Thank you for standing by. My name is Tammy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Pediatrix Medical Group, Inc. First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. Thank you. I would now like to turn the conference over to Charles Lynch. Please go ahead, sir.

Thank you, operator. Good morning, everyone. Welcome to our fourth quarter earnings call. I'll quickly read our forward-looking statements and then turn the call over to Mark. 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 Medical Group, Inc.'s 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 Medical Group, Inc. 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. That, I'll turn the call over to our CEO, Mark Gordon.

Thank you, Charlie, and good morning, everyone. Also with me today is Kasandra Rossi, our Chief Financial Officer. First, I want to thank Charlie, who will be departing at the end of this month. Charlie's contributions to our strategic goals and the communication of those goals to you will be missed. Please join me in wishing him well in his future endeavors. I want to begin by thanking our board of directors for reappointing me as Chief Executive Officer after serving as Executive Chair. I'm excited to return to this role and particularly at this point in time for the company following a period of such significant change. As I'll explain in a few minutes, I returned out of optimism about our prospects. I will begin with our fourth quarter results and then spend time on our strategic priorities to 2025 and beyond. We finished 2024 with very strong fourth quarter and therefore year-end results. Our same unit revenue growth was strong driven by continued favorable payer mix and positive volume. Our same unit cost trend continued down compared to the third quarter as well. As a result, adjusted EBITDA of $69 million was significantly above the expectations we've provided in our updated guidance last year. From a strategic standpoint, we completed our portfolio restructuring on time exiting practices that represented $200 million in annual revenue and a clear drag on earnings with their requisite overhead. I work very closely with our operating teams who are incredibly focused. In this call, we have very hard work ensured that we were able to begin 2025 with a more focused portfolio and a more efficient operating team. Similarly, the successful transition of our revenue cycle management function to a hybrid model enables us to focus this year first on ensuring the stability…

Thanks, Mark, and good morning, everyone. I'll provide some details of our fourth quarter results and then I'll discuss some of the parameters of our preliminary 2025 outlook. Our consolidated revenue growth of just over 1% reflected strong same unit growth of 8.7%, largely offset primarily by the impact of our portfolio restructuring. In total, this impact was just over $35 million. Reflecting a large share of the annualized $200 million in revenue that our restructuring represented based on 2023 financials. On the cost side, the decline in practice level SW and B expenses also reflected our portfolio restructuring. On a same unit basis, the growth in these expenses continued to decelerate as compared to both the prior year period and on a sequential basis. I'll note that while this trend is encouraging, same unit salary expense growth continues to be above the average range of 2% to 3% that we saw pre-2022. The increase in our G and A expense on a year-over-year basis primarily reflected incentive compensation, based on strong financial results. The additional staffing we added through most of 2024 as part of our hybrid RCM model was offset by efficiencies we have created through the year through staffing reductions across other shared services. Moving to cash flow. We generated $135 million in operating cash flow in the fourth quarter compared to $73 million in the prior year. Partially driving this strong cash flow was a sequential decline in our accounts receivable DSO, which ended the year at 47.5 days. Compared to 51.5 days at September 30th. Which as you may recall, we attributed to RCM transition related. Our capital expenditures were $3.5 million. As a result of this cash generation, we ended the year with cash of $230 million reducing our net debt to $386 million…

Thank you, Kasandra. Operator, we will now open the call up for questions.

Thank you. We will now begin the question and answer session. To raise your hand and join the queue. To withdraw your question, simply press star one again. And your first question comes from the line of A.J. Rice with UBS. Your line is open.

Hi, everybody. Good luck, Charlie, and welcome back, Mark. First, maybe just to drill down a little bit more on the 2025 outlook. There's a lot going on with the restructuring of the operations and some of the other things you called out. I wonder if you can just speak to what sort of level of embedded same facility volume growth and pricing expectations, are you baking in and any other same store metrics to give us a little better sense of what the underlying trends are. When you normalize for everything else that's going on.

