Surgery Partners Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 14 speakers on the call.

Operator

Greetings. Welcome to Surgery Partners First Quarter 20 24 Earnings Please note this conference is being recorded. I will now turn the conference over to Dave Dougherty, CFO. Thank you. You may begin.

Speaker 1

Good morning. My name is Dave Dougherty, CFO of Surgery Partners. I am joined today by Eric Evans, our CEO and Wayne DeVythe, our Executive Chairman. During this call, we will make forward looking statements. There are risk factors that could cause future results to be materially different from these statements.

Speaker 1

These risk factors are described in this morning's press release and the reports we filed with the SEC, each of which are available on our website, surgerypartners.com. The company does not undertake any duty to update these forward looking statements. In addition, we will reference certain financial measures that are considered non GAAP, which we believe can be useful in evaluating our performance. The presentation of this information should not be considered in isolation or as a substitute for

Speaker 2

With that, I will turn the

Speaker 1

call over to Wayne. Wayne? With that, I will turn the call over to Wayne. Wayne?

Speaker 3

Thank you, Dave. Good morning and thank you all for joining us today. My initial comments would briefly highlight our consolidated Q1 results and the strength we continue to see in our long term growth algorithm as it relates to both our organic and capital deployment initiatives. I will then provide a brief update on our recent acquisition activity and refreshed outlook for the remainder of the year before I hand over the call to Eric and Dave. They will provide additional insights into our operating and financial performance for the quarter, along with recent activities to further strengthen our balance sheet and support our long term mid teens growth goals.

Speaker 3

Turning to our Q1 results. We reported net revenue of approximately $717,000,000 representing growth of 7.7% over the prior year quarter. On a same facility basis, net revenues grew 10.2% as compared to the comparable period, representing a combination of both case and net revenue per case growth. Adjusted EBITDA was $97,500,000 representing 8.2% growth over the prior year quarter with adjusted EBITDA margins improving in the quarter by 10 basis points to 13.6%. Finally, our efforts to pursue higher acuity procedures continue to produce strong results with total joint replacements increasing by 54% over the Q1 of 2023.

Speaker 3

Eric will provide additional insights into our physician recruitment and total joint expansion programs along with our early success in targeting orthopedic surgeons specializing in total shoulder procedures, which were removed from the inpatient only list starting January 1 of this year. We continue to be extremely pleased with our same facility growth and the expected long term sustainability of our organic top line and margin expansion growth goals. As previously stated, our short stay surgical facilities have been purpose built to capture the macro tailwinds of both an aging population and the increased movement of higher acuity procedures into a purpose built outpatient setting. We believe our results reflect the strength and durability of our business model as we pursue this highly fragmented segment, which currently consists of over 6,000 ambulatory surgical facilities and an estimated $150,000,000,000 total addressable market representing both current and expected surgical procedures to be performed in an outpatient setting in the coming years. Moving to our capital deployment activities.

Speaker 3

We maintained our disciplined approach to sourcing and executing on strategically important acquisitions at attractive multiples. As a reminder, we previously completed a $60,000,000 transaction in early January that we had initially targeted closing in the Q4 of 2023. Since that time, we've maintained a robust pipeline and anticipate closing an additional $200,000,000 to $250,000,000 in acquisitions in the Q2 of this year with the low end of that range having closed on April 30. This level of deployment reflects both an annual targeted goal of at least $200,000,000 along with the redeployment of the remaining net proceeds from assets divested in 2023. Our business development team continues to source algorithm remain predictable and executable.

Speaker 3

Before I turn the call over to Eric, let me provide a brief update on our outlook for the remainder of 2024. Based on our strong organic performance in the Q1 and the timing of our recently completed acquisitions, we are increasing full year net revenue and adjusted EBITDA outlook to at least $3,050,000,000 $505,000,000 respectively. This refreshed outlook represents at least 11% 15% growth in net revenue and adjusted EBITDA respectively as compared to the prior year and balances our optimism for the company's growth with an appropriate amount of conservatism. We look forward to updating you on our progress as the year unfolds. With that, let me turn the call over to Eric to provide additional insights for the quarter.

Speaker 3

Eric?

Speaker 4

Thanks, Wayne, and good morning, everyone. The start of 2024 for Surgery Partners has been productive and our results continue to demonstrate the outsized demand for purpose built short stay surgical facilities that offer a safe, high quality and high value experience for both patients and physicians. Importantly for our investors and based on current and past performance, our growth remains consistent and predictable, in line or better than our internal expectations. As Wayne mentioned, all aspects of our mid teens growth algorithm continue to deliver. Diving deeper into our results, Same facility net revenue growth was 10.2% in the Q1 and represented both case and net revenue per case growth of 1.3 percent and 8.8 percent respectively.

Speaker 4

We continue to put increased focus on both physician recruitment activities and higher acuity procedures that would benefit from an enhanced patient and physician experience associated with our purpose built short stay surgical facilities. On the physician recruitment front, we added over 200 positions in the quarter, slightly higher than our historic run rate, and our 2024 recruitment class has a revenue per case that is 25% higher than the class of 2023. That is partially impacted by the growth of orthopedic surgeons that specialize in higher acuity total joints, including shoulder procedures, which represented approximately 1 third of our Q1 recruitment class. Additionally, as we have previously stated, each of our recruiting cohorts continue to drive strong compounding year over year growth with our 2023 class performing 134% more cases in the Q1 of 2024 as compared to their initial quarter in 2023. Our recruitment activities have continued to fuel our growth, especially in musculoskeletal, with over 61,000 MSK related procedures performed in the Q1 of 2024, representing 14% growth over the prior year quarter.

Speaker 4

More importantly, total joint cases in our ASCs continue to grow at a disproportionate rate, which saw a 54% increase in case volume as compared to the prior year quarter and a 90% compound annual growth rate since 2019. On a consolidated basis, our specialty case mix and volumes were in line with our expectations with over 153,000 consolidated surgical pacings in the quarter with particular focus in our high acuity business lines. To put a finer point on this, while all our specialties have recovered from the pandemic with strong growth rates, in aggregate, our Q1 case volume has a compound annual growth rate since 2019 of just over 4% with growth of over 6% in orthopedics. Our unique partnership model and our approach to enabling our physician partners' independence and strong community reputation allows us to naturally benefit from the continued site of care shift to our safe, high quality and cost effective facilities. We work every day to bring the benefits of a professional scale management company, while keeping the invaluable local field and connection that differentiate our surgical facilities.

Speaker 4

This approach preserves the strong reputation of our partners have earned, allowing them to focus on their patients, knowing their preferences and input will remain an integral part of the facility that they have helped build. Together, our partners win, our payers win, and most importantly, our patients get the best care possible for their surgical care needs. When this happens, we deliver consistent high quality results as we have done over the past 5 plus years, despite managing through a global pandemic and a challenging inflationary macro environment. Moving to operating margins. As Wayne mentioned, our operating margins improved in the quarter by 10 basis points to 13.6 percent.

Speaker 4

Our operating margin improvements reflect both our ongoing procurement and revenue cycle initiatives that continue to benefit from our increasing scale along with synergies achieved on our previously acquired facilities. We expect margins to improve throughout the remainder of the year consistent with historical earning patterns. Finally, diving deeper into our capital deployment activities. As Wayne discussed, we continue to have a robust pipeline of opportunities and expect to deploy over $200,000,000 in the Q2 of 2024. We closed on the majority of our targeted acquisitions on April 30, representing 5 different transactions, including a large system acquisition that includes a specialty surgical hospital, ambulatory surgical center and related physician practices.

Speaker 4

We are excited about partnering with the physicians in this market, which is in a region we know quite well. These acquisitions, which increase our multi specialty capacity, are rapidly being integrated into our operations and are expected to yield further earnings from our operating system synergies in the 1st 12 to 18 months post closing. On the de novo front, since 2019, we have opened 11 new ASC facilities and have 11 fully syndicated de novos under construction. Many of these projects are slated to open in 2024 and early 2025. These facilities include consolidated and minority interest ownerships and are primarily multi specialty with a concentration in orthopedics.

Speaker 4

In closing, I'm proud of our management team and our many talented physician partners and colleagues for effectively managing through inflationary labor and supply pressures over the past few years, while delivering a superior patient experience with high clinical quality. With inflationary pressures largely abated, coupled with how well our teams are effectively executing on our initiatives across business development, recruiting, managed care, procurement, revenue cycle and operations, we are confident that we will achieve our updated 2024 goals. More than ever, our company provides a cost efficient, high quality and patient centered environment in purpose built short stay surgical facilities that provide meaningful value to all of our key stakeholders. The desire and need to move more procedures to our care setting has never been greater, and our company is positioned to deliver industry leading growth associated with these tailwinds. This, coupled with an existing and growing EBITDA pipeline and a talented deep and experienced leadership team provides further optimism for long term sustainable mid teens adjusted EBITDA growth.

Speaker 4

With that, I will now turn the call over to Dave to provide additional color on our financial results as well as our updated outlook for 2024. Dave?

