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

[Audio Gap] 2021 Leveraged Finance Conference presentation, and I want to thank Charlie Lynch, who's joining us, he's always been gracious and great with his time in terms of joining us at our conferences, both here and out in Las Vegas. So I want to thank Charlie ahead of time. I think most of you know, Charlie is the Senior Vice President of Finance and Strategy at MEDNAX, and Charlie has about, I guess, about 15 slides or so we're going to walk through, and then turn it over to some Q&A on the phone. So Charlie, I'll go ahead and turn it over to you.

Great. Thanks a lot, Larry, and having -- thanks for having MEDNAX at your conference again. It's always been valuable to us. Good afternoon, everyone. The slides should be available to you, and I'll walk through them briefly so we can allow some time for Q&A as well. But we did want to put together some materials to hopefully reorient you to what MEDNAX looks like today after the significant changes we've undergone and undertaken over the last couple of years, and what we're focused on in terms of strategic growth and our positioning in the women and children's industry. I'll quickly just reference our forward-looking disclosure within the slide deck on Page 2. And quickly moving to Page 4, which is the beginning of the material. As I hope many of you are aware, MEDNAX is one of the leading providers of women and children's clinical services in the country. The company, originally Pediatrix, was founded over 40 years ago as a single neonatology practice here in South Florida and Fort Lauderdale. Today, we're providing -- our affiliate physicians are providing services across 39 states and Puerto Rico, and also across a highly diversified array of specialties for both women undergoing high-risk pregnancies, for sick and premature newborns and for children all the way up to young adulthood. On Page 5, the next slide. I hope this picture gives a good sense of the breadth of services provided across our organization and the continuum that they can provide beginning with conception and pregnancy through labor and delivery, and whatever may be required in hospital care. Obviously, neonatology is -- remains at the core of our service lines and represents the greatest contributor to our top line across all of our service lines. But even within the hospital itself, we provide -- our physicians provide a number of different services within labor and delivery and attending deliveries when required. Clearly, in the neonatal ICU, in the newborn nursery, and we're also the largest provider of hearing screens across the country. Our neonatologists often work very closely with maternal fetal medicine physicians who are obstetricians who care for women undergoing high-risk pregnancies, so they can well coordinate the care that both the mother and the baby may need. Moving on, post discharge from the hospital are fairly broad array of pediatric subspecialists, physicians, provide any number of highly critical and often very, very scarce services to children to cater to their needs. And you can see all the different areas, pediatric cardiology, urology, GI, ophthalmology, surgery, any number of services. And as I'll get into in just a couple of minutes, one of our areas of focus for future growth is within general and urgent pediatric primary care. We've begun this year with the acquisition of a handful of clinics in Houston, and just signed an agreement a couple of months ago with a company called Brave Care, and we'll be working in partnership with both Brave and NightLight to develop what we think is an opportunity for a significant number of pediatric primary and urgent care clinics across the country. On Slide 6, you can see what our existing footprint looks like. As I mentioned before, we do provide services across about 39 states and Puerto Rico. We do have concentrations in a number of different geographical areas across the country. And we consider these some of our focal areas and markets where we do have a significant footprint and presence across multiple subspecialties, many of whom -- many of which can work in close collaboration with each other to provide the best array of services for women and children, and provide the best partnership to the hospitals that we work so closely with in each of those markets. About 75% of our revenue is still associated with hospital-based care. About 1/4 is office-based care, most of those pediatric subspecialties. In terms of what we've undertaken over the past couple of years, and moving to Slide 8, we have gone through a number of changes, many of which you should be familiar with. If you recall, MEDNAX itself a couple of years ago was a far more diversified organization, comprising not only women and children's services, but also anesthesiology, radiology and some RCM services. Beginning in 2020, we began refocusing our organization through the divestitures of both American Anesthesiology in May of 2020 in the midst of the pandemic and MEDNAX Radiology Solutions at the end of 2020, which we sold to Rad Partners. Just prior to that, we had also divested MedData, which would affect the revenue cycle services provider that work in collaboration with our own RCM infrastructure for a number of years while they were part of MEDNAX. So exiting 2020, MEDNAX effectively reverted to its roots as Pediatrix and Obstetrix, our core medical groups, and refocused all of our attention on women and children services. Also in 2020, we undertook a number of leadership changes with the introduction of Mark Ordan as our new CEO; and Marc Richards, as our new CFO, in addition to 5 new Board members, all as a part of an agreement with Starboard Value, which is -- which remains one of our largest shareholders. Since then, we have had an intense focus on operational and cost initiatives. I think the highlight of those is -- which we announced earlier this year, was an agreement with R1 to transfer our revenue cycle functions to R1 in a multiyear agreement, which we've undertaken and are in the midst of right now. The benefits to us of partnering with R1 are partly financial, where we realized immediate cost savings within our G&A, and performance as well, where we anticipate over the coming several years that we and R1 will share the benefits of improved RCM