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Operator: Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2023 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Charles Lynch. Please go ahead.

Charles Lynch: Thank you, Greg, and good morning, everyone. I’ll quickly read our forward-looking statements, and then we’ll get into the call. 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’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 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 most recent annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K, 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. With that, I’ll turn the call over to our CEO, Dr. Jim Swift.

Jim Swift: Thank you, Charlie, and good morning, everyone. Also with me today is Marc Richards, our Chief Financial Officer. Our first quarter results were largely in line with our expectations, with some variances that Marc and I will discuss this morning. And as you’ll see in our release this morning, we’re maintaining our full year outlook for adjusted EBITDA of between $235 million and $245 million. In terms of business trends, patient volumes were stable to positive against relatively strong year-ago comparables. This was particularly the case for our office-based services, where same-unit volume grew 4% against a nearly 5% prior year comp. Within our hospital-based services, same-unit births and NICU days declined year-over-year, but this was also against a difficult year-ago comp.

And both metrics were up on a two-year compounded basis. As you’ll see in our release this morning, same-unit pricing was also strong, keeping in mind that in last year’s first quarter, we recorded roughly $10 million in CARES funds. This pricing growth partially reflects modest improvements in our revenue cycle management activities, which I’ll detail in just a minute. On the cost side, our practice-level expense growth continued to hover above historical trends, similar to what we’ve discussed in the last few quarters. But we expect this expense growth to normalize through the course of 2023. Lastly, our G&A expense declined year-over-year and continues to reflect efficiencies we have created, primarily in the area of net staffing. And we will continue to seek further efficiencies in our corporate services.

Turning to revenue cycle, I’ll classify the progress we’ve made as encouraging, but by no means complete. Throughout the beginning of this year, our internal focus has been on highly targeted staffing additions, both to address the gaps we had identified in front-end activities experienced to date, and to bring in the necessary subject matter expertise that matches the nature of our clinical services, particularly in the hospital-based care. Our internal team has worked very closely with our vendor to ensure that we are tracking the right metrics, quickly identifying any variances to benchmarks, and ensuring that the improvements that we have had to make to date can be built upon as we go forward. Overall, we’re pleased with the steps that we have implemented to bridge the front-end gaps that we identified and have spoken about in the past.

We also believe that supplementing the extensive services we receive from our vendor with an internally staffed function is not only proving effective, but will also be necessary on an ongoing basis. What we found is that, in our business, a hybrid solution is the most effective at or near the point of care. And while I emphasize that it’s still early, we nonetheless believe that this hybrid, a higher-touch front end working in tandem with our vendor, has enabled us to reduce our unbilled AR; get claims moving through the process; and as Marc will detail, generate improvements in our DSOs, our accounts receivable and ultimately our revenue. With that, I’ll turn the call over to Marc Richards.

Marc Richards: Thanks, Jim. Good morning, everyone. I’ll start with details of how our RCM activities flowed through our financial results. As you’ll see in our earnings release and our 10-Q filed this morning, both gross and net AR have declined since the end of last year. Overall, our DSOs were 51 days as of March 31, down two days from year-end and down eight days from a year ago, but still above the high 40s range that we would consider to be historically normal. On the P&L side, our net same-unit pricing increased by 40 basis points year-over-year despite a 2.2% headwind based on the CARES funds we recorded in Q1 of ’22. In the first quarter of ’22, we highlighted that our same-unit pricing was burdened not only by core RCM activities, but also by a temporary issue surrounding our private pay collections, the latter of which represented roughly half of the pricing headwind we discussed on last year’s first quarter call.

Accordingly, despite a notable improvement in same-store pricing, core RCM activities continue to burden our P&L. And similar to our discussion last year of our full year outlook for adjusted EBITDA, additional and sustained improvements are a component of that outlook. Turning finally to our balance sheet. We were a net borrower during the quarter, as we typically are in Q1, based on the timing of incentive compensation payments and employee benefit plans matching. We ended the quarter with net debt, just over $750 million, and net leverage of 3x. With that, I’ll turn the call back over to Jim.

Jim Swift: Thank you, Marc. Operator, let’s now open the call for questions.