Speaker 1

Thanks, Eric. Starting with the top line, we performed 153,000 consolidated surgical cases and 178,000 total surgical cases in the Q1. These cases spanned across all our specialties with an increasing focus on higher acuity procedures, which is reflected in our double digit same facility revenue growth this quarter. The combined case growth in higher acuity specialties, specific managed care actions and the continued impact of acquisitions supported revenue growth of 7.7% over last year to $717,400,000 which is overcoming approximately $36,000,000 of revenue headwinds associated with facilities in 2023. On a same facility basis, total revenue increased 10.2% in the 1st quarter.

Speaker 1

Same facility rate growth was 8.8%. We have seen especially strong rate growth in the back half of twenty twenty three and continuing into 2024, primarily driven by higher acuity procedures, specifically orthopedics and spine. We continue to forecast our same facility net revenue growth to exceed our algorithm target of 4% to 6% in 2024, with full year same facility revenue finishing in the high single digit range. Our forecast anticipates net revenue being more balanced between rate and volume on an annualized basis, with rate playing a smaller role and volume playing a larger role in the second half of the year. Adjusted EBITDA was $97,500,000 for the Q1, giving us a margin of 13.6 percent, in line with our expectations of continued margin expansion.

Speaker 1

Inflationary pressures related to labor and supply costs continue to abate as we return to a more normalized run rate that provides natural margin expansion as we grow volume. We will remain vigilant in monitoring these factors across portfolio and expect margins to continue to improve throughout the year with annualized margins improving by at least 50 basis points over full year 2023. We ended the quarter with $185,000,000 in cash. When combined with the untapped revolver capacity, we had nearly $800,000,000 in total liquidity. We reported operating cash flows of $40,000,000 in the quarter, which was in line with our expectation.

Speaker 1

This amount differs somewhat from last year due to the timing of certain events. However, it is in line with our expectations of lower cash generation in the Q1 and supports our continued belief that we will achieve our previously discussed free cash flow goals in 2024. The effective interest rate on our corporate debt is 6.3% fixed through the Q1 of 2025. The company was able to effectively redeem our senior unsecured debt at favorable terms and pricing extending the maturity to 2,032. We now have no debt maturities until 2,030.

Speaker 1

We also recently entered into interest rate caps that will cap the variable component of our $1,400,000,000 term loan at 5% starting in the Q2 of 2025. Over the past 6 months, we have addressed all exposures we had related to financing and interest rate risk through the end of the decade. Accordingly, we have predictability in our interest costs and are not exposed to significant interest rate risks, which are key factors giving us confidence in our free cash flow growth. In the event that the interest rate environment becomes more favorable in the future, we will have an opportunity to capitalize on such improvements. Our first quarter ratio of total net debt to EBITDA as calculated under our credit agreement was 3.5x.

Speaker 1

As a reminder, this ratio will be impacted in the short term based on the timing of acquisitions, but we remain committed to our long term target of sub 3.5 times. In the Q1, we deployed just over $70,000,000 in acquisitions, including $60,000,000 associated with the previously discussed transaction closed earlier in January. We also completed additional acquisitions on April 30 this year, which represented our targeted goal of $200,000,000 in annual capital deployment. The facilities we invested in are primarily focused on MSP procedures and are well positioned to support and strengthen our same facility growth trends in future years. Carrying the momentum of our Q1 results, we remain optimistic and confident about the company's growth and are raising our outlook for 2024 net revenue to at least $3,050,000,000 and adjusted EBITDA to at least $505,000,000 representing at least 11% 15% growth respectively compared to 2023.

Speaker 1

This guidance implies continued year over year margin expansion consistent with our long term guidance. This updated outlook represents greater than a 14% compound annual growth rate since 2019, emphasizing the resiliency of the business model and demonstrating the power of our long term growth. Our business has a natural seasonal pattern largely driven by the number of surgical days and annual deductibles resetting for commercial payers that tend to skew our results lower in the Q1 and higher in the 4th relatively speaking. We continue to anticipate the seasonal pattern of our results will be consistent with 2023, with 2nd quarter adjusted EBITDA to be approximately 23% and revenue to be approximately 24% of our full year guidance. Our Q1 results speak to the strength of our operations and our business model, and we believe that the balance of the year should continue to capitalize on that momentum.

Speaker 1

With that, I'd like to turn the call back over to the operator for questions. Operator?

Operator

Thank Our first question is from Brian Tranquette with Jefferies. Please proceed.

Speaker 5

Good morning guys and congrats on a solid quarter and the acquisitions. I guess my first question maybe for Eric or Wayne. As we think about this bolus of deals coming in the Q2, number 1, is there something in the market or are there assets that are just coming up for sale because this is a big chunk of deals that you're announcing. And then maybe second, I know Dave mentioned it's MSK, but just anything you can share with us in terms of the margin profile for these assets or the seasonality factor for these assets as it compares to yours? Thanks.

