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

Hi, everyone. I'm A.J. Rice, the health care service analyst at Credit Suisse. We're very pleased to have up next presenting at the conference, MEDNAX. We're joined today by Mark Ordan, the CEO of MEDNAX. We've got Dr. Jim Swift, Chief Development Officer; and Charlie Lynch, who heads up Investor Relations for MEDNAX. We appreciate you guys participating, once again, in our conference this year.

And I guess just to start off, we're off the heels of the third quarter release. And in the context of that release, you guys anticipate -- updated your outlook for this year, $250 million of EBITDA. Say that you expect to exceed $270 million next year. When you think about that puts and takes, especially for next year, what are the open questions, if there are open questions that would finalize that guidance, where are the variables that have the biggest swing factor to them looking into next year in your mind?

Thanks, A.J. It's Mark Ordan. And Well, let me speak about that. Obviously, we just did, as you said, so recently announced our numbers. So we're comfortable with both our outlook for '21 and our optimism for 2022. We think we're on a steady path to do what we've said. The difference would be if some -- as we've said on the earnings call, there was some external factor that would hit us. It could be birth rate, it could be overall climate, if something were to change, obviously, that could have affected. But I think as good managers in a strong and vital business, we react well to it. So we're comfortable with what we've said.

Okay. And then when you think long-term, pandemic maybe hasn't affected you as much as it's affected some of the other companies presenting at the conference. But when we get into '23 and beyond, what do you think the growth building blocks are for the company, organic, tuck-in deals, larger transformational opportunities? How do you size and lay out the growth trajectory?

Right. Let me say a couple of things. First, the pandemic did have a very strong negative effect on us as a provider with a large concentration of hospital-based services and our ambulatory services. We're also sharply affected by it. We've had a very nice rebound since then. Turning to growth. We see a continuation of how we've grown in the past by being best-in-class in our NICUs and attracting more contracts in NICUs, always trying to fill in smaller deals in pediatric subspecialties where we could become a better and better partner to hospitals and find new hospitals that want to work with us. And then as we've said over the last months, we've already entered the primary and urgent care market in pediatrics, and we see that as an important growth avenue for us. So we see growth coming organically from what we do and doing it better, hopefully, increasing the number of relationships we have, possibly some M&A activity where we acquire practices, and then growing into primary and urgent care, which we also think is a lot of synergy with what we do.

When you think about that organic mix pricing, I mean, traditionally, I think we felt that as low single digits, 1% to 2% maybe. And then you think of the organic component of that, what -- when you put that together, do you think you're low single digits, mid-single digits? How would you describe where you think you land?

I would think it's not because of price. I don't see price as a real ingredient in our growth. But I would say that we're a low single digit grower until the effect of primary and urgent care starts to kick-in, and then I think that can get us above that growth rate.

Okay. I want to talk more about the -- certainly urgent care opportunity. But if you think about -- another way you're describing the business these days a little differently as hospital-based services and outpatient or office-based services. What is the mix of that today? And how do you see that changing over time? It seems like office-based might actually grow faster as you add various components here, but I'll let you describe which one you're thinking that's going to develop?

About 60%-40% today, favoring hospital-based. We don't have a target. So we see opportunities in both areas. So it does seem like the office-based is growing at a possibly slightly faster clip. I think that's because we are looking at ways that we can be better service providers to the community around their hospitals. So we already have the NICU and at times, the PICU, we'll look at other ways that we can grow around it.

Okay. Okay. I think in the latest quarter, you described the births in your market up 2.9%, NICU days up 6.8%. And I think when asked why the variance, you described it as a higher percentage of births were ending up in the NICU, and that was partly driving that. What makes a higher percentage of births end up in the NICU? Albeit, I will admit you described that as returning to the historical norm, but what creates the variability on that?

Well, I'll tell you, statistically, that's true what we see is if the growth rate is X and the NICU rate growing is greater. So that's just a mathematical fact. As to why there would be that difference. I would actually -- Jim is a pediatric intensivist by background. Maybe, Jim, you could talk about why you see anomalies like that.

