unfortunately, while it's a positive for business, it's unfortunate that the variant -- COVID, today, is taking aim at children. I don't know, Jim, if you want to add something to that?

Yes. I think that's the biggest impact as we've seen this wave that really the children have been affected by the Delta variant more so. And then as we've described previously, a typical routine winter illness, RSV, had resurged really coming out of the spring months into the summer and continues. And we suspect that we'll see the same thing on the influenza front given the fact that they're going to be exposed to that as well coming into the fall and winter. So our pediatric intensive care units and our pediatric general floor units are quite busy right now, including our pediatric ERs. So volumes that we typically would not see this time of year were significant volumes there in all of those locations.

Right. And as a result, I mean, a number of companies over the last few days at this conference have talked about wage pressures and what they're seeing, particularly in regards to nursing, et cetera. What have you seen in terms of what you might have to do in certain markets in terms of bonuses or sign-on bonuses, retention, loan forgiven? What are you seeing in terms of labor and wage pressures, I guess?

It's exactly what your other participants have experienced and it's not -- it's also not even unique to health care. This is an across-the-board issue right now. But certainly, in health care, we are -- there is wage pressure. We are, I think, to the many employer of choice, we speak their language. So I think it's a little bit easier for us, but the strain that our providers are under is severe. So it's -- we just have to work that much harder. I do think it's a core strength of ours. So I think we're coping with it better than others, but I think it's going to get harder and harder over time.

Right. And Mark, a question for you has come up. In terms of thinking about -- obviously, the company is generating a great deal of free cash flow. When you think about the next 12 to 18 months, the use of that? Do you think primarily it will be used for M&A? Will you think about buybacks? What do you think about the usage of free cash flow going forward?

I think, for now, we see a lot of opportunities to buy practices and to increase our spend with hospital systems. So that's our primary use of cash. I don't foresee any major acquisitions, but I wouldn't rule it out. If over time -- I've talked about this on our earnings calls. If over time, we think that we're just going to be a big cash generator with a relatively modest use of that cash, our debt level is already lower, than we would consider buyback or a dividend or something else. So for now, we have some uses for our cash, and we'll watch that closely.

Great. Another question that follows that is just in terms of, recently, Starboard sold part of their stake in the company. What do you -- in terms of communication with Starboard and their intentions and their views, anything you can comment on there?

Sure. Starboard -- first of all, Starboard has been enormously helpful to our company. Beyond being a shareholder, they're an observer on the Board and they've been incredibly valuable to the company and our shareholders. They're a fund, and they have the right to buy and sell securities like anybody else does. The stock has appreciated dramatically since they got involved. So they were taking a small portion of their chips off the table, which is totally their right. I did 10% joking, say, to a partner -- lead partner at Starboard, who works with us very closely, "I just want you to promise me that your interest isn't declining in any way, that you're going to be as big a supporter of the company as you always have been." I got that promise. And so I don't foresee any difference out of them, or out of the fact that shareholders have made money.

Okay. A question regarding some of the health insurers and payers. Obviously, we're getting at that time of the year where you start to negotiate or renegotiate various contract payers. What are you seeing -- in terms of rates in your core business, what are you seeing? And what are you seeing in the peds business in terms of reimbursement rates? Anything you can comment on?

I'd say that -- first of all, we have a terrific managed care team. We have -- we provide an extremely vital service throughout the country. So overall, we're seeing -- we're not seeing any major difference in rates up or down. I've commented that we've been tussling a little bit with CVS, Aetna, and it's part of the fabric of what we do. We're confident that because we're such a vital provider of services in their markets that we'll find a good resolution. We're certainly patient between now and then. They're, by far and out, our biggest payer. So I don't -- I assume things will continue. I know people have asked about what it will be like under surprise billing? Again, I think that given what we do and a long -- the long relationship that we've had, our necessary services, I mean, our absolutely vital services and with the best clinicians, I don't think this is an area of concern.

All right. Let me see. We've got a couple of other questions here from our audience. In terms of supply chain, and this is another issue. Obviously, last spring, a number of health care providers were caught short in terms of supply chain and particularly when it comes to protective equipment. Can you talk a little bit about your supply chain and the ability to access the drugs you need now given what's happened with the pediatric population and protective equipment, just a question from our audience?

Look, I'm going to let my doctor and chief answer that.

Yes. I think where we saw as a run-up in the early days of the pandemic, the shortages in the protective equipment, we've been pretty well supplied both internally. We made an investment in those -- in that protective equipment, and our facilities around the country continue to stay ahead of it. So we've been -- for all of our frontline workers and physicians, nurses and MAs, medical assistance, we've had plenty of the protective equipment. On the drug front, we have not seen an impact, at least on the pediatric side, in terms of some of the critical drugs that we utilize in the neonatal intensive care unit and the pediatric intensive care unit. So I think, around the country, we're well supplied in terms of our partners and the hospital as well.

Great. And, Jim, a follow-up question for you. Just in terms of the neonatal practices out there. Obviously, you know a lot of these groups and physicians. As a result of COVID, are you seeing more outreach of them, inquiring about potentially joining MEDNAX? What's sort of the state of play do you think right now?

I think it's been less on the inpatient side, neonatal side and more on the ambulatory or outpatient side that we've seen a lot of physicians who've reached out to us to find out what the landscape looks like. I traveled the country so I spent a fair amount of time with some of these large practices to talk about where health care is going, in particular, and as it relates to the pandemic. So that outreach, I think, has paid off in terms of those physicians reaching back out and asking, are we going to be in a particular space, most of it, again, focused on women and children. So we do get the rare inquiry from an adult specialty where they ask if we're going to be in adult cardiology, and we differ from that. But again, I think the outreach that we've done and the outreach factor has been quite fruitful in terms of the M&A pipeline.

Great. And I'll throw this out to you, Mark. I mean, another question that we received is just regarding the pediatric primary care, primary care in general. Do you see yourselves going outside of your market, some of your core markets where you have neonatal practices? Or would you expand beyond just to get into larger pediatric urgent care?

Well, one of the things that makes us so uniquely suited to do this is that we are such a major player. We have the largest physician -- pediatric physician practices in 20 of the major markets in the country, which means we already have overhead in place. We already have regulatory and all the support that you would need to do business in those markets are already in place. So it's just incremental overhead for expansion. So they're major markets, they're driving markets. They're also markets where we have great relationships with the hospital systems. So we don't feel at all limited by staying in our 20 major markets. Now we could look in the edge cities around our major markets to say that it doesn't have to be at the corner of [ 5th & Main. ] But no, I think to -- we can expand very rapidly and very broadly without having to go to different geographic regions of the country.

Great. And Mark, a follow-up question, you had mentioned where things stand with CVS, Aetna. Can you give us any update on the current status of discussions with CVS, Aetna?

Nothing new, but there are discussions. It's not like we're at a standoff. So I could just say I'm confident. It's not a person. I know if they were having a premature baby or they had another issue, really a vital issue in pediatric care, they'd be hoping, hoping that they could see a MEDNAX physician. So I'm certain that CVS, Aetna, that they want to be back in network with us. So I'm sure we'll figure that out.

Great. All right. All right. Well, those are the questions we had from audience. I really appreciate you guys being on board and being part of our conference today. I want to thank you for participating and thank the audience for a number of good questions here today. Thank you very much.

Thanks so much for including us, Jim.

Have a great day, everybody.

You are welcome.