Speaker 6

Brian, good morning. Let me

Speaker 3

start with the M and A and then I'll actually have Eric talk a little bit about the MSK because I think as we look at the increases in total joints coupled with the new activities around shoulders, I think you'll get a better feel of why we're having such a positive impact on same store. Starting on the M and A front, just a reminder for all those listening that our base algorithm assumes that we will achieve 4% to 6% growth through deploying somewhere between $150,000,000 $200,000,000 a year for M and A. And we continue to target $200,000,000 as our preferred goal for the year. As we mentioned in prior years, we always have this robust pipeline, but as you know M and A can be fickle. So a lot of the timing of what you're seeing in 2Q was really a function of a lot of the grassroots efforts that were done last year and building these relationships with a number of facilities and physician partners.

Speaker 3

And really just came to a head in the Q2 of this year. We were somewhat optimistic we might have gotten those done in the Q1, but they pushed into April 30 Q2. That being said, with those transactions closed on April 30, we've already accomplished our entire $200,000,000 targeted goal for the year. I would remind you though that the algorithm assumed we would deploy 200 and use generally a midyear convention assuming a high single digit multiple. So you'll get an incremental value though due to the timing for the current year.

Speaker 3

And then you get of course full run rate effect as we move into next year. Last thing I would say is we continue to have a robust pipeline and I don't anticipate that slowing down. It's nothing new though, Brian. We're not necessarily seeing the pipeline growing because of any kind of macro situation. It really is the importance of partnership.

Speaker 3

And I think many of these organizations are realizing the value we can bring. And word-of-mouth gets out there over time as we continue to do this and these partners have an opportunity to get some liquidity for themselves, but also have an opportunity to remain owners in something that they built. With that, Eric, maybe highlight a little bit just on the higher acuity stuff and what we're doing in that space.

Speaker 4

Yes, I guess related to the M and A, I would just comment that these are MSK heavy, our transactions. And so your question on margin seasonality, it's going to match our portfolio overall, though it leans MSK heavy. I think to Wayne's point, one of the things you saw this quarter, and we're glad it's MSK heavy, there's a lot of growth opportunity within that service line. One of the changes this year was CMS took the total shoulders off of the inpatient only list and put them on the ASC list. We've since that time in Q1 have performed over 500 total shoulders, really strong growth with the vast majority of that being in ASCs.

Speaker 4

Certainly, this new acquisition gives us the opportunity to grow that along with bringing our synergies to a really, really exciting market. So we couldn't be more pleased with the transactions we just completed.

Speaker 5

That's awesome. And then maybe my second question is for Dave. We've got a lot of questions about the Idaho payments last year and how that affects comps and growth rates this year. I know you gave sort of guidance in Q2 EBITDA, but maybe if you can just share some color on how we should be thinking about those comps from a growth rate perspective given the lumpiness of those payments? Thanks.

Speaker 4

Yes, Brian, thanks for the question. I'm going to jump in on this one. And I know there was some confusion coming out of the end of the year last year and want to make sure I clarify a few things. So I'd make 3 points, but one point that I think you should all hear is this is not a material issue for the company. As you think about our total Medicaid business is 4% of our cases.

Speaker 4

The net revenue is roughly comparable to that 4%. So you have 4% of our cases, I want to hear it make sure you hear it's immaterial. And that 4% revenue that includes all the different programs that go into it. So it's not a big part of our business. I'll start there and make sure everyone hears that.

Speaker 4

On the second point, these programs that are in multiple states, whether it's upper payment limit or cuff payments or across different states, there's different programs that wrap around Medicaid. Those programs are sustainable and expanding, but will still be immaterial to our business for the foreseeable future. Just don't see that as a big thing for us. Now what I would say the last point is the timing of reimbursement and state tax policy and the way payments come in, that is really hard to predict. So that's kind of what you saw a little bit of last year, but the key message here is we don't do a lot of Medicaid business, small portion of our business.

Speaker 4

The vast majority of the payment for Medicaid is fee for service. There are some of these programs that help make Medicaid sustainable and those programs again still insignificant in the grand scheme of things.

Speaker 5

Awesome. Thank you, Eric.

Operator

Our next question is from Whit Mayo with SVB Leerink. Please proceed.

Speaker 7

Hey, thanks. Good morning. Maybe just remind me guys just on the revenue cycle initiatives now that you're on the one clearinghouse, just the anticipated impact this year. I think it's expected to be a larger driver of growth. I think there's been a big focus on this internally.

Speaker 7

Any color would be helpful.