Sure. So for volume, like, I guess, I'll take them one at a time. For volume, we did have a bit of acceleration of volume in the back half of 2024 with NICU days coming in, you know, just under 3% and births were up about 30 basis points in Q4. The other stats for neonatology, length of stay was flat. Admin rate was slightly up. But, you know, we are takers of volume for the most part, so we did include flat volume in our outlook for 2025. Talking about MSM, we did see mid-single-digit growth there all year. And that was really based on a little bit of higher acuity resulting in some additional visits to our MSM clinic. But from a modeling perspective, we did assume that volume would be flat. Looking at pricing, we talked a little bit about payer mix. And we know that payer mix was a massive tailwind for us in 2024. But we do anticipate that that will level off and course, as we work our way through 2025, that comp will get a little bit tougher. So we do have that flat. On the managed care side, we talked about the fact that we expect 2025 to be pretty stable, which actually will take as a win in the hard and tough environment that we're operating in where payers still are a bit immobile. And then on the RCM side, collections were really strong in the back half of 2024. And the metrics are looking great. But we did build in some improvement in 2025 into our outlook. But we are really focused on stabilization. And as we move through the year, you know, we'll see if we can kick that up a bit with automation initiatives and process improvement. Of course, the biggest line in our cost trends are in the SW and B line. And as we mentioned, we did decelerate clinical comp expense for the third quarter in a row, getting that just above 3%, although, again, not in line with our historical trends of 2% to 3%. So we do see that flattening out. But if we can make some additional headway there, you know, we'll build that in as we move through the year.

Okay. That's great. Let me the follow-up question. We heard a lot we we're hearing a lot from the hospital operators about professional fees and seeing demand for more subsidies, more support, and it seems like it's gone from ER to anesthesiology and more recently, we've heard hospitals talk about radiology. I wonder, in your NICU management, relationships, are you seeing any opportunities for improved economics? Any any comment on what those discussions are like?

We have strong and continuous conversations with our hospital partners, and that's always been a part of what we do. So we would expect going forward that that's gonna be part of what we do. But we're not baking in any into our forecast any increase. So we'll report as we go along. Okay. Alright. Thanks a lot.

Next question comes from the line of Jack Slevin with Jefferies. Your line is open.

Hey. Thanks. Good morning. Congrats on the quarter. And thanks to Charlie, and congrats stepping back in to Mark. Hopefully, that covers the pleasantries. Just wanna touch that item. Alright. And I think gave a lot of color. It's really helpful. I guess just backing out the leap year, putting in the $20 million from the restructuring, you get to, like, $240 level. Right?

And so

taking all the rest commentary. I guess the expected that wage inflation is gonna outstrip type core rent assuming payer mix is flat in the guide like you said. Is that the right way to think about it and sort of get to that sort of $5 to $25 million kit versus a $40 sort of starting point when you adjust for those first two items. Am I thinking about that the right way?

I think that when we thought about the appropriate range, think about the comment that Kasandra made and then I made earlier. There are enough headwinds in the provider space that just make us cautious, you know. And, obviously, throughout the economy, this is a time of real uncertainty. So that tempered our thinking. And, importantly, it's mid-February, but that's why I said we'll update you. So there's certainly is an opportunity to do better. We just wanted to be careful in our guidance. It wasn't because of the negative trend. Or something specific like that. It was just being mindful of the environment that we're in. And the uncertainty.

Okay. Got it. That makes sense and appreciate. That given, I guess, you know, how much all of us are checking Twitter on a daily basis. For sort of nebulous headwinds. Then that's what I'm gonna check. Really? Yeah. One follow-up here. Maybe taking a step back. Is something that's perhaps positive that's coming out of that same sphere of influence. There's talk now that's a little more positive on IVF. I think it's something that's pretty clearly could be a large tailwind for you on a multiyear basis.

Maybe if it

color in terms of Are you seeing any sort of benefit there How should we think about that opportunity for you Is this something you've looked at or something you're contemplating as you look at a few

Oh, what I'd say is that we agree that it is possible tailwind for us. We have not calculated that yet. And it's not incorporated on our numbers, but we do see that as a potential.

Got it. Thank you guys. You have a good one. Thank you. Thank you. And for the pleasantries.

Next question comes from the line of Whit Mayo with Leerink Partners. Your line is open.

Hey. Thanks. Good morning. First, a two-part question. One, Kasandra, what do you think the earnings tailwind was in 2024 from the improving payer mix. And two, I don't think that that mix developed was incorporated within the initial plan that you developed last year. So I'm curious when you isolate that one factor, Mark, how do you think about the overall performance of the business in all the other areas? Thanks.

Sure. So on the payer mix tailwind, I think if you kinda take Q4 and you look at the same unit growth of about 9%, about 6% of that coming from pricing, so it's a meaningful number for 2024.

And Mark is

it. Structural stages in a way I was just saying because of structural changes in the way you know, payers. There's been a migration toward exchanges. We don't see this necessarily as stopping or reversing. Right. So this well put home. But we can't we can't positively.