Operator: Your first question comes from the line of Kevin Fischbeck from Bank of America. Please go ahead.

Kevin Fischbeck: Great. Thanks. Maybe just to start on the cost side of things. You said that you expected that the cost growth will moderate as the year goes on. Can you just kind of tell us what’s going to be driving that? And when do you start to see the — I guess, it’s just a comp issue. So when we should start to see that getting better year-over-year. And then how you think about cost growth once things are normalized.

Marc Richards: Kevin, Marc Richards here. Why don’t I jump in, and then I’ll flip it over to Jim. You are correct. Looking at both the discrete comp item in the P&L and same-store comp, sequentially and quarter-over-quarter, we did see an outsized growth in clinical compensation. That is consistent with our projection for the quarter. And we also expect that to revert back to a more normalized increase as the year progresses, I think that’s important to note. So we saw that coming in the first quarter. We expect it to slowly revert to normal as the year continues. Jim, I don’t know if you want to –

Jim Swift: Yes. And Kevin, we talked about this last quarter, some of this with our organic growth activity as practices have come on, and this de novo growth does add some cost in as we ramp up. And generally, we see a lot of growth that occurs in the last quarter and then into the first quarter, and that will smooth out over the years. So we think, again, this will return to normal.

Kevin Fischbeck: Okay. Great. And then just on the pricing side, obviously, no surprises that, that’s still, I guess, a concern for some. Just want to hear the latest and greatest from what you guys are seeing, how that process is working and whether the backlogs that are happening have any kind of input on DSOs or skewing any of the metrics. Thanks.

Jim Swift: Well, I’ll start. We have not seen further activity from the payers that gives us pause. But nonetheless, the IDR process — and this came out recently with CMS reporting, what’s been going on in the IDR process with the backlog. But we’ve been able to successfully push many of these claims through the IDR process, and we’re still winning about 72% to 75% of these. And on individual basis, with some of the payers, we’re winning 80%. And I think there was a trend line in the CMS report for Q4 that just came out that providers, on average, were winning about 71%. So we think that’s an important infrastructure piece that we’ve built to be able to manage the IDR process and succeed, that sends the message to the payers that we want this on a fair and balanced level. So we think that this — hopefully, this will bring those payers who are out of network to the table, and we’ve had substantive conversations with some of them.

Kevin Fischbeck: Great. Thanks.

Operator: Your next question comes from the line of Brian Tanquilut from Jefferies. Please go ahead.

Taji Phillips: Hi, good morning. You’ve got Taji on for Brian. Thank you for taking my question. So first, I just want to circle back on your commentary on same-store pricing growth, right? Now that we reconciled that with — considering persistent RCM pressures, but also looking at negative comp from 2022. How should we be thinking about how that will trend throughout the year?

Marc Richards: Hi, good morning. Marc Richards here. I think that’s a great question. And there are a lot of pieces in the first quarter relative to pricing as we’ve seen marginal improvement relative to our RCM efforts. Same unit pricing for the quarter up about 40 basis points. That was burdened by about 220 basis points of CARES in the first quarter of last year. So with taking that into account, there’s 260 basis points of same-store accretion there, which is partially offset by issues we saw in the private pay side in the first quarter of last year, which accounts for 100 or so basis points of that. So picking through the first quarter, looking at pricing in the 150 basis point area, it is probably consistent with expectations going forward.

I would note also that in that pricing analysis, there’s probably some component, a smaller component, some catch-up from prior year activity. So to the extent that we still are creeping in that 150 basis point range as the year progresses, I’d say that’s consistent with our expectation. I know that’s a lot.

Taji Phillips: No, I appreciate the color. And then as I shift to the balance sheet, I see you ended Q1 with $6 million of cash on hand. Just curious about your outlook on improving your cash balance on hand.

Marc Richards: That’s a good question. We — in the first quarter of the year, we’re a net borrower. Our compensation arrangements with our practices require annual incentive payments in March of the year. Accordingly, we drew on our revolver and funded that. However, we do expect, as the quarter and the year goes on, that position will change, cash will continue to build up and our net borrowings will decline over the next quarter or two.

Taji Phillips: Thank you.