Speaker 1

Yes. Good morning, Whit. Thank you for the question. Our rev cycle initiatives are definitely a component part of our growth. They have been now for several years as we enter into 2024.

Speaker 1

We've become a lot more mature in our rev cycle process, but we do expect continued contributions from there. Our Q1 results in this area are reflected somewhat in our revenue and in our cash flows that we reported from an operating perspective and gives us confidence that the value is going to continue to show through

Speaker 3

in our results for 2024. One thing I would highlight for our listeners on the call is that our growth algorithm of 3% to 5% of EBITDA growth through margin expansion really is reflective of the opportunities we have in the rev cycle, coupled with the opportunities we have in procurement, coupled with the synergies we get from the additional M and A. And so to Dave's comment, the rev cycle, I personally think we're in maybe the 3rd inning of what we are capable of doing as an organization around rev cycle. And as we continue to grow our company, we continue to get new and unique talent into the organization that's worked on a larger scale. And that talent then is bringing really new ideas to us around opportunities that we are losing to be able to collect more for the services we're actually performing.

Speaker 3

And in many cases, things that get denied that we really shouldn't have denied based on the procedures that were done. So long and short of it is, I don't expect this going away in the near term or in the mid term or in the long term. I think this is something that's another 5 year plus journey for us and every time we plug and play a new entity, those opportunities repeat.

Speaker 7

Okay. So safe to say some element of the rate that you're getting in the quarter is coming from increased yield from some of these initiatives. Just want to make sure that I'm clear on that.

Speaker 1

There is definitely an element to that. And again, as Wayne mentioned, it's part of the way this company operates as we integrate new companies.

Speaker 7

Okay, got it. And the $19,000,000 or roughly $19,000,000 in transaction integration M and A costs, can you maybe put some of those costs in the context that did step up? I know you were more active in M and A. I just want to make sure that that's is this the right number to sort of think about on a go forward basis? Just any help would be helpful things.

Speaker 1

Yes.

Speaker 3

I think it will go down Whit. I mean, I think that's kind of the bolus of the pig in the python of all these deals that we just got closed on April 30. So you kind of have the all these things happening at once and all that's flowing through quarters we're getting to the end. And that includes a combination of legal, advisors, valuation work we do, etcetera. So I think that will come down over time.

Speaker 7

Got it. Thanks, guys.

Operator

Our next question is from Kevin Fischbeck with Bank of America. Please proceed.

Speaker 8

Great, thanks. Can you talk a little bit about the volume number in the quarter? I know that there's certainly some concern about the quarter and I think a little bit of confusion about what Q1 should look like based upon leap year and calendar. Can you talk a little bit about how you feel like the calendar impacted that number because it was below the 2% to 3% that you guys normally target for the year? Thanks.

Speaker 4

Yes. Thank you, Kevin. Appreciate the question. So obviously, last year, we had 5.3% case growth, felt really good about that. If you look at the 2 years combined, still feel good about our growth in the quarter.

Speaker 4

There are certainly were weather impacts, there were days of the week impacts. We just we have to manage through that, right. The reality of it is when we look at our case volume for the year, we still expect to finish the year at the upper end or above our guidance. And so the Q1 really, really pleased with the high acuity growth, which again one of the problems with case count is there's a lot of movement between where we want what procedures we're really going after. So we were really pleased with where we landed within our expectations given the comparables and quite honestly just reemphasize we expect to be at the high end or above our algorithm by the end of the year.

Speaker 3

Kevin on your question of the leap year, it's an important one because in the current year, as a reminder, we don't benefit from it unless we get an extra Monday through Friday. And so if you actually look at the days we were open this year, it's comparable to the days that were there last year despite the leap year. That being said, we will pick up a day in the Q3 and Q4 of this year versus last year due to the leap year and due to when the number of Mondays through Fridays fall on the calendar. So no inherent benefit to us for the day in the quarter, but it will newer to us as the year progresses.

Speaker 8

All right, great. Thanks. And then just a little color on the deal that you were doing, I guess, consolidated versus unconsolidated. I mean, is the revenue boost related to the deals? I know I was a little bit of confused because as you pointed out in your earlier response that you assume a certain amount of deals with the midyear convention.

Speaker 8

So is the guidance raised due to just the timing impact of those deals coming in a little bit earlier? Or how should we think about how much of that revenue guidance raise is kind of run ratable, if you will, versus just kind of accelerated timing? Thanks.

Speaker 1

Yes. Kevin, this is Dave here. And again, thanks for that follow-up question because it is a little bit perhaps a little bit confusing. Our guidance, as we talked about at the beginning of the year, does assume $150,000,000 to $200,000,000 of M and A midyear convention. And I think we mentioned on our Q4 call that our pipeline at that point in time was all or predominantly consolidated.