performance in terms of yield and revenue. One last point on the R1 transition is that, that effectively took a significant component of our G&A infrastructure and moved it to a variable cost component, which we find as an additional and important benefit of partnering with R1. We undertook a number of other IT initiatives through the course of this year, implementing an Oracle ERP, centralizing our data centers and the like, which will also add to our efficiency. And we expect it will enhance the support services that MEDNAX, the infrastructure, provides to the practices affiliated with our organization. And lastly, we've reengineered our growth team, focused all of our energies around a sales organization that's highly targeted, far more focused than it was before, solely on women and children services. And as I mentioned, launched our initiative and growth strategy around pediatric, primary and urgent care. So it's been a tremendous amount of change over the past couple of years. But where we stand today, we are focused. We're far more efficient than we were in the past, and we believe we're very well positioned to pursue the growth that's available across our markets. Just quickly on Slide 9. I want to give a depiction of the trends in our financial performance over the last couple of years. I don't think these -- this kind of a V-shape should be surprising to anyone, spanning from 2019 to 2021. But I think the highlight here is through the first 9 months of this year, our adjusted EBITDA has largely returned to pre-pandemic levels, a little over $180 million for the first 9 months of this year. For the full year, as we updated on our third quarter conference call, we expect our adjusted EBITDA for 2021 to be north of $250 million. As a reference point, our adjusted EBITDA in 2019 pre-pandemic was $265 million. And for 2022, we do expect adjusted EBITDA to be at least $270 million. Lastly on here, another attribute of this organization I would like to highlight is that we have a very attractive cash flow profile. We're an asset-light organization. So we have a high conversion of our adjusted EBITDA to free cash flow. From a mathematical standpoint, the rule of thumb that I typically use there is we would generally anticipate our GAAP operating cash flow to be somewhere in the range of 60% to 70% of adjusted EBITDA. And our CapEx needs are quite low on a normalized basis, should only be in the range of about $30 million per year. Lastly, thanks to the refocus of the organization, the divestitures of Anesthesiology, Radiology and MedData, we now have a conservatively leveraged balance sheet based on our expected adjusted EBITDA for 2021. We're leveraged at only about 2.5x, and we've got about over $350 million in cash on our balance sheet. Moving to our growth strategy briefly, and this is on Slide 11. I've referenced a few times the move into primary urgent care where we think we're uniquely positioned given the number of subspecialty pediatricians across our organization today to have what I would call almost a retail presence, and opening primary and urgent care clinics in markets where we have a good footprint, hospital relationships and subspecialty presence that can support primary and urgent care. And we do think that with our background around pediatric care, this opportunity is fairly unique to MEDNAX and specifically to Pediatrix, our medical group. A couple of months ago, we announced an agreement with Brave Care, which is a highly innovative, call it, a combination of technology and service organization that has developed a fairly groundbreaking IT and operational platform for pediatric primary and urgent care clinics. Through this agreement, we are now a minority owner of Brave Care, that technology company. And that agreement will allow us to use Brave's operating platform as we open new pediatrics primary and urgent care clinics. And we do think this can be a game changer for pediatric primary care that can be very patient-friendly and family-friendly, enhance the experience and also provide a number of resources to families and their children for any kind of health care that they need, including the ability to utilize the subspecialty physicians that already exist in the pediatrics organization. I noted the footprint that MEDNAX has today across the country, and I think that what you probably should expect, and this is on Page 12, through the primary and urgent care strategy that are targeting for new clinic developments should largely follow what our footprint looks like already. As I mentioned, we already have a portfolio of clinics in Houston through the acquisition of NightLight earlier this year. We're in the process now, with the ink on the Brave Care transaction drying, to develop plans around new clinic development or acquisitions of small platforms across our markets. And we do believe that there's an opportunity for us to acquire or open 100 or more of these clinics over the coming years to fill out that kind of presence in the markets. We're looking in areas that may be underserved relative to the number of children in that market versus the number of pediatricians, and we're overlaying that with our existing presence as well. So we do think there's a broad opportunity for pediatrics for this growth. And we also think, I should highlight, it's a natural expansion of our existing footprint and should be highly complementary to our existing business. Lastly, I'll just wrap up with our cap structure. This also should be familiar to everyone. We're currently sitting, as I mentioned, at less than 3x net leverage. Our debt structure is binary right now. We have a $600 million credit agreement that has nothing drawn on it, and we have $1 billion in 6.25% senior notes due 2027. We referenced on our third quarter earnings call that those notes are callable in 2022. We view our debt structure right now, given the divestitures we've undertaken and the cash we've built, as somewhat inefficient. So we will be making decisions over the coming weeks and months about our debt structure to find something that's appropriate for the size company we are right now, our EBITDA profile, our growth and capital allocation requirements. And we haven't made any decisions yet, but we'll be doing so in the near future. And with that, Larry, I'm happy to open it up for questions.