Operator: Your next question comes from the line of Ryan Daniels from William Blair. Please go ahead.

Jack Senft: Hi, good morning. This is Jack on for Ryan. Looks like you guys added some nice office-based patient service growth year-over-year with maternal and fetal medicine being a strong area this quarter. Any comment on the growth or contribution from some of the other service areas, such as pediatric primary and urgent care? Any additional color here would be great.

Charles Lynch: Sure. It’s Charlie Lynch. I will give you a couple of pieces, I’ll work backwards on primary and urgent care. We’ve continued to see fairly strong growth in patient volumes in that service line. The caveat is that, in aggregate, it remains a relatively small piece of our total volume and net revenue. So in terms of impact to our overall same-store volume growth, doesn’t move too much. Within the office-based service lines, looking at the first quarter, the strength we saw was primarily in some of our peds subspecialties. But also within cardiology and maternal and fetal medicine, which are our largest office-based service lines, we saw growth that was just under the 4% that we quoted for total office-based services.

Jack Senft: Okay. That’s all. Thank you.

Operator: Your next question comes from the line of A.J. Rice from Credit Suisse. Please go ahead.

A.J. Rice: Hi, everybody. Maybe first on the comments around the revenue cycle management. So you’re at 51 days and hoping to ultimately, maybe to get back to the high 40s. Any time frame on that? And then also with respect to this issue, you’ve added staff to support everything that’s going on there and making sure you’re getting it right. Is this a sort of a run rate, that you think, of expenses associated with the revenue cycle management side that will go forward? Or as you get things on track, you see an opportunity to reduce some costs you’re incurring there, beyond just getting the DSOs in a more normalized fashion.

Jim Swift: A.J., thanks for the question. This is Jim. I’ll start and Marc can speak to it as well. I think what we found and what I commented on is there’s a fair amount of high touch really at the point of care. Especially in the hospital-based side, where we need to get the information, that can be a little bit challenging at times in an automated fashion. So we’ve put some folks back, forward-facing and actually, some of these folks used to be within the organization doing other activities. But we have them forward-facing at — almost at the bedside, if you will, get some of this information. It’s a small amount of people that we’re focused on, but that has smoothed out the front-end side of the business in terms of the RCM.

We are going to keep those people in line right now because we think that’s part of the solution to what the challenges are. We are working with the vendor on some of the areas beyond the front end and then also on the back end. But we think for the future right now, we’re going to keep these folks in line. But it’s not a significant cost for what we’re providing. Marc, do you?

Marc Richards: Yes. A.J., just real quick on your DSO question. I would note that our guidance expectation for ’23 does anticipate continued improvement in the DSO. So we would expect to be in that high 40s as we approach year-end this year.

A.J. Rice: Okay. All right.

Marc Richards: We’ll need to triangulate with our continued efforts surrounding improvements relative to RCM.

A.J. Rice: Okay. And then just on the business development arena, what are you seeing with respect to potential opportunities to add more areas where you manage NICU, other — where you’re already in the NICU, adjacent women’s health services? Can you talk a little bit about the pipeline that you see out there and maybe the opportunities for growth in that direction?

Jim Swift: Yes, A.J., thank you. Listen, I think from an organic standpoint, we still have a very robust pipeline of organic growth. it probably breaks evenly across the ambulatory specialties and the inpatient specialties. Some of those may be tilted more towards the newborn service lines and pediatric critical care, but we do have some NICU opportunities in there. On the nonorganic side, we feel we have a pretty good pipeline that we’re actively working at this time that is inclusive of some opportunities in Level 3 NICU. So more to come on that, but we feel it’s a pretty balanced approach, both on organic and inorganic.

A.J. Rice: And then finally, when I hear people — you hear the hospitals reporting. They are calling out some fees associated with hospital-based services increasing. Now that sounds like it’s mostly emergency room, maybe anesthesia a little bit. Is there any dynamic going on with what you’re doing in terms of changing year-to-year fees that the hospitals would have to pay you for any reason?

Jim Swift: I think our approach to that, A.J. has been pretty flat. There are some services that do require fees to support, especially in smaller volume. Or I know sometimes in the OB hospice arena, that’s one that requires some contract stipend with the hospitals. But again, we haven’t seen a big change in our approach. As you know, we’re largely — have our practices do not have stipends with it. So again, we haven’t been at the forefront of that discussion.

