Surgery Partners Inc (SGRY) 2015 Q4 法說會逐字稿

Greetings and welcome to the Surgery Partners fourth-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Doyle, Chief Executive Officer. Thank you, sir, you may begin.

Thank you, operator. I'd like to welcome everyone to Surgery Partners' fourth-quarter and full-year 2015 earnings call. Joining me on the call today is Teresa Sparks, our Executive Vice President and Chief Financial Officer. I'll now turn it over to Teresa to review our safe harbor statement.

Thanks, Mike. Before we begin, let me remind everyone that during this call Surgery Partners management may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, anticipations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements.

Such risks and other factors are set forth in the Company's earnings release posted on the website, provided in our financial prospectus and subsequently filed form 10-K as filed with the Securities and Exchange Commission. The Company does not undertake any duty to update such forward-looking statements.

Additionally, during today's call the Company will discuss non-GAAP measures which we believe can with be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of adjusted EBITDA to net earnings calculated under GAAP can be found in our earnings release which is posted on our website at surgerypartners.com and in our most recent form 10-K.

With that, I'll turn the call back over to Mike.

Thanks, Teresa. We appreciate everyone joining to us review Surgery Partners' fourth-quarter and full-year 2015 results today. 2015 was a very successful and significant year for the Company, as we completed our IPO in October, while we continued to grow our operations organically and through targeted acquisitions. We see a clear path to growing our existing operations and continue to support a robust pipeline of opportunities to expand our network and deliver high-quality cost-effective solutions for our patients and physicians.

Let me give you a few highlights for the fourth quarter. Total revenues increased 46.5% over fourth-quarter 2014 to $263.3 million. Same-facility revenues increased 13.5% over fourth-quarter 2014 with 6.5% case growth. Ancillary service revenues increased 82.7% to $19.6 million. And adjusted EBITDA grew 41.2% to $43.8 million.

We continue to generate strong internal growth and expand our facilities and physician networks. During the fourth quarter Surgery Partners closed on several transactions. Our first ambulatory surgery center in North Dakota; an integrated physician practice and two ASCs providing a platform for expansion in Georgia; two anesthesia platform companies, one in North Carolina and one in Georgia, allowing us to expand into new contracts in those states; a physician practice in Florida; and an urgent care facility in Louisiana.

We are especially excited about the addition of three platform companies in existing markets in North Carolina and Georgia. These provide a strong base for us to expand service lines in these markets.

We are also pleased to announce that we commenced operations in our new surgical hospital in Great Falls, Montana which replaces an existing facility. The Great Falls Clinic Medical Center provides a wide variety of services at seven locations in North Central Montana. As these transactions illustrate, we had a very busy fourth quarter and we see continued attractive opportunities in 2016.

We also continue to build out our service line through adding partnered and employed physicians through both current and new service offerings. As of December 31, 2015, we operated 101 surgical facilities across 29 states. Approximately 72% of these facilities are multi-specialty, providing multiple opportunities for growth.

During 2015 we added 21 employed physicians to our network, with 13 in-market physician practice transactions and four de novo practices. We now own or operate 46 physician practices in nine states, employing over a dozen specialities.

Teresa will you now review our fourth-quarter financials in more detail and I'll return to discuss our 2016 outlook.

As Mike mentioned, we were very pleased with the continued strong performance of our operations in the fourth quarter. The 46.5% increase in revenue includes 13.5% same-facility revenue growth. Same-facility cases grew 6.5% while revenue per case also increased 6.5%. Our-same facility results include facilities owned and operated since October 1, 2014, including our non-consolidating facilities.

Our focus remains on physician recruitment, service line expansion and in-market physician practice transactions which enhance top-line revenue growth. Our pipeline is stronger than it has ever been and we are excited about our prospects for 2016.

As a reminder, we now operate a portfolio of 101 surgical facilities and own a majority interest in 72 of these facilities. We consolidate 90 of these facilities for financial reporting purposes, providing for a transparent balance sheet.

Fourth quarter adjusted EBITDA was $43.8 million compared to $31 million last year, an increase of 41.2%. On a pro forma basis, to reflect the Symbion acquisition, adjusted EBITDA increased 17.1%.

For the full year, revenues increased 138% to $959.9 million, largely due to the Symbion acquisition, while same-facility revenues increased 10.7%. Our same-facility results for the year include facilities owned and operated since January 1, 2014, including our non-consolidated facilities. Adjusted EBITDA for the year was $158.1 million, up from $77 million for the same period last year and pro forma adjusted EBITDA increased 12.7%.

