Surgery Partners Inc (SGRY) 2016 Q1 法說會逐字稿

Greetings and welcome to the Surgery Partners, Inc. first-quarter 2016 conference call.

(Operator Instructions)

As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mike Doyle, CEO of Surgery Partners. Please go ahead, Mr. Doyle.

Thank you, operator. I would like to welcome everyone to Surgery Partners first-quarter 2016 earnings conference call. Joining me on the call today is Teresa Sparks, our Executive Vice President and Chief Financial Officer. And will now turn it over to Teresa to review the Safe Harbor statements.

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 meanings 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 risk, 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 prospectus and subsequently filed Form 10-Q 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 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-Q.

With that I will turn the call back over to Mike.

Thanks, Teresa. I am pleased to report that 2016 is off to a strong start thanks to our dedicated physicians and employees. We are enjoying solid demand and favorable trends across our business segments with total revenues up 19.2% over last year and same facility revenues up 13.3%. Some other key highlights of the quarter were 18.3% revenue growth in our surgical facilities, same facility case growth of 11.6% with 1.7% associated with the extra day in the quarter, successful integration of facilities acquired in the fourth quarter of 2015 and successful placement of a $400 million of unsecured senior notes with a fixed rate to replace existing floating rate debt.

In the first quarter of this year we continued to strategy of integrating multiple service lines in our existing markets while continuing to grow our operations through in-market transactions. Our performance demonstrates that our model is resonating with physicians, patients and payers, who all benefit from high-quality care at a lower cost. As an example, we recently expanded an existing payer relationship in Florida which provides are physicians the ability to perform joint replacement procedures for that payer's covered [lide] throughout our state-wide network of surgical facilities.

We continue to experience success through our dedicated recruitment team focused on introducing new physicians to our surgical facilities and ensuring we are fully accommodating our existing physicians' cases. The team continues to expand service lines such as spine, total joint and cardiovascular procedures.

Finally, from a strategic perspective we remain focused on providing solutions for physicians through employment and partnership opportunities allowing physicians to maintain independence focusing on providing outstanding care to their patients. This strategy assisted us in securing strategic relationships with two healthcare systems during the quarter to develop surgical facilities in an existing and in a new market. I would like to take a minute to review development activities.

We remained very active during the first quarter, completing three in-market transactions including two in-market physician practices and one in-market surgical facility. During the quarter we also successfully relocated our hospital in Great Falls, Montana, to our new state-of-the-art facility located on a shared campus with our physician practice and ambulatory surgery center. We continue to integrate our expanded service line offerings in this market.

Our M&A pipeline remains well balance with opportunities in both surgical facilities and ancillary services. Subsequent to quarter end, we continue to focus on our in-market strategy completing a platform transaction in Jacksonