Ladies and gentlemen, thank you for standing by, and welcome to the Pediatrix Medical Group's Q2 2025 Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded. I would now like to turn the conference over to Mary Ann Moore, EVP, General Counsel and Chief Administrative Officer. Please go ahead.

Thank you, operator, and good morning. Certain statements and information during this conference call may be deemed to be forward- looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by Pediatrix management in light of their experience and assessment of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Any forward-looking statements made during this call are made as of today, and Pediatrix undertakes no duty to update or revise any such statements, whether as a result of new information, future events or otherwise. Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the company's filings with the SEC, including the sections entitled Risk Factors. In today's remarks by management, we will be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this morning's earnings press release, our quarterly and annual reports and on our website at www.pediatrix.com. With that, I will turn the call over to Mark Ordan, our Chief Executive Officer.

Thanks, Mary Ann, and good morning, everyone. Also with me today is Kasandra Rossi, our Chief Financial Officer. Our second quarter results, including adjusted EBITDA of just over $73 million exceeded our expectations. This was driven by same unit revenue growth of over 6%, which in turn was a result of strong hospital-based volume with NICU days up 6% and favorable reimbursement factors, including higher acuity levels, strong RCM collections and increased hospital administrative fees. Our ongoing cost management initiatives continue to control same-unit salary trends, partially offset by incentive compensation from higher results. These results, along with our second half visibility, have prompted us to raise and narrow our full year adjusted EBITDA range to $245 million to $255 million. These results have also continued to raise our cash position, bolstering our balance sheet and adding options in a very turbulent hospital-based health care environment. Kasandra will now provide additional financial details, and then I'll discuss our view of where we are, our focus now and looking forward.

Thanks, Mark, and good morning, everyone. I'll provide some additional details in a few areas. Our consolidated revenue decreased by just over 7%, driven by non-same unit activity, which declined by about $63 million, primarily related to the impacts from our portfolio restructuring activity. This decrease was partially offset by strong same-unit growth of over 6%. Same unit pricing was up 3.5%, driven by increased patient acuity, primarily in neonatology, strong RCM cash collections and an increase in contract administrative fees. Importantly, payer mix remained relatively stable as compared to both the prior year period and on a consecutive quarter basis. Same-unit patient service volumes increased by approximately 3%, driven by strong increases in hospital-based services, primarily neonatology, where NICU days were up over 6% and within office-based services, where we saw a modest increase in maternal fetal medicine services. Practice-level SW&B expenses declined year-over-year, also reflecting portfolio restructuring activity. On a same-unit basis, we saw an increase in expenses as compared to prior year, but the increase was primarily related to higher incentive compensation based on practice results as well as salary increases. Salary growth has remained in a tight band, consistent with the ranges we have seen for the prior 4 quarters that averaged 3% to 3.5%. Our G&A expense decreased slightly year-over-year, primarily due to a net decrease in salary expense, reflecting the favorable impacts from the staffing reductions across shared services completed in the prior year as well as modest decreases in other expense categories, including professional services and legal fees. These decreases were partially offset by an increase in incentive compensation expense based on overall company financial results. D&A expense declined to $5.3 million as compared to $8.8 million in the prior year, also primarily reflecting the impacts of the practice dispositions. Other nonoperating expense…

Thanks so much, Kasandra. Since returning as CEO in January, I have spoken about our concerted efforts to be the best possible partner to our hospitals and to be the employer of choice to leading clinicians who want their careers to be at a quality-driven critical care provider. We continue to believe strongly that these efforts provide the best possible foundation for stability, resilience and opportunity. In my career, I have looked for and usually found opportunities in areas where many see the headwinds most prominently. To capitalize on opportunities in a tougher environment, we believe you have to be the very best at what you do. If you're the best, you will attract the very best talent and be an invaluable partner. At Pediatrix, where we provide the most critical care to mothers, babies and children, being the best means an intense focus on quality of care, having an organization dedicated to this and having the resources needed to support this fully. We are the nation's leading research organization in neonatology. Our clinician leaders serve on boards of outside organizations dedicated to advancing care in neonatology and in maternal fetal medicine. We spoke about acuity earlier in the call, and we oversee more Level 3 and Level 4 NICUs than any other provider organization. Recently, Senator Cotton and other legislators introduced the Neonatal Care Transparency Act, and we believe that we can assist anyone as thought leaders since we know the intricacies of this as well or better than anyone. To be the best, we need to look for ways to be better partners with our hospital partners. We look for opportunities to grow with them while attending to the core of the care and the services we provide. To be the best, we must be resilient, and I've…

[Operator Instructions] Our first question comes from Pito Chickering from Deutsche Bank.