Speaker 1

So you could assume a revenue in your calculations kind of associated with that. Fast forward to today, we have now approximately $200,000,000 that we're going to do inside the 2nd quarter, a majority of which was done in April, the end of April. Most of those are going to be in consolidated assets. There was one ASC inside that portfolio that will be non consolidated. So, it is definitely a component of our increased guidance for the year.

Speaker 1

The other component, of course, is increased confidence in our underlying revenue growth for the organization.

Speaker 8

Great. Thanks.

Operator

Our next question is from Andrew Mak with Barclays. Please proceed.

Speaker 9

Hi, good morning. Just wanted to follow-up on the professional fees and other OpEx. It looked like that was up double digit sequentially in year over year. Can you elaborate on what's driving those costs higher and whether we should expect some moderation in any of those categories for the balance of the year? Thanks.

Speaker 1

Yes. Thanks, Andrew. I appreciate the question there. So first off, managing the margin in the company does require us to look at and evaluate all of the costs kind of sitting inside these categories. And as Eric mentioned a little bit earlier, our state based reimbursement programs do have a degree of estimation associated with provider taxes as a component of that and provider taxes is it can be a pretty material part.

Speaker 1

So as we true those up, those may be reflected in there in the Q1. What you're seeing inside those other operating expenses is that true of provider taxes.

Speaker 9

Got it. That's helpful. And then just wanted to follow-up on the free cash flow. How did that trend relative to your internal expectations? And it seems like there's still some seasonal elements here that are impacting that or timing elements.

Speaker 9

Can we get a refresh for you on expectations and cadence for the balance of the year? Thanks.

Speaker 1

Yes, for sure. As you know, 2023, we generated positive operating cash flow and free cash flows for the first time in the company's history. And we continue to expect that operating and free cash flow will exceed prior year amounts for the full year. Prior year and current year quarter is purely impacted by timing related items, which we expect to normalize on a full year basis.

Operator

Our next question is from Sarah with Cantor Fitzgerald. Please proceed.

Speaker 10

Thank you. You talked about the back half of the year being more driven by volume than revenue per case, but it also sounded like strong revenue per case was related to acuity, including hiring mix, so things that would continue. So just wondering if you can clarify why you would expect revenue per case to normalize down and if there was any kind of one time benefit, that inflated revenue per case in 1Q like DPP or anything else? Thanks.

Speaker 3

Hey, Sarah, good morning. Just a reminder, as I mentioned earlier, I think first and foremost, it's important to recognize that as we get closer towards the end of the year, we will have obviously the same level of higher acuity cases we have in many situations. But we do have extra business days and the number of Mondays Tuesdays again do affect a lot of procedures specifically GI and ophthalmology and there's a lot more volume on those days. And again, the number of Mondays Tuesdays and will disproportionately affect that mathematical calculation in any one quarter. The second thing I would just remind you is as we continue to grow in these high acuity procedures, just the math of it, if we grow quite a bit in the Q4 as we did last year and then you move to the Q4 of this year, we'll continue to grow on those.

Speaker 3

But the incremental growth in terms of how the math of that calculation works gets somewhat abated. So the way I would look at it is not to look at any 1 quarter, but to look at the algorithm for the full year. And as Eric mentioned earlier, we expect to exceed or at least be at the high end of that 2% to 3% on volume for the full year, biased towards exceeding that in the back half of the year due to the extra days. And then I would also say that relative to the rate, I definitely believe we'll be well above the 2% to 3% targeted rate. So same store is probably going to finish closer to high single digit for the year, but a little more balanced as we get to the full annualized basis.

Speaker 10

That's helpful. And just on thinking about the calendar, given we did have that calendar pressure in 1Q for planned procedures with spring break and Easter, did you see that come back in April? Have you already seen it come back into the system?

Speaker 8

Look, I don't want to

Speaker 3

get ahead of ourselves. It's 1 month, but we are not disappointed with April.

Speaker 10

Okay. Thank you.

Operator

Our next question is from Gary Taylor with TD Cowen. Please proceed.

Speaker 11

Hi, good morning. Most of my good questions asked, so just a few detailed ones. Just first, on supplies, really good performance there. I think flat dollars and supply cost per case down 1.4% year over year best result in a few years, I think. Anything unique to call out on supply expense?

Speaker 1

No, nothing unusual.

Speaker 11

But I wouldn't I mean, would we be modeling this good for the rest of the year? Or think about having some modest level of inflationary growth or mix growth in that, I would think?

Speaker 1

No, our inflationary growth factors that we built into our guidance would be marginal and well contained within our revenue growth.

Speaker 11

But mix growth would be the factor if we see that, right?