As Mike mentioned, we had a very active quarter in terms of acquisitions and we are ahead of our plan in terms of business expansion. At the end of the fourth quarter, we spent $74 million on acquisitions. For the full-year 2015, we spent $124.5 million on acquisitions. This included $40.4 million to acquire 13 in-market physician practices and we added four de novo practices which added 21 physicians to our network. We continue to see growth opportunities in offering new service lines in new and existing markets.

With our focus on high acuity procedures we are now performing [spon] procedures in 22 facilities and total joint procedures in 18 facilities. In addition we provide anesthesia services in 34 of our surgical facilities.

In terms of a balance sheet update, we had cash and cash equivalents of $57.9 million at December 31, 2015. We have availability of $21.6 million under our revolving credit facility and additional capacity in our current credit agreement.

Adjusting for one-time cash outlays, our net operating cash flow was $15.1 million for the quarter. Our ratio of total debt to EBITDA at the end of the fourth quarter was 5.8 times as calculated under the Company's credit agreement and consistent with our leverage at the date of our initial public offering. We are focused on deleveraging through overall growth in EBITDA, generating strong free cash flows and through our capital-efficient acquisitions. We are targeting a total net debt to EBITDA of 4.5 times by the end of 2018.

While our maturities are long-term, we continue to evaluate the credit markets for opportunities to improve terms, including a fixed-rate component of our capital structure and expanding our capacity to fund growth opportunities. We are very pleased with our progress this year. And with that, I would like to turn the call back to Mike to discuss our 2016 outlook.

Thanks again, Teresa. We are entering 2016 with a strong base of business. As Teresa mentioned, we were able to accelerate closing more acquisitions than originally planned for the fourth quarter of 2015 and we continue to engage new physicians through recruitment and employment opportunities.

As for 2016 guidance, we expect EBITDA growth of 16% to 21%, or a range of $184 million to $191 million. We expect revenue growth of 14% to 18% or a range of $1.1 billion to $1.14 billion. The positive contributing factors to our 2016 outlook are sustained internal growth and the impact of acquisitions we closed over the past year, as well as some contribution from acquisitions during 2016.

We will face some headwinds as it relates to CMS reimbursement changes for the laboratory business. While we anticipated reduction in the laboratory rates, the final rates proved to be more aggressive than our original assumptions. As a result, this year we will absorb a one time impact to our growth rate due to the lab rate adjustment.

Overall, our commitment to our strategy of integrating surgical facilities and ancillary services remains unchanged. We are extremely pleased with the successful year in 2015 and excited about the momentum we generated leading into 2016.

With that, I would like to thank you for joining us today and thank the physicians and employees who enable us to provide exceptional care to our patients every day. I'd like to turn the call back over to the operator to begin with the question-and-answer session.

(Operator Instructions)

Our first question comes from the line of Frank Morgan with RBC. Please proceed with your question.

Good morning. I was curious if you could talk a little bit more about the ancillary strategy, how far penetrated do you feel like you are? Where are you today with Symbion and what incremental penetration do you think you can get in ancillaries?

Thanks, Frank, good morning. I think a great question and I think we've explained that it's difficult to quantify overall penetration into our existing markets. We have the ability for multiple specialities and I think, as you take a look at what we've done and as we continue to employ more physicians, we now have 46 physician practices throughout the country.

We've continued to implement anesthesia into the Symbion portfolio facilities, adding six last year since the transaction. The physician practice piece of it continues to be exciting. We have, as I mentioned, 46 practices throughout nine states and now employing over a dozen specialities.

So as we look at penetration, we have anesthesia. We have diagnostics. We have continued physician practices not only in existing specialities but in new specialities.

So giving a specific penetration number is very difficult. I think the way I'd quantify it is there's a lot of running room. We have some markets where we have more than one specialty but those are very few.

We not only get to expand our physician practices and ancillary services into new markets but also expand those within the existing markets. So you may have one physician practice with three locations.

For example, our Georgia integrated practice that we acquired in the fourth quarter had five locations all in one specialty. But you could expand into a new specialty with multiple locations.

A long way to answer a short question, that is very difficult to quantify other than the fact that there continues to be a lot of running room throughout the portfolio of facilities in the current markets we are in. And we continue to add new markets as we did with North Dakota in the fourth quarter.