Yes. I think that we saw an uptick in the preterm, right? So the birth rate -- the trend of the birth rate, then it's really what falls out in terms of those preterm infants that meet the requirements to be in the NICU. And I think that was the biggest change that we've seen year-over-year.

Is that something that you would tie somehow to the pandemic? Or is that something that just sort of ebb and flow from quarter to quarter?

Yes. Just nothing tied with pandemic at all.

Okay. Okay. A lot of discussion this quarter about the nursing dynamic and the challenges that, that presents on the labor side. You don't have as much as a hospital or home health operator exposure to RNs, but you get called out on the call, you've got more nurse -- you do have a significant number of nurse practitioners. Can you just tell us what you're seeing in this area? It doesn't sound like you're having to bring in a bunch of contract labors like some of the home health guys did, but what is the labor dynamic in your market that we're talking about?

It's affecting us like it's affecting everybody, and we're included. I would say that our response is not to have blinders on, but to always be the employer of choice. I think we are so focused on women's and children's health, and we think that people want to be part of our operation. And I think that focus pays off in many ways, including attracting and retaining people. So while it's difficult for us, it hasn't had a C change effect that it's had on other people. And I think that's really because our practices and our practice leaders are passionate about what they do and we do, and that attracts people.

Okay. All right. When you think about G&A spend, I think you were down $4 million sequentially in the quarter, and you pointed to some efficiency issue while focused on some reductions in legal expense and your R1 agreement, which is a revenue cycle management agreement. What is the trajectory over the next few quarters into next year for continued savings here? Or is the run rate we exited Q3 pretty much where we'll be in?

The new Board and management team has now been together for 1.5 years. So I would say that during this time, and obviously, we got together during the pandemic. So as you emerged from the pandemic and our volumes are -- get stronger and stronger, we continue to look at ways to become a more efficient organization. So I think you should expect that, that will continue. I think that the biggest change that we could have made was the change that we did make, which was to move to R1 and to outsource RCM. So we don't have a lot of those opportunities, but that's a very important one. And that's not just important to get G&A down, but to be a more efficient operator, more accurate operator. So that just makes us better at what we do.

Is the benefit derived from the R1 transition fully reflected in Q3? Do you think we'll see a few more quarters where that ramps up? How does that...

I think it just started in Q3. So I think we expect that it will increase over the coming few quarters.

And so you'd be sort of at a mature run rate on that agreement by midyear next year. Is that the right way to think about it?

That's what we'd like to -- we'd like to get to that point by the year end.

And you said from a cash flow perspective, I know you didn't size the incremental G&A savings, but from a cash flow perspective, what this might ultimately mean for you?

We didn't break it out specifically. But as we move forward and we can see the difference in our results, we'll update people.

Okay. I'd like to just take a few minutes to talk about your interest in urgent care and what that opportunity might look like. You've done 2 acquisitions, Nightlight and Brave Care. It might not be 100% clear to all of the audience, which -- how each of those contributes to what you're trying to put in place. Maybe I'll have you just do that to level set people immediately and then let's talk about moving forward and...

To level set, I'd remind everybody that we're a leader in neonatology and many of the major pediatrics sub specialties. Because of that, we have a very big concentration in many major markets. Because of that, we are the largest pediatrician in many of our markets. And we see the obvious synergy of linking with general pediatrics and pediatric urgent care. It's essentially what we do on the most acute side. So we feel that it's a very natural area to move into. And since we already have concentration in pediatricians in our markets, along with the overhead in our markets, we think there's nobody else positioned the way we are to do this. So to start, we acquired a relatively small company in Texas, Nightlight of Houston. And then we made an investment in a company Brave Care, which provides not only the know-how but also technology to make this a really great from patient-facing experience. So the 2 of those give us a platform from which to grow, and we plan to grow through a combination of acquisitions and also organic growth. And to give you a sense of what that is because I talk about primary and urgent care, it's not that we're growing in primary and also urgent care. We're doing it together. So we will have 4,000 to 5,000 square foot clinics, which provide the range of services from pediatric primary care to pediatric urgent care since those needs from patients don't just take place between 9 and 5 or between 6 p.m. and 10 p.m., it's -- so we think this is going to be a meaningfully different experience to people and again, one that we could uniquely provide. And we think it can be a very meaningful thing to our company. We think we could open over 100 of these over the coming few years and orders of magnitude if you think of them as being able to do revenue in the $2 million to $3 million range that probably cost about $2 million all-in to launch 1, you could see how that could have a very strong effect on the company over time.