Speaker 1

As a percent of revenue, it should be neutral.

Speaker 11

Okay. And then can you just elaborate for a second on AR growth in the quarter. I think you highlighted that in the release. Anything related to change? Or is it state program accruals that aren't yet paid?

Speaker 11

Like any comments there?

Speaker 1

Yes. Thanks for pointing that out. That is not specifically related to the items that you mentioned. It's almost purely related to the growth in the organization, both from recent acquisitions growth in revenue and then typical seasonal patterns with the Q1 billing cycles.

Speaker 11

Last one for me. On the acquired practice as part of this system deal, is that orthopedic practices or any detail you can provide there?

Speaker 4

Yes. So it is yes, it is orthopedic related practices. As you know, I mean, we are primarily an enabler of independent physicians. And even when we do this type of arrangement, we do it in partnership even at the practice level and it's tied to our surgical facilities. But yes, those are MSK related.

Speaker 11

Got it. Thank you.

Speaker 4

Of course. Thank you for the question.

Operator

Our next question is from Bill Sutherland with The Benchmark Company. Please proceed.

Speaker 6

Thank you. Good morning, everybody. Curious, Dave, if given you've gotten to the target already in April for the capital deployment for the year, Clearly, you may close a little bit more, you said $200,000,000 $250,000,000 But kind

Speaker 1

of how are you thinking

Speaker 6

about it at this point from an opportunistic perspective? Or is this really a candidate for the year?

Speaker 3

The short answer is, I'm optimistic it won't be the last acquisitions for the year. As Dave mentioned earlier, at the end of the quarter, we have over $800,000,000 available at the consolidated level plus the undrawn revolver. And as Dave mentioned, we plan to grow into our free cash flow as the year progresses. And so the pipeline is robust. It's despite the number of acquisitions we completed, it continues to be in that high 200 plus 1,000,000 still of many transactions.

Speaker 3

And I would anticipate we have an opportunity to get a few more done this year. But we haven't baked any of that into our outlook because again, it be fickle and these things can change as the year progresses. But right now, I think there's a very reasonable chance we'll do better than the 200.

Speaker 6

That's good. Eric, can you kind of go through the de novo progression? I mean, you hit it during the prepared comments, but and perhaps how it will flow through to the income statement as these get developed?

Speaker 4

Sure. So we're excited about our de novo capabilities growing and you've seen that over the past couple of years. We expect to be have double digit in process at any given moment. Those facilities, there's a lot of startup kind of delays as we think through those. But in general, we spend the 1st several months getting them open post syndication, getting contracted, getting started, obviously highly accretive investments.

Speaker 4

If we could do all de novos, we would, although there'd be a delay obviously. So we like the investment profile. Typically, by the end of the 1st year, they're cash flowing and have a positive EBITDA, but there is a ramp up. Those 1st 6 months It can be a little bit bumpy with just new contracts and getting doctors comfortable changing habits, all that stuff. But by year by the end of the year, the 1st year, we expect them to be contributing to our financial performance.

Speaker 4

By year end of year 2, we would expect them to be close to run rate and then just getting into our organic profile. So again, from a capital investment standpoint, these are our best investments along with end market M and A. And so we're really excited about how much is growing. Those opportunities continue actually to be at a higher level than we've ever seen. So we're really pleased with the progress there.

Speaker 6

So you would you mentioned 11 fully syndicated under construction that would be for next year's P and L?

Speaker 4

Yes. So you think about it, we said a portion of those will be opening later this year, another portion in early 2025. So again, probably not a huge contribution when you think about 2025 really start to hit us in 2026, but obviously planting seeds for the future that give us confidence in that mid teens growth we've committed to.

Speaker 6

Great. Thanks for all the color. Appreciate it.

Speaker 4

Of course. Thank you, Bill.

Operator

Our next question is from Jaeson Casarrolla with Citi. Please proceed.

Speaker 2

Great. Thanks and congrats on the quarter. I just wanted to ask about the $2,700,000 of unconsolidated minority earnings in the quarter. It's not a major driver of EBITDA trend. It was down a little bit year over year.

Speaker 2

Obviously, the number of ramping unconsolidated facilities, maybe can you just help bifurcate how that $2,700,000 balances between the newer investments on their maturity curve that could be a drag in that against the more mature assets with positive contribution included

Speaker 3

in that as well?

Speaker 1

Yes. I'll make this real simple. The number of de novos that Eric just talked about, including those that are opening up that may operate in a somewhat of a loss position are considered to be the investments that we make in those. We back those out of that number. And you can see this in our press release, there's a footnote I'm sorry, there's a tabular disclosure in the back.