Okay. Just thanks, Charlie. Thanks for the introduction. I also want to encourage the audience to use the Veracast site. To the extent that you may have questions as well, I can process those questions over to Charlie. But just out of the gate, Charlie, just a follow-up on the capital structure question. Your thoughts, I know Mark had mentioned, I believe, on the call, he referenced that was inefficient, if you will. Is your thought that you may move to look at something, some sort of secured, unsecured mix in the new -- potentially the new structure if you do decide to move forward with refinancing the existing debt?

Well, I think the reference is really, Larry, to the fact that we've got a gross debt, partly debt outstanding of $1 billion, $1 billion-plus, yet our net debt profile is significantly lower than that. And I think our primary goal is to achieve -- and again, we haven't made any final decisions on anything, and we will do so at the right time. But I think we want to find something that has -- that gives us a debt structure in aggregate size that's more appropriate for our business today and our financial profile than the $1 billion in outstanding that we have right now. So that's first and foremost. In terms of secured, unsecured and structure, we've got any number of options that we can determine from, and we'll make the most appropriate decision that we can.

Okay. Two, I know there's obviously been a wealth of headlines and noise around No Surprises Act and the takeaway from kind of the emergence of Part 2 here. Can you just give us -- provide us, kind of given we're in this kind of interim period here, if you will, kind of your thoughts and kind of the industry's thoughts about, obviously, the takeaway here in that it's certainly been -- it certainly proved to be -- or appears to be very favorable to lean towards the payers. Can we kind of get your thoughts on it and kind of where you're at in terms of processing your message back in response?