Yeah. This is about the fifth quarter in a row that we did see some tailwind in payer mix. And like Mark said, if it is a permanent shift, we would expect that to level off. But like we mentioned in our prepared remarks, you know, it going either way can, of course, move our move our numbers in either direction.

Do you know what percent of your commercial revenues are coming from patients on the exchanges now. We don't we don't have that number. Yeah. We usually can't see that with with any specific primary reason why we know, can't truly validate that the exchange migration is the key driver. We don't disagree with it, but we just can't validate it through our data. Right. Okay. Maybe just one last one. Mark, just you referenced in your prepared comments some And things about the business that give you you see great opportunity, I think, was your quote. Just what are some of the areas where you have the most optimism as you think about Yeah. 2025. Thanks.

Actually, that's two of them that I started out. And we're on it right now. There are two areas that I think are really key to our future success. What is really systematic. Work on our hospital relationships. I mean, it's old-fashioned. Call it grinding or blocking and tackling. But that's what we're going to be very focused on. Really going hospital system by hospital system to make sure we have the strongest relationship. And that's both with ones where we enjoy our relationship now and also with a prospective opportunity. The second is in recruiting. You know, we are nothing but our people. And I think with another benefit of being more streamlined is we can really focus on how we do the best job possible in attracting and retaining amazing clinicians. We have for a long time happy home for people. We want to make sure that we really maximize what that can provide. So that might seem amorphous, but it is the core of what we do. As we're gonna be all over the PRD. K. Thanks.

Again, if you would like to ask a question, press star one on your telephone keypad. Next question comes from the line of Pito Chickering with Deutsche Bank. Your line is open.

Hey. I do got Benjamin Shaver on for Pito. Just congrats on the nice quarter. I actually had a couple of questions on I guess I'll hit pricing. First. So obviously very, very strong in the fourth quarter. I was just wondering sort of how much of that 5.9% came from improvements in optimal contract admin fees. And then second part of that quest.

Price was very strong in the second half of

this year, and I was wondering if that sort of comps into the first half of 2025.

Thanks. So on the cost contract revenue, hospital admin fees, or the price component. It was probably just under a third there as well.

And then on the payer mix,

is how that flows into 2025. We're really just looking at flat pricing overall between payer mix, managed care, contract admin fees, and then a little bit of a bump up in RCM. Collections.

Gotcha. That makes sense. And then I just wanted to hit the on exiting the primary and urgent care clinics. You mentioned that that was gonna be roughly tailwind, like, favorable EBITDA tailwind?

And

I was wondering if you could break out the split of how much you guys recognize of that in 2024 and how much of that tailwind is going to be a tailwind of 2025.

Yeah. So, really, we considered the primary and urgent care exit as part of the entire portfolio restructuring. That's included in that $30 million lift in EBITDA of which we realized about a third of that in 2024. And the rest will come through in 2025. But it wasn't a discrete event. It was really an entire portfolio.

Yeah. But and most of it was not related to primary and urgent care. Right. It was to be really broad array of ambulatory practice.

And importantly to that.

Gotcha. That makes sense. That's super helpful. And then I said a last question on sort of your capital allocation. You mentioned that you obviously finished the quarter with a lot of cash on the balance sheet. You guys are generating cash as well. You mentioned you have no real plans for M and A and you're gonna mainly be using Natasha's support and continue to invest in your business.

Oh, I assume that most of the stuff that you mentioned

happens every year. Right? So I have I have I was just wondering if you could have any clarity on maybe any leverage targets that you're looking at and sort of how you're thinking about returning cash to shareholders?

Thanks. Well, I look I mentioned in my prepared remarks, you know, and we all know it, in a kind of period like this with a lot of turbulence, you think having an incredibly strong balance sheet is very, very helpful. It provides us with opportunities in a lot of areas, and that could include M and A. But, you know, it's early in the year, and we'll watch how the year progresses. How the sector progresses. And then as Kasandra said, we'll work with our board of directors to decide what our best course. Certainly, if it you think we should do something paying down debt further or something else to return money to shareholders. We'll look at what the best uses are of our money is. Right. You know, this has been a sector that that has not rewarded people for having high level. And we anticipated that, and we also learned from that. So we're very pleased to be where we are.

Yeah. That makes a lot of sense. Thank you. That's super helpful. That's all I have. But congrats again on the nice quarter. Thank you. Thank you. Thanks, Jack.

There are no questions at this time. I would now like to turn the call back over to Mark Gordon for closing remarks.

Thank you all for tuning in today and for your support, your good questions, and again, Charlie, we wish you all the best along with our thanks. Have a great day.

This concludes today's conference call. You may now disconnect.