Thank you. Maybe one more and then I'll hop in the queue. Over on the balance sheet, Terry, you talked about exploring your capital structure and maybe looking at fixing more of your debt. Could you remind us what component of your debt is variable today and any other terms that you might be specifically trying to improve? Thanks.

Sure, thanks, Frank. Today our first and second lien are both at a floating rate.

So we would look to fix a component of our corporate structure with some fixed rate to offset some of that floating rate. So currently all of the corporate debt is at a floating rate with a 1% floor.

Maybe a target on what percentage you'd be trying to fix?

As you know, really just watching the market, but I would say a 40%/60% split, somewhere around there would be appropriate as we start to shore up our balance sheet and to become more -- to have it reflecting a more public Company-type structure.

Okay, thanks.

Our next question comes from the line of Kevin Fischbeck with Bank of America-Merrill Lynch. Please proceed with your question.

Great, thanks. Going back to Frank's first question about the ancillary business, it's hard to quantify how penetrated you are. When you guys went on the road with the IPO, you talked about how much of your revenue is coming from ancillary business.

It's a little bit hard sometimes to tie back to the number you guys gave just because you include anesthesia in the surgery center revenue. So on that metric, can you give us an update of what percent of your revenue is coming from the ancillary business as you see it? I think it was 27% was where you were pre-Symbion.

If you take a look at the -- again, as you bring it back to -- with anesthesia, it's in the 10% range, just a little over 10% of our -- so I believe 10.5%, 10.7% of our revenue is coming from our ancillary services which includes anesthesia. So it is a little bit difficult to break that out. Keep in mind that it becomes -- as we have from a segment reporting perspective and as we continue to expand our ancillary services -- some of this does become a little bit difficult as you acquire an anesthesia practice in an existing market and provide the anesthesia services to our existing facility.

With our platform acquisitions which have been exciting in the fourth quarter, we have the ability now that we're providing services to external facilities in the same markets. That, again, has some effect on our growth. So as we take a look at that anesthesia, it will be our total anesthesia pie which now includes some external contracts as well.

Okay, that's helpful. As far as the lab cut, can you quantify how much the lab cut was or how much more it was versus your expectations?

I think maybe the way to think about the lab cut, and there's several things, obviously this is something that was out of our control. As we looked at what Medicare had talked about doing, what was in the legislation and what they were going to do to the clinical lab fee schedule, it was all set for 2017. And that would have a limitation of the amount of decreases that they'd have on a year-over-year basis.

That seems to have gotten thrown out the window by CMS which we have no control over. So they really changed the codes to get around that ruling or that thought process. They changed the codes from the [8-0] series CPT codes to G codes, specifically around the toxicology screenings and conformation testing.

We expected the rates to decrease over time in that 15% to 20% range and that turned out to be much more. It ended up being in the 40% to 50% range. The overall impact about $11 million in 2016.

That provides a rebase for the growth. It's a one-year effect and we'll continue to have growth in that business and that service line as we move into 2017. So obviously a challenge but something that will continue to show great growth and a great opportunity in that business.

Is that number just the Medicare side or is there any bleed-over into the commercial rates as a result of the schedule cuts?

Good question. As you remember, we had the out-of-network to in-network lab that will anniversary in the first quarter this year.

Other than that, we've always looked at our commercial rates like we're getting paid under Medicare. And it really seems that Medicare has used this, maybe overstepped how they look at it, but to come closer in line with the commercial rates. And as usual, Medicare coming below those.

So we don't feel any pressure from the commercial side. Those seem to in line as we would take a look at it and a pretty close cluster of how pricing is around Medicare now and commercial payers.

Okay. Basically, if you didn't have this lab cut, you'd be guiding to like 23% to 28% EBITDA, something like that?

Yes, that's correct, 23%, 28%.

Okay, perfect. All right, thank you.

Our next question comes from the line of Brian Tanquilut with Jefferies. Please proceed with your question.

Hey, guys, this is Jason Plagman on for Brian. Just wondered if you could provide an update on your progress on the Symbion synergies and if there's any change in the target or upside from the synergies due to that lab cut that you've been discussing.

Well, I would say the integration, is progressing as planned. We're continuing to capture synergies as you expect. We captured in 2015, largely focused on cost synergies with starting to -- that process of capturing our revenue synergies.