Yes. And we've made brief comments publicly in the past, and I probably won't go too far beyond those. But one thing I'll say, and I think you've seen this shared by other providers in their own comments and anything that's shown up publicly, MEDNAX, for ourselves, we've always been in support of a legislation that would protect patients and not burden them with unnecessary bills. Philosophically, we've always been a company that has made all attempts to be in network with our payer partners. And we've been significantly successful in doing that over all the years we've been in business. We've always found that it is a far more sustainable strategy to ensure that you are contracted with the payers in the market, particularly when you're providing services that can be highly critical, in some cases, emotionally traumatic to the family, to make sure that that's not something that they also have to worry about. So in our view, and in all of our advocacy leading up first to the legislation being signed, and this goes back several years, we've always tried to ensure that the spirit of the legislation is along those same lines that those providers who are operating in-network and contracted with payers are hopefully doing the right thing, and that a legislation doesn't have any perverse incentives that create a bigger problem than they're trying to fix. And for that reason, we've always been supportive of this kind of legislation. As the interim final rule was published, I think you saw that a number of providers as well as a number of legislators who had signed the initial legislation expressed some beliefs that the interim final rule did not totally follow that legislation. And that's where a lot of advocacy efforts have focused during this comment period. I don't want to weigh in how the final rule will be published, how it will be amended and in what ways, and we'll find out soon enough. But again, from a 30,000-foot standpoint, MEDNAX as a company has a fairly minimal amount of out-of-network revenue to begin with, and that's by design. And our hope is that anything that is finalized will enable us to continue to function in the same way.

Okay. Fairly nominal, meaning you're taking low single digit as a percent of commercial revenues in terms of out-of-network revenues. Is that...

Yes. Yes, it bounces around. And as you're probably aware, we always have different situations where we might be out of network temporarily with certain payers under certain contracts, and that's the case today. But yes, it's tended to be in that kind of mid-single-digit range.

Okay. Charlie, your thoughts on -- I know there's been some noise and there's been some activity out of, I guess, 1 state in particular with regards to kind of payer behavior and so forth. Can you comment on that in terms of what you're kind of seeing or potentially aware of?

Well, we're certainly aware of it. None of that has been focused on our company. But we're as aware of it as anyone else. And I think this is where you see some of the concerns arise about the interim final rule that it can create perverse incentives for payers to take action that is against the spirit of legislation of ensuring that providers and payers work together. So again, we weren't the recipient of those, but we're certainly aware of them. And I think it just lends some credence to the concerns that have been raised about the interim final rule.

Okay. Okay. Great. I'm getting a couple of questions coming in here, if I can. One is your thoughts on call them this 6.25% at a 4-point premium, what is -- would there be a better approach to using -- your best use of capital, which I guess would be a $40 million premium. Is there not a better approach to better use of capital?

Well, again, I don't want to jump ahead because we haven't made any final decisions on what we're going to do. But I think that our philosophy behind it is we're cognizant of that potential cost. We're going to weigh that against what the payback period might be if we took some steps. And we're also going to weigh it against what we see -- what we decide should be the optimal debt and capital structure for the company for our strategic goals over the coming several years. So it's all being weighed in, in any kind of structure we might contemplate. But again, we haven't made any final decisions yet.

Okay. Away from that, I have another question in here coming in. Really regards to your strategy, kind of I know, I guess Mark had touched on your kind of new approach, your new strategy, kind of acquisitions, more acquisitions, expanding practice and so forth. Had a question coming in just in regards to, could you just kind of highlight the kind of 3 or 4 data points that kind of bridges you from the $250 million today out to the $270 million-plus as you get into '22?

Yes, sure. First, I think I should emphasize that 2021 for us has not been a period of total recovery from the pandemic. As we entered this year, kind of falling out from exiting 2020, we were still seeing some significant impact to our business from the pandemic, whether it was related to overall patient volumes or payer mix. Now much of that appears to have normalized through the course -- certainly through the course of the first half of the year. But nonetheless, that's one component that represented a continued headwind as we enter 2021 that obviously, we don't know what can happen with additional variants and what the future holds for us. But barring that, that would be a headwind that goes away next year. The efficiencies that we have gone after this year also aren't fully reflected in our financials so far. I mentioned the R1 deal that we have and the partnership we have with them. And as that fully matures, that should be additionally additive to our EBITDA as we look into 2022 and beyond based on enhanced performance. And lastly, our growth strategy has been bearing fruit this year. We referenced on the third quarter call that looking at the comparison of EBITDA for the 9 months to date to 2020, to our best estimate, about 3 percentage points of that growth year-over-year were driven by organic growth initiatives and other patient access initiatives that we've put in place, over and above just normal demand trends as well as a modest contribution from acquisitions. And that's where we see a great opportunity moving forward for sales-driven growth to continue. We do see good opportunities. Our win rate in winning new contracts has improved. Additional modest stream of acquisitions, both in our core services and in any number of pediatric subspecialties as well. And then lastly, on top of that is the primary and urgent care strategy, which if you think about that in broad terms, to the extent over the coming several years we can move to a portfolio of 70, 80, 100-plus clinics, that's a significant potential contributor to both our revenue and adjusted EBITDA over that time frame. So I think there's multiple avenues for us coming out of 2021, certainly looking into 2022, but also beyond that, that give us confidence around that $270 million floor next year and additional growth beyond that.