Speaker 1

There's around $800,000 You strip that out, you can see kind of the growth in the total contributions that come from those. The other part of our contributions just as a reminder Jason is the management fees that are reflected in revenue associated with those transactions. So you could see that level of detail on our press release.

Speaker 2

Okay, thanks. And maybe just a follow-up, you highlighted for a while now that the major driver of revenue per case growth has been the high acuity focus certainly. But I guess just curious on any updates on the managed care contracting side, how those conversations are going, if there's anything from a cycle perspective to highlight or areas we see opportunity including on the value based care side of

Speaker 3

the flag? Just any thoughts around that would be helpful. Thanks.

Speaker 4

Yes. Thanks for the question, Jason. We continue to make progress in our managed care negotiations. I'd say the national payers are increasingly interested in the value, obviously, our facilities can provide. And so we look for a balanced approach there.

Speaker 4

You've heard us talk about this for quite some time, which is we want to make sure we're paid fairly. We also really want steerage and we want to make sure our doctors are paid fairly. So there's a balance in how we think about those negotiations. We continue to be pleased with our rate lift there. Now again, the majority of our rate lift is going to be still the acuity, but we are making progress in those conversations.

Speaker 4

And when it comes to value based care, I'd say this, we always kind of start with, we're 50% cheaper on average than some of our peers. And so we always say it's the safe half before we take any risk, but we're happy to enter into value based care arrangements in the markets where they make sense. We do that periodically. And I expect that over time that will become a bigger part of the story. But I think in the fee for service world, payers see us as a value care player and they're increasingly having conversations with us about how to take advantage of our independent portfolio.

Speaker 2

Great. Thank you.

Speaker 4

Thank you.

Operator

Our next question is from Lisa Gill with JPMorgan Chase. Please proceed.

Speaker 12

Hey, good morning. It's Cal on for Lisa. A couple of quick questions here. I guess on recruitment, it sounded like that was a little bit better than you guys expected. Can you talk about what drove the strength there in the quarter and how you're thinking about that over the remainder of the year?

Speaker 12

And then I guess second, I know you don't have much Medicaid exposure, but just wondering if you saw any impact from redeterminations on volumes in the quarter and how you think about that as you move into the back half? Thanks.

Speaker 4

Hey, Kyle. Appreciate the question. From the recruitment side, yes, we were really pleased with the Q1. I think we have a veteran team that is very targeted based on data and very targeted on a few specific service lines. Now as you know, the service lines continue to expand every year with technology.

Speaker 4

So they've got a little brighter hunting ground. We've got new markets. But we feel really good about that trajectory. We expect that to remain a little continue to be above where we've been the rest of the year. So we've got a really nice pipeline on recruitment.

Speaker 4

Again, just a veteran team that's very focused on data and executing well. On the redeterminations, look, as I mentioned earlier, Medicaid is a very small part of our business. So I think even if there were an impact, we'd be unlikely to feel it, but we definitely have not seen an impact in that area at all.

Speaker 12

All right. Thanks.

Operator

Our final question is from Ben Hendricks with RBC Capital Markets. Please proceed.

Speaker 13

Yes, just a quick follow-up on the redetermination issue. We've heard some of the at the tail end of redeterminations and that there could potentially be some delay in that volume just because of higher co pays and deductibles. Is there a potential for health exchange volume to kind of increase your typical 4Q seasonality?

Speaker 4

And maybe some upside there? Thank you. Appreciate the question, Ben. What I would say is there is potential, but it's small, right? I'm going to go back to like the book of business is so small for us that even if there were some pickup there, it's likely to be immaterial.

Speaker 4

But we'll keep an eye on that. I would go back to compared to other businesses that are broader in healthcare services, it's just such a small portion of our business, it's unlikely to be worth spending much time on.

Speaker 13

Great. Thank you. And also just one more question about cash flow guidance. So we still thinking kind of I think you would tuck going into 140 to 160 for the year. Is that still

Speaker 11

the right number to think about?

Speaker 1

Yes, it is, Ben.

Speaker 11

Thank you.

Operator

We have reached the end of our question and answer session. I will now turn the call over to Eric Evans for closing remarks. Great.

Speaker 4

Thank you so much. Before we conclude today, I'd like to reiterate how proud I am of my colleagues and our physician partners who collaborate to deliver on our mission to enhance patient quality of life through partnership. Their working contributions allow us to deliver consistent and predictable results and drive sustained growth for all of our stakeholders. Most importantly, they also continue to serve our communities with the highest clinical care in a lower cost setting with the convenience and professionalism our facilities are known for. You for joining our call this morning and have a great day.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

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Earnings Conference Call
Surgery Partners Q1 2024
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