Mike mentioned we had six anesthesia contracts in our existing Symbion markets and so that is continuing to progress as planned.

I think as far as you take a look at from an upside perspective, we continue to evaluate opportunities, new ancillary services lines. We continue to be very excited about the opportunities that we have had in the Symbion markets and beginning to have physician employment in those markets and the outpatient markets. There has always been physician employment in the surgical hospital market.

But again, lots of exciting things happening, as we mentioned, on our platform acquisitions in the fourth quarter. All three of those platform acquisitions were in Symbion markets. So again, continue to see opportunity and we'll walk that through in what we're thinking for 2016.

Great. And then just one other follow-up.

On the G&A spend, how should we be thinking about the run rate in 2016? Were there some one-time things in the Q4 number, maybe stock comp? Can you provide a little color on the G&A?

The fourth quarter had some one-time true-ups related to salaries and benefits from an IBNR on our self-insured fund and our bonus accrual. Really as you go forward, a normalized metric would be in that 4.2%, 4.5% of revenue.

Great, that's helpful. That's all I had.

Great, thanks.

Our next question comes from the line of John Ransom with Raymond James. Please proceed with your question.

Hi, good morning. I have a few questions, mostly about the 2016 outlook, maybe getting a little more detail if we could.

First question, if we think about what your acquisition spend was in 2015, I think you said at the end of the third quarter you spent around $51 million to get $20 million of EBITDA. Can we update that metric for the full year, both before and after the lab cuts, what kind of multiple you paid?

Sure. As you mentioned, the $50.5 million is, John, what we spent first quarter through third quarter and had announced that on the third-quarter call in the Q. That represented about a 2.5 times multiple, so roughly $20 million in EBITDA acquired. Those were largely in-market physician practice transactions which are really our key area of focus in terms of capital-efficient transactions.

As you update that for the lab rate changes, that capital-efficient nature of those transactions remains intact. The multiple goes up to about 3.4 times but obviously still a very good metric and a very wise deployment of our capital.

So what about -- you had quite a bit of spending in 4Q. What was the EBITDA effect from that spend in the fourth quarter, if any?

And what do you expect those acquisitions to contribute in 2016? Again, net of lab.

The acquisitions in the fourth quarter were less focused on the in-market physician practice transactions and more heavily weighted towards anesthesia. Although we did have one integrated physician practice transaction in our Georgia market. Again, more heavily weighted towards anesthesia.

We spent $74 million in the fourth quarter and we'll have EBITDA in the range of $10 million to $11 million as a result of that spend. So when you look at those blocks of capital that we've outlined here with the third quarter -- first through third quarter. In the fourth quarter, total spend of $124.5 million, that's a blended multiple of about 4 times prior to the lab rate and about 4.5, 4.8 post the lab rate.

So again, a deleveraging effect and a good use of our capital.

And Teresa, that fourth-quarter spending, did it have a material effect on EBITDA in the fourth quarter? Or is it all on the come for the --

No, those transactions were completed in the last, call it, two weeks of the year.

All of them were?

Yes, just about, the material ones. There was really --

Not a big Christmas at the Sparks household then. You were busy.

(laughter) I was very busy, not a lot of rest.

All right, switching gears to 2016. Can you help with any other metrics around modeling? For example, cash flow from operations, maintenance CapEx, D&A, interest expense, anything like that to help flesh out the income statement? That would be great.

I think some of these metrics, as we get into more detail, we can definitely work offline. But I think one of the key things to talk about is the cash flow. We'll generate $50 million to $60 million of free cash flow next year which will go towards our CapEx targets from a growth standpoint and help fund those transactions in 2016, along with the combination of credit -- our revolver -- and then what's available under the credit agreement. That's a key metric as we look into 2016.

I would characterize the growth as roughly 50/50 split between 2016 new development and 2015 new development, combined with same-facility growth at an EBITDA level. So that 50/50 split, of that 50% 2016 new development, over 70% of that is under LOI, very far along in the process and really teed up to close.

So those are some named uses of capital that, as we roll into 2016, we'll have -- they're identified and near-term close. So we're looking at total capital spend in 2016 on a range of $150 million to $160 million.

The $150 million to $160 million includes both acquisitions and internal CapEx?

That's just CapEx spend from a growth standpoint. Our maintenance CapEx is about $30 million. So that will get back into that 2%, 2.1%, 2.5%, somewhere in there, of revenue.