And maybe you talk about what the pro forma maturity margin might look like on a $2 million to $3 million revenue basis?

We think it will reflect the overall margins that our business has today. So we think it will be a strong contributor, and we will detail that as we move forward. But we do think in aggregate, if we have over 100 of these and you do the math from what we described, this is not a minor addition. And going back to your very initial question, we think this will get us to be a solid mid- to upper single-digit grower.

Okay. What is the staffing on a 4,000- to 5,000-foot primary and urgent pediatric care? Is it mainly nurses? Is it got a couple of...

It's a combination of pediatricians and nurse practitioners and support staff. So -- and it depends on what the needs of the patient are. So your need on any given day could be what's typical in an urgent care visit something relatively minor or it's an issue that comes up during the night when we're available 24/7 or you're part of our practice as you would with any general practice and you get your well visits and you have a pediatrician who you feel like as part of your family. So it brought that entire range.

And do you need to add nurse practitioners and pediatricians or do you have within the network? Some of the time that people are currently devoting to their office space or the hospital, they can divert to the surgeon care center.

We'll be adding people to do this. I would presume that people who are currently active in our practices don't have slack time. Now there are probably people who may move from 1 to another. And that, again, I think, helps us to be an employer of choice because we'll be offering a lot of opportunities for people.

Right. And there certainly are urgent care centers out there today doing just general urgent care services and even some groups trying to do primary care locations. Do they -- and this may be a question for Jim, do they not -- if I'm doing pediatric worrying about my kids taking them in. Am I going to consider that? Or this would be preferable? Do they have pediatricians that you might see if you go into the average urgent care clinic. Probably not, I would think.

Yes. The average urgent care clinic is usually an internal central medicine or family practice. So that's generally what you're seeing there. They wouldn't staff it with a pediatrician for the off chance that somebody comes in. And that's what we saw with Nightlight that they have an identity in Houston as being a pediatric provider. Therefore, parents choose that venue because of the pediatricians and the capable nurse practitioners that are on in that platform.

Okay. Okay. One of the questions has come up. This is the sideline, but I'm curious what you guys would say because you have a bird's eye view on this. With the 5- to 11-year-olds getting vaccinated, do you believe that, that's going to mainly be administered by pediatricians or do you believe that people will go to a CVS or a Walgreens or something to get that to the extent they have their kids vaccinated.

I think the lion's share of those are probably going to go to their pediatrician just because of the discussion around vaccination and the kind of anticipatory guidelines need to be given to the families. No doubt, there will be some families that may choose to go to a -- one of the pharmacies to do it, but we think that's probably going to be a conversation with their pediatrician. And we've seen that already in terms of our Nightlight clinics, parents coming in to have that conversation with those pediatricians that staff those facilities.

I've got a couple of people are e-mailing me about the surprise billing legislation, you get that. They're asking on a volume basis, what percent of your patient population do you expect to be out-of-network January 1 when the surprise -- No Surprise Act goes into effect? How does that compare to last year? And is this creating any issues? I'll take it a step further and say is this legislation creating any issues for you in any way?