Can you talk about the hospital admin fees? I think those were previously guided to be flattish. What percent of the pricing growth in the second quarter came from admin fees? And can you tell us sort of how these negotiations are going and sort of how we should think about these admin fees as we head into 2026?

Sure. So late in 2024, we did say that we expected hospital admin fees to be in the flattish range. In Q1, we did see same unit growth there of just about 10% of pricing. This quarter, it was definitely north of that, and our admin fees made up about 1/3 of our pricing growth. We talked to operations, and they've said they have certainly been targeting some key programs, both from a renewals perspective and certain ASCs. We've been able to work with our hospital partners to demonstrate the value we bring and substantiate the ASCs that are necessary to continue supporting their programs. I don't think in any way we're saying it's easy, but we are definitely having some success there.

Yes. I would say this goes hand-in-hand with our efforts to really bolster our relationships with our hospital partners. We're not shy about looking for support where it's warranted, and we believe we operate very efficiently, and we're providing an absolutely urgent service to our hospital partners. So we're -- we feel comfortable in that area. There's always -- you always have to justify what you're doing, but we think we're good at that.

Okay. And then a follow-up here. Let's say you increase your admin fee by, let's say, 1%. What is the flow-through on how much sort of goes back into doctor compensation versus the corporate? Just trying to figure out and then the timing of when those to occur.

Probably somewhere in the 30% to 40% range.

Is it pretty immediate to flow through?

Yes, pretty immediate.

Okay. So next question, just NICU growth was exceptionally strong this quarter. Just any color on sort of what's driving the NICU growth? Is it just a large number of babies? Is market share sort of comps? Kind of what drove that 6% NICU growth this quarter?

It's really the factors that we talked about before. There's no one particular driver of it. And we mentioned one of the things we highlighted was that acuity is certainly up. It's hard to parse where it's all coming from. So it's just overall strong in really every regard.

Okay. And then last one here for me. Just looking at sort of this Big Beautiful Bill, looking at the Medicaid impact for -- sorry, expansion states, how would that flow through into you guys just as I think about sort of moms and kids sort of versus changes of policy kind of how would that flow through to you guys?

You're asking specifically about the expansion states?

Correct. Exactly just for the expansion states.

It's not clear yet how that will flow through. A lot of the details of how that's going to work are not clear. I stressed earlier that 60% of our volume is in the non-expansion states. So we think that the effect will -- and it phases in over time. So it's -- look, we're not taking it lightly at all, but we think that as you see the rules around who's covered and who's not covered because it specifically carves out pregnant women, we'll see how that flows through. And we think we have both the time and understanding to manage through it as it becomes clearer.

Yes. I mean that's sort of my question. Just as I think about your patients being pregnant moms and/or kids, I guess I'm struggling to sort of see how either of those are going to be the ones being cut from live simply because it seems moms, kids and old poor people are generally being held the same. It's much more about working males. And so I'm trying to figure out why there will almost be any cuts to you guys coming from the Big Beautiful Bill.

We hope that's the case. And as you know, in any legislation, it's the details on how it's implemented that have not yet been announced. But given that in the very initial wording of the bill, these were pointed out, and I read it the same way you do, the intent of the bill was aimed at a different area of the population. It gives us somewhere between confidence and hope that we won't be targeted. So the fact that we're mostly in the non-expansion states and the fact that legislators are keenly aware, including in those expansion states that their voters depend on necessary care, it gives us, again, somewhere between hope and confidence. And we have -- we punch above our weight in pointing these things out, I think, to the government, and we're active at that.

Our next question comes from Whit Mayo from Leerink Partners.

Mark, can you just elaborate more on buybacks, how you're thinking about the buyback strategy and the pace of buybacks?