A.J. Rice: Okay. Thanks a lot.

Operator: Your next question comes from the line of Pito Chickering from Deutsche Bank. Please go ahead.

Kieran Ryan: Hi, there. You’ve got Kieran Ryan on for Pito. Thanks for taking the question. I saw that commercial and nongovernment mix was down about 70 bps year-over-year. So not a huge move, but I was wondering if you could just talk about any impact on pricing that had there. And just given the broader puts and takes within pricing, do you still see that up in the 1% to 2% range this year?

Charles Lynch: Kieran, it’s Charlie Lynch. I think Marc gave a good reference around that. Essentially a core trend in that mid-1s range when you picture the pieces for this quarter. So I think you’re relatively on point there. On the payer mix side, yes, we did see a 70 bps increase by volume year-over-year on the government side. It had a modest impact on our net pricing for the quarter, a little bit of a headwind for this quarter. I would back up though and say that, on a gross basis, looking at our mix, we’re still looking at a multiyear trend line here that is stable to very slightly improving. So given that there are some variances quarter-to-quarter, we like to call those out. But smoothing that out a little bit, we’ve got a meaningful amount of stability in our overall payer mix. And in fact, it has a very slightly favorable trajectory.

Kieran Ryan: Got it. Thank you. And then if I can just get a quick follow-up. Obviously, the improvement on the RCM front. I just wanted to check in to see, are you still sizing that impact at about $15 million this year, weighted towards the first half? Just wanted to see that…

Marc Richards: That’s right. That’s still consistent with our expectations this year. That is correct.

Kieran Ryan: Thanks so much.

Operator: Your next question comes from the line of Whit Mayo from SVB Securities. Please go ahead.

Whit Mayo: Thanks. Good morning. Just a few clarification questions here. Marc, did you guys recover any AR in the first quarter that you had fully reserved in prior quarters?

Marc Richards: Well, with — it’s — that component of really any recovery really flows through the rate analysis. There’s not a significant component of that. My comment was, to the extent that the first quarter rate is, on its face, positive, that may contain some additional efforts related to last year that are flowing through. That’s the extent of it.

Whit Mayo: Okay. I think you guys also referenced in your prepared comments some efficiencies that you expect to see in corporate this year. Can you maybe just elaborate a little bit more on some of those efforts?

Marc Richards: In terms of our overhead?

Whit Mayo: Yes. I think you said you’re seeking some efficiencies in our corporate expenses this year. I wasn’t sure if that’s a number that we should circle as being sizable or if that’s just an ongoing effort, yes.

Marc Richards: No, I would say that was — relative to what we have done over the past year or two, there have been significant changes. We continue to seek efficiencies. But as we indicated, right now, we don’t have a significant program in place or the expectation of material cuts to that throughout the remainder of the year. I think that’s our overall take on that, Whit.

Whit Mayo: Okay. No, that’s helpful. And I may be overreading this since it’s in the press release, but I just want to make sure I get at it. It indicates that SW&B was offset by a decrease in incentive comp in the quarter. Just not sure that I’m reading that. That might just be a comment more about the prior year incentive comp.

Charles Lynch: Yes, Whit, it’s Charlie. That’s a little bit specific, and it largely references the flow-through year-over-year related to the CARES dollars we received in the first quarter of ’22, which accrues down to the practice level, and it will impact incentive comp and variable comp there, and that didn’t recur this year.

Whit Mayo: Okay. Last one, sorry. I know that you guys don’t want to be in the habit of providing guidance for every specific quarter, but I wasn’t sure if there was anything, Marc or Charlie, that you’d care to call out or share just as it relates to sort of your internal expectations.

Marc Richards: I would say that, to the extent that in the quarter ahead, we noticed anything in consensus expectations that we would want to address. We did not notice that related to Q2.

Whit Mayo: Perfect. Thank you, guys.

Operator: And at this time, there are no further questions.

Jim Swift: Thank you, operator. We’ll end the call now.

Operator: Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconferencing. You may now disconnect.