Our out-of-networks -- a business like ours at times are out-of-network, and it's -- I've commented on this several times and said it's unfortunate, but part of life as a provider. So a year ago, we were out-of-network in some areas and then you get back in network. And so there's no material difference now. We are overwhelmingly in network where we're out-of-network. We're in active discussions with payers about that. But specifically, to the legislation, I'd say a few things on sort of repeating what I said on the earnings call. Number one, we've always been against surprise billing. So we felt that, that legislation -- that prohibited surprise billing at nationwide made a lot of sense. And we already operate in many states where that was already prohibited. So we have no call about that. So what is worth, we fought to the bipartisan legislation that was passed was excellent. It was very fair. I don't think it's favors providers. If anything, maybe it favored payers, it doesn't matter. It was fair. It's the right thing to do and we believe in doing the right thing for our patients. We felt that the interim financial ruling that came out September 30, ignored a lot of the good things that were in the legislation. The legislation was very clear about what they were trying to achieve and how. And then an interim final ruling came out, it seemed to not have read the legislation. So we think that, that interim final ruling, which many people are challenging both the court and legislatively, what to change. If it doesn't change, then as I said on the earnings call, then we'll adjust accordingly. We think that's a shame. We think that what will happen is if rates are dealt that it's really going to affect care, the availability of care in rural areas and in other underserved areas. So we think that would be a very unfortunate outcome. For us as a company, we'll adjust to whatever comes our way. We have a very good relationship with our payers. We provide a very vital service. We're very important in our hospital systems, and then we have our office-based component, and we're growing in other areas. So I'm confident that we can navigate through that. But yes, we do believe that the interim financial rule ignores a lot of what's important in the legislation.

And when you think about out-of-network specifically, would you size that at 5%, 10%, less than 5%? Or how -- any broad brush comment on that?

I think it's less than 5% right now.

Right, okay. Okay. And just maybe, I guess, actually to just make sure people are on it because I see I got 4 questions asking the same thing about this. What specifically about the interim rule are you trying to change? Or would you like to see...

Interim rule -- well, the legislation said that if you're out-of-network, and you're in arbitration, there are several factors that should be taken into account by the arbitrator to determine a price you to get back in network. Interim financial rule says, you could ignore a lot of those factors that over a few year period, legislators' thought as vital, ignore a lot of those things and just look at what the qualified payment rate is in that market. And we think that any 1 single metric is very insufficient and can have unintended consequences -- we assume unintended consequences because what it will do is got care in rural areas and in an underserved area. We don't think anybody in the executive bench or in any of leading other departments or in legislative would like to see that happen. So sometimes the ruling comes out that when you should be surgical, it comes it out with...

Right. No, that makes sense. When you talk about underserved rural areas, I mean, I know you're talking more broadly. But I do think about some of the service that you provide, and a rural area typically doesn't have a NICU or something. Is there an opportunity for some of your physicians to leverage their time using telemedicine? If you looked at that and maybe helping consult with some of the issues that you might find in some of these underserved rural and other communities?

First, we do have a very important rule of presence and we also have in nonrural areas where population can often be underserved care. That's an important part of our business. About 60% of our business is Medicaid. So we're not -- that's why I tell people but right there. So most of what we do is paid for by -- with the government pay and in areas that otherwise would be underserved. So if you think about the IFR and its implementation, those are the people that will be hit at hardest. I'm not talking about that MEDNAX specifically, it would be any provider of version special care like us, anesthesiologists, surgeons, it will have a major effect.

Okay. When you start...

To answer the other question, yes, telehealth is an important and growing area for us.

Okay. Okay. When you think about capital dollars spent on acquisitions, obviously, you're saying that the development activity around the urgent and primary care pediatrics business will be meaningful. Are there acquisitions there to be done? Are they similar? If you're paying $2 million to $3 million to open 1, what are you buying an urgent care center of that size at and then the return similar, whether you buy or build?

We -- it's unlikely, we would buy anyone unless it had some undulation. It's more likely if we were to buy it because there are chains of urgent care companies that have 10, 12 units where they could be in a market where it's attractive and it's more attractive, not only to get those locations, but also to get to people who are already involved. So we're good at that. That's in our DNA at MEDNAX. So that's something we would always do. We always look at.

Yes. So there are a meaningful number of those out there. Do you think that will be...

And there's some, and I would say in many markets, it could be a combination of buying something as a platform and then building de novo around it.

And when you talk about acquisition multiples, I know as you've talked about it in other parts of your business, you're talking about mid- to high single-digit type numbers. Is that similar for an urgent care pediatric-oriented place?