You saw that in 2015, a little higher than that because of the integration capital that we invested related to the Symbion transaction. But the maintenance CapEx will be on top of that and it will be roughly $30 million.

So when you talk about free cash flow, we should think about, say, $55 million plus $30 million, that would be a proxy for cash flow from ops? So $85 million or so of cash flow from ops?

Yes, that's about right.

And what are you contemplating for NCI payments in 2016 in your guidance?

If you look at it on a percentage basis, 2015 has come down a little bit compared to our historical average as we've acquired more facilities that are 100% owned through our ancillary services strategy. I think 2015 we were right at 7.8%, 7.7% as a percent of net revenue. That will be in the range of about 7% in 2016.

Again, as we roll out our ancillary strategies and focus on entities that are 100% owned, you'll see that start to tick down a little bit.

Last from me. The revenue from acquisitions you closed in fourth quarter, could you give us a place holder for that as well?

Well, let me follow up with you on that as far as the revenue breakout, just to summarize those in those categories for you.

All right, thanks a lot, Teresa. I'm done.

Our next question comes from the line of Ralph Giacobbe with Citi. Please proceed with your question.

Thanks, good morning. Can you help us think about EBITDA pull-through and maybe margin expansion as we look you ahead? Obviously the lab pressures isn't allowing to show that margin expansion. Trying to reconcile -- is it as simple as just adding $11 million to the EBITDA number that you had and so it's roughly 100 bps impact to margins, just on that issue alone?

And then help us think about it on a go-forward basis. Is there anything else that's hampering or restraining the margins?

I'll just jump in real quickly. As we look at next year's guidance, we've held margins constant at roughly 16.8%. That's about a 1% change related to the model and consensus and yes, to your point, you've identified it.

It's really related to that, all related to the lab rate impact. And so it will be a one year impact for 2016 and then you'll continue to see the margin expansion as we had planned.

So a delay in the margin expansion but definitely all the fundamentals are still there. We're just going to have to absorb this one year of lab rate impact.

Okay, that's helpful. Could there be further pressure on lab, just from the PAMA legislation that's out there and expected to be implemented in 2017? Although I think there's some questions around the timing of that.

Or does this cut basically minimize the potential impact of that PAMA legislation?

Great question. I think the PAMA is something that's been very different, although they're taking a look at it and it really seems difficult for them to get their arms around. They were supposed to be beginning to collect information already.

I think what's happened is they've decided to have a focused approach on different pieces of the lab and they've moved around the overall process that they should be going through and dealt with it by changing codes. Obviously changing codes for the entire clinical lab fee schedule is going to be quite a feat.

So they're going through this process of evaluating and requiring everyone to submit the data on the existing labs. And usually the mid-size players, still a lot of controversy whether the hospitals will be included or not. They were supposed to start collecting data last quarter and they still have don't have a good understanding of how they're going to collect data.

All that to say, one, we don't believe that there's anything else to take out of this piece of the business. We felt it was very aggressive, along with our colleagues that provide those types of services throughout the country.

And then as you take a look at what's going to happen with PAMA, I think it's going to be some time to play out. Looks like it's going to be delayed. But again, don't think it's going to have any effect on this specific area -- any further effect on this area.

Okay. Is the call there simply that the rate cuts now basically get you more or less in line with what you think a commercial rate is?

I would say it's gotten us below that. I think it's been, again, more significant than anyone thought it was going to be.

The push-back on that was pretty strong but success on that push-back was very limited. There was a small amount of movement on the tiering of testing but overall unwillingness to have something more reasonable.

Okay, all right, that's helpful. Last quarter you had talked about a new in-network contract within ancillary. Is that a pressure point as we think about 2016, that's also maybe causing a little bit of a drag?

Or am I not thinking about that right? And then the broader question is, is it all largely in-network at this point? Or is there still some level of out-of-network that we need to think about?

I think I'll start with the fact that there's still -- as we mentioned in previous calls, there is continued to be just for the first quarter, the in-network to out-of-network piece of it. As you take a look at out-of-network exposure, or rate exposure, on the commercial side, we feel very comfortable that we are where we need to be. We feel that there's room to continue to negotiate with the payers and get a better footing in that part of the business and we continue to do that on a regular basis.

But I think from an exposure perspective, we feel that, again, the changes have been more aggressive than we thought they could be and I think most of our colleagues thought they could be. So we feel pretty good all the way around from a rate perspective on that piece of the business.