Sure. Well, what I said is we -- what I said, I'll sort of repeat it. We believe that in a turbulent time and throughout my career, I've thought you really want to have a strong balance sheet. It provides you with a lot of opportunity. And at a time like this, when most people are scared about the provider world, where all they see are headwinds and look at how -- look at the multiple of our stock, say, hey, it's a good time to have cash and to have flexibility. Now it's not our job to hoard cash. We're not a mutual fund. So we want to be careful about what we do. The reason we added Greg, and we've bolstered our team in this regard is we do think there are opportunities in a turbulent environment like this, and we want to be able to take advantage of those. Having said that, it's not like I'm announcing some kind of big acquisition or something. So we think about our debt level, and we could pay down debt. And look, nobody is more incentivized than I am or Greg or anybody in our team to raise our share price. If we think that the best strategy is to buy back shares, we have the ability to do it and still not push our leverage levels high, and that's something that we're very mindful of. We're very pleased to have this flexibility, and we're not going to just sit around and watch it.

Okay. No, that's helpful. And my follow-up is just we can all see the activity with IDR and arbitration, some of the payers, as you know, are talking about it. Just any update there? I mean we can see you're winning claims. Is this not a favorable development? And maybe just comment on whether or not the plans are, in fact, paying you.

Yes. It's -- that process, while painful for everybody, has gone well for us. And we've done very well in the process. And I would say, as you know, we're overwhelmingly in network. We continue to overwhelmingly be in network. In a few cases where we were out of network, people have wanted us back in network. We provide the necessary service. So I would say, certainly, versus where -- what people have feared and in some cases, continue to fear, it's gone a lot better than we had worried about.

Our next question comes from Tao Qiu from Macquarie.

Just want to drill down a little bit on the guidance. If you annualize the first half numbers, you reached the lower end of your guidance range. When we consider normal seasonality, that should push you above your current guidance range. I understand you mentioned the cautious view on the hospital landscape. I'm just curious, we're talking about potential headwind coming down the pipe. Is it on the revenue, expense or both? And maybe what is your outlook in terms of the cadence on margins for the balance of the year?

So I think when we talked a little bit about our guidance and when we raised guidance last quarter, we talked about the fact that as we move through 2025, the comps do get a little bit tougher. We had that volume top line increase in Q1. That was our easiest comp of 2025. Got a little bit tougher in Q2, but we really did start to see growth in the back half of '24. So the comps will be a bit tougher as we move through the year. So I think that's why when we moved our guidance up, it really was specifically related to what we saw in Q1 and Q2. But we do expect margins to be fairly stable as we move through the end of '25.

Great. And then a follow-up on the budget bill impact. A lot of your business is originated from the hospitals, right? When we think about the regulatory and reimbursement changes, hospital seems to be the biggest victim there. What is your contracting discussion with hospital like these days? Are they looking to contract their service lines down the line if this headwind persists?

No, we're not seeing that at all. Again, we provide an unbelievably necessary service, and it's very important in the overall financial picture for hospitals. So we're not seeing people retreating from this. Now it could -- I do fear that it will have an effect in rural areas and other underserved areas of the population if this isn't done with proper care. But we overwhelmingly are in Level 3 and Level 4 NICUs and even Level 1 and Level 2 NICUs provide an absolutely vital service, which is really very important to the financial well- being of the hospital and to their patient the patient outcomes. So we're not seeing that at all. What we are seeing is that we provide the necessary service. We spend our days and nights reinforcing that with hospitals. And hospitals, look, at a time like this, they are looking to take advantage of opportunities just the same we are with the headwinds. I mentioned earlier that we are aggressively looking at hospital systems that are growing, that are thinking about like a hub-and-spoke model for what they're doing and how we can be partners with them as they grow.

And we have no further questions at this time. Please continue.

Well, if there are no more questions, I think we're set. We -- I hope that you can tell that we are very mindful of the challenges in front of us, but I think we're very prepared to manage through them. We feel confident. We believe that investing in our operations is a very wise thing for today and going forward, and we appreciate your support.

Thank you. That does conclude our conference for today. Thank you for your participation. You may now disconnect.