Yes.

Okay.

We're adding similar of those adjustments.

What about some of the other acquisitions you've traditionally looked at? What's the pipeline look like there? And has the pandemic impacted that? Maybe people feel like they need more financial wherewithal. They're talking to you, maybe they're worried about a capital gain tax on their property or whatever, any of that having any change impact on the discussion?

Jim -- Dr. Swift can comment a little bit. He's our head of development on what the overall landscape looks like without giving any opinion about tax rates.

Exactly. Now, obviously, we've seen the opportunity and we've talked about this before that we are broadening the landscape in terms of the specialties we're in. So I think with that, we've seen a nice response from some of these practices that want to be a part of what we're doing, primarily because they understand what we do, and they believe in the same thing we believe of having all the resources that we can provide for families and our health system partners. So we think the pipeline is good. We -- and again, to Mark's point, the mid single-digit multiples seem to be prevailing, and we think there'll be a fair amount of activity around. Again, both primary care and then subspecialty care and then our core businesses will still be relevant going forward as well.

Any way to size the -- I mean you repositioned the company, you're moving forward and where you want to dedicate, is there any way to size what a normal year range of either acquired revenues, acquisition spend, whatever might look like.

Well, we look forward to providing that information. But despite your best efforts, not today. I think as we go into '22 and a lot of these things start to tell, we'll be able to provide better guidance about that.

Okay. Okay. One of the things I think you've talked about since you've come on, Mark, is this idea, obviously, cost management efficiency, but there's also been this element of trying to move from high fixed costs to some variability in your cost structure. Can you comment on that? I think it's always been perceived with the NICU dynamics are pretty fixed cost, but have you been able to move the needle on what variable versus fixed so that as volumes fluctuate, you have some sustainability on the margin?

No, I think that more and more when you describe MEDNAX, while we are a leading NICU operator in the United States, a lot of the work that we're doing is on the ambulatory side. It's on many of the other pediatric subspecialties. And we've talked obviously quite a bit about pediatric primary and urgent care. So I would say when you have a more balanced set of services, then I think you can make a lot of those costs more variable than fixed. I would also say that if you're -- when you're focused as we are and working on growth that's much more organic, you can find other ways to make sure that your overhead is rightsized. And the company has gone through many changes over the years, but I think what you should expect, but anybody should expect now is going to be -- we're very focused. So I would think -- and this is our background. This is why we joined the company to say, whatever we're doing, how can we do it better? So again, our -- moving to R1 and RCM was a perfect example. But in anything we do, we're saying how can we do it more efficiently. So I think that's now, I think, part of the DNA of MEDNAX in addition to taking the very best care of patients all the time.

Right. One thing I would add, A.J., on that, just to reinforce something that came up on the call is that, that transition to R1 has effectively shifted our RCM expense to a fully variable expense. So that's something that can adjust pretty accordingly if we see swings in volumes and revenue.

Right. Interesting. When you think about the pandemic, and we talked about labor a little bit already. But one of the questions -- comments we're getting is people sort of burned out clinicians needing to take earlier retirement or going ahead and retiring or maybe take time off to do other things. Have you seen any -- I wouldn't think necessarily that would be true for your physicians, but should I ask you. Have you seen any uptick in retirements, transitions for any reason in the pandemic?

We haven't. I mean it's very difficult. I'll have Jim comment on this as well. But we haven't. I would just say, it is what our physicians -- everybody has gone through has been terrific. But what I'm amazingly moved by is the passion that our doctors and clinicians have for our mothers and babies. And they get energized by it in an incredibly tough situation. So during the pandemic, and since the depths of the pandemic, wherever we are and we have a big concentration in Texas and in Florida, 2 states that were very hard hit by it. It's amazing how resilient people have been. But they've been exhausted by it. And Jim, do you want to add anything to this?

Yes. I think that's the thing. They were exhausted, but coming out and as the cases came down, catch their breath. And I think they're committed because they have the commitment of the executive team of making sure they have the necessary tools and protections all during the pandemic and coming out, and that resonated with them. So coming out of pandemic, I think we see a very stable workforce that is going to march on with us.