Okay, that's helpful. One last one, actually, to sneak in. On the organic growth on the volume side, obviously the growth's been strong within same facility. The challenge sometimes we have is obviously there's a lot of adds to that number in terms of new physicians coming onto an existing practice.

Do you guys have the data? Or are you willing to share at all what volume looks like on a same-physician growth basis? If you had the same doc for a 12-month period, what kind of volume they're generating in terms of year over year?

We're not providing that information on a per-doc basis because for us that strategy is just the same as if we were recruiting in those markets. We wouldn't have a per-physician count. That's one of our strategies, to bring in growth into an existing market.

We're looking at that as what's relevant is the case count. And how we secure that case count through either recruitment or employment, is just one of many strategies. But really believe that the relevant metric is that case count in our surgical facilities.

If you think about how the process works to bring new physicians in and how we're getting the opportunities and the traction on these in-market transactions on the physician practice side, we are still recruiting new unaffiliated -- or using physicians or partnered physicians that are not all employed. We continue to recruit a healthy number of physicians into our existing facilities outside of employment. The employment opportunity, we're usually led to that opportunity through the recruitment professionals in the market talking to the physicians.

And now we have another option. We don't have an option just to only use our facility or partner in our facility, we have the employment option. That usually comes up in the initial conversations and instead of recruiting that physician through a more traditional path of bringing them to the facility and partnering the facility or utilizing the facility, we find an opportunity for the own and operate or manage that practice.

Okay, that's helpful, thank you.

Our next question comes from the line of Matthew Borsch with Goldman Sachs. Please proceed with your question.

Hi, this is [Stacey] joining on behalf of Matt. Thanks for taking the question. Wanted to ask about operating income in the ancillary segment.

Looks like it's come down annually for the last couple years as well as sequentially, both margin-wise and gross dollars. Can you share some color on that?

On a sequential basis, we had a couple of things in the quarter primarily related to our de novo startup losses from practices that we have started up that have some lead time on becoming profitable. And so we have a concentration of that in the fourth quarter.

As you look quarter-over-quarter on a sequential basis, that's what's driving your operating income margin down from, call it, 25% to 20%. On a year-to-date basis that 25% should be the go-forward run rate related to that segment. If you compare that 25% to the prior year, that reflects the impact of the out-of-network to in-network movement that we talked about earlier on the call.

Okay, that's very helpful, thank you.

Our next question comes from the line of Andrew Schenker with Morgan Stanley. Please proceed with your question.

Hi, this is Vikram on for Andy. Going back to the acquisitions expectations for next year, can you give us some detail around what type and how many facilities you're expecting to invest in? And then maybe the timing of the acquisitions?

I can give you some metrics and then Mike can fill in on some color around some of the named transactions. Again, I mentioned the split, roughly 50/50 our growth next year, with 50% 2016 new development. And over 70% of that, again, is under LOI very far along in the process, teed up, ready to close.

The remaining 30% -- so we expect 70%, call it, early second quarter time frame. The remaining 30% is our generic growth. That is what you've heard you talk about before, anywhere from eight to ten in-market physician practice transactions and four to five generic surgery centers.

So that we would anticipate coming in over the course of the last half of the year, probably more heavily weighted towards the fourth quarter.

I think as you take a look at what types of businesses we're looking at, again, focused on continuing along in-market opportunities with independent physician practices.

Have an opportunity with some integrated physician practices, ASCs. And we'll have some entry in very small pockets into some new ancillary services that make sense for that specific market and mostly focus that in our hospital markets versus the ASC markets for the time being.

All right. And then on the organic growth front, some of your peers have within citing strategic relationships or joint ventures with large health plans as a potential tailwind. Can you give us some color on how your progress with payers has gone on over the past year? Are you entering similar strategic relationships?

We consider all of our relationships with our payers strategic. I think we really have to understand from that perspective. We have a strong focus on our physicians and the fact that patients will choose physicians and physicians are going to choose where they do their cases.

Our physicians for the most part are partnered-employed and then we have a contingent of affiliated physicians. But continuing conversations with payers and as you take a look at the strategic piece around that is how do we not only incentivize and have the payers understand that there's a benefit to access lower-cost providers and work with us on those physicians.