Okay. Does the acquisition opportunity, is it -- can you speak to the acquisition opportunity, the development opportunity now, as you sit here today? It's obviously a little bit of a different strategy than what was in place prior to some of the divestitures and so forth. So can you just speak to what that presents for you in terms of opportunity longer term, even beyond Brave and so forth?

Yes, I think that obviously, it's still twofold. We're not foregoing potential transactions across neonatology and our other existing maternal and pediatric subspecialties. So we do have a pipeline of potential transactions that we're working against and we think they'll be contributors. And again, most of these transactions are relatively small, the normal size of practice across our specialties is not that big. But in total, they can add up. And many times, they can be highly strategic, even if they're not large. Adding a very scarce resource or scare service within a market on behalf of our hospital partners can open the door for other opportunities for us as well. So we think about it more holistically around those acquisitions and what they can bring. We have found greater opportunities for sales-driven growth over the last couple of years, and we're continuing to pursue those. Earlier this year, for example, we highlighted that -- actually goes back to last fall, that we had won a significant contract here in South Florida to provide neonatology services across Memorial Health System, including Joe DiMaggio Children's Hospital, which we stood up and got going earlier this year. And we do think there are other opportunities similar to that, that we can also pursue that are de novo and organic and not acquired. On the primary care side, we have shared a couple of thoughts on that, but I'll just speak at a high level. Thinking about the opportunity for 100 or so clinics in the coming number of years with an average revenue generation per clinics somewhere in the 2 -- north of $2 million range can give you kind of a sense of the size of the prize that we available to us. And to the extent that we're right, based on our own existing experience and other accounts we've looked at and our own modeling that these can provide a contribution margin that's comparable to our own profile today, I think you can see where that can be nicely additive to the overall organization financially, Larry.

Okay. Great. Just before we wrap up, Charlie, because I think we're actually out of time here, and as always, thank you. From a leverage profile perspective, it's still your insight that 2.5 turns, which is obviously a very, very attractive point from where you've been here, marginally higher historically, not much. But is that kind of from a longer-term perspective, is that where you want to be?

I don't think we've laid out a hard and fast financial profile. We're standing on that. I do think that speaking on behalf of the rest of the leadership team, our bias is toward a conservative leverage profile. We have found, even in the recent past, that it has served us fairly well, because you don't know what you don't know is coming down the pike. So I think that we'll continue to have that bias toward a conservative leverage profile. All of the growth activities that we talked about, we don't see that as something that's going to extend us significantly from an overall leverage standpoint, particularly given our free cash flow characteristics. So the need for a higher leverage profile, I don't see as great against the risk of that higher profile.

Yes. I guess that's my question, just trying to bridge the growth and the leverage profile. It sounds like there's sufficient cash flow to fund the growth, if you will.

Yes. We do think there is.

Yes. Okay. Why don't we go ahead and wrap it up. I think I've got it overnight, I've addressed my questions, so thank you to everyone that joined. And Charlie, thank you for the time. As always, truly appreciated MEDNAX, and we always appreciate your attendance at our conferences. So great.

Thanks, Larry.

Thanks, everyone. Have a great afternoon.

Thanks, Larry.