I mean one other thing -- go ahead.

I was going to say, as a CEO, it's hard to me when I'm out in the field to complain about how hard it was.

Okay. Interesting. When you're thinking about -- so I could see in the pandemic environment, financial uncertainty, maybe if you got your own practice tying in with a larger deep-pocketed corporate and they might all of a sudden look more attractive. Have you seen small practice physicians, either OB-GYNs or pediatricians. Is that pipeline picked up of people that would affiliate with you and get involved in some of the office space stuff because of what's happened in the pandemic? I mean, I guess, it could even happen with a group that's doing the neonatal intensive care unit as well. But is that the financial volatility over the last 18 months had any impact on the pipeline?

I'm sure that that's been a contributor. But I think it's really the story we have around the services we're providing. And I think the other area that we're focused on is really about the recruitment of these very narrow specialties. And so I think some of these practices that may be 2 member specialty groups, know that we bring a scale in terms of recruitment that can help them in the future. So again, I think it's less about pandemic more just about the environment we see today.

I'd stress what Jim talked about. We provide so much support. We're the largest research organization in neonatology in the country, in the world. We provide so much support for our doctors and our clinicians that many stand-alone practices can't possibly do to themselves. So in every area of support, whatever a physician needs, we try to be a leader in providing that support, which is not inexpensive. In the case it sounds but we think that's a big reason that people do want to come to us because we'll provide that support, and we're fully focused on women's and children's health. That's the only language we speak.

Right. And one of the big announcements last year and pretty quickly after you took over, Mark, was the opportunity with Memorial. And that's a big contract you took on. That's been ramping up this year. Is that fully reflective in your numbers? And are there -- can you describe the pipeline for other types of transactions like that or?

Well, we're working on others like that. We are particularly proud of that. Everything about it, and I can break because I had nothing to do with it. It was soon after I got there, but I think that's a coincidental fact. But we have a terrific team that worked on getting that in place. And when I spoke to the head of that hospital and thank them, they just went on and on about how great our team is. And I will tell you since then, it wasn't like we made a deal. It is such an important part of what we do, and our senior leadership is very dedicated to totally manage their hospital and everything about it. So -- and I think that's a good reference for us elsewhere to see what we do, that we could take on a major new assignment like that and be really devoted to it, not the day after, but forever. So we're very proud of that.

Is that run rating at this point? Or is there still on a sort of...

Yes -- no, no, it's doing quite well. We're very pleased with our relationship there. But that's true of many of our hospital systems. And a lot of our work is not just done on finding new ones. It's also really cementing our relationship with existing opportunities with existing relationships to make sure that we stay strong.

Right. And I think on a call like this, I asked you about this all the time, but the balance sheet strengthened at this point. You've layed out some grow the business opportunities that you want to pursue, but you've got substantial cash flow. What might be other areas, share repurchase, dividend, anything else? So at what time frame might those come into play and just give us a pointer for that.

Well, we've talked about our avenues of growth, which we think are exciting. And as we develop our trajectory in pediatric primary and urgent care, we'll judge the cash needs that we have and balance that against the -- what's best for shareholders. So we're -- I would say that we are an extremely shareholder-friendly organization. We understand this. It's what we've done throughout our careers, right? So -- and we get that question a lot. I think at a time like this, with all the changes in health care to have a strong balance sheet and to have the ability to not only build de novo but also acquire, as you said before, mix is very attractive in a lot of ways. So we're not giving up on that anytime soon. And we don't want to change our financial metrics as we grow. So we're comfortable right now with where we are, but we certainly -- we'll certainly consider that as we say, this is our use of cash, this is our steady cash flow. What do we do with the gap will be -- we'll always look for shareholder-friendly ways to deploy our capital.

Well, that's great. I think we're out of time at this point. I really appreciate you guys participating in the conference once again. As I said, hopefully, we'll be doing this in-person next year. And in the meantime, I hope you guys have a great Thanksgiving and everyone on the line as well.

Thank you, A.J.

Thank you very much.

Thanks, A.J.