We've had those strategic relationships with payers for a significant period of time. We have a facility that's joint ventured with a payer in a Florida market. We have continued relationships with payers who are assisting us, or directing us, with physicians that they'd really like to have the capabilities of ambulatory surgery center and the ability to access the lower-cost-of-care site.

And that's worked very well for us as well. As far as the health system relationships, in conversations with multiple health systems. And some of those health system relationships are taking a little bit of a different turn now.

They're understanding that they have to find a way to provide surgical care at a reduced cost. One of the attractive aspects of our strategy for them is that, as they look to come off of a hospital campus and provide more community services, which we've been providing since inception, they're looking at having a little bit of a different type of relationship instead of coming in and buying a third of our surgical facility.

But they're more interested in -- wow, Surgery Partners is working in the community, they have multiple surgery centers, they have multiple physician practices, we like what's happening here. So we're getting opportunities to partner with health systems not only to help manage their existing surgical facilities, expand their existing surgical capabilities, but also to support what we have built from a community perspective. So again, some exciting things happening there as well.

Great, thank you very much.

Our next question is a follow-up question from John Ransom with Raymond James. Please proceed with your question.

You guys are probably excited to be talking to me again.

It wasn't a surprise, John. We knew you'd be back. (laughter)

I got a little greedy with those first round of questions.

Just to clarify something you said, Teresa. If we look at the adjusted EBITDA growth from 2015 to 2016, I believe you said about half of that's organic and about half of that's acquisition. Did I read that right or hear that right?

I said about half was new development in 2016 and about half same-facility in 2015 new development rolling into 2016.

Said another way, if we look at the number going from 2015 to 2016, if you'd never bought another thing, what would the EBITDA growth be? I guess you'd get the $11 million from what you just bought. If you fully loaded all the stuff that you bought, layered in organic growth on top of that and subtract the lab cuts, what sort of pro forma organic EBITDA growth are we looking at, ballpark?

The transactions we completed in the first through third quarter, those were primarily in-market physician practice. If you roll all that into 2016 as same-facility, that would be about $18 million of your total increase. And then that's obviously before the lab cut.

$18 million plus $11 million that you bought into the fourth quarter minus $11 million, something like that?

Plus your same-store.

Right. So the $18 million would be --

So the balance would be same store, that's what I'm trying to get to. Normalizing all the deals, subtracting the lab cuts, gives us a number. And then the balance of the EBITDA growth is implicitly same-store, that's what I was trying to get at.

Yes, that's correct.

Okay.

Again, that's after the impact of the lab rate cuts for 2016.

Continue to have a strong growth rate absent this challenge that we have, the one-year challenge that we have with the lab rate perspective, continue to have strong growth. The fundamentals of the business continue to be the same. And from a pipeline perspective and the ability to have these deleveraging in-market transactions, it's fuller and busier than it's ever been.

Also the platform transactions in the fourth quarter afford us the opportunity for growth in other service lines in those markets. That's something we haven't contemplated in the roll-forward you just stepped through.

I'm going to give you an opportunity also, there's a lot more seasonality in your business than there used to be. Can you give us some thoughts directionally from 4Q to 1Q, adding the revenue, adding the EBITDA from the deals, subtracting the lab cuts and then factoring in seasonality. How should we think about directionally sequential revenue and EBITDA going into 1Q?

Right. As we look at the quarters comparatively to 2015 to 2016 as a percent, so we'll have some pressure in the first quarter as we anniversary, as Mike mentioned, the out-of-network to in-network move at our lab. We'll have a little more pressure in the first quarter combined with seasonality.

Last year the first quarter was about 23% of our total for the year. I would think that would come in around 20%. And then sequencing throughout the rest of the year to get back to a normalized rate and building up to the end of the year with obviously a strong fourth quarter, as we typically experience.

Great, thanks. I'm done.

Thanks.

Thanks, John.

Thank you. We have reached the end of the question-and-answer session. Mr. Doyle, I would now like to turn the floor back over to you for closing comments.

Thanks, operator. Just to clue everybody up before they have off for the weekend or not quite, a few more hours to go, but I wanted to say thanks for everyone joining and support.

Again, team has done a fantastic job of, not only in 2015 working through an integration, a successful IPO and, again, working through our changes in acquisitions that we were able to accomplish in the fourth quarter has been a very busy and successful year. We're excited about what we have in store for us in 2016. So with that, I'll finish up the call and hope everybody has a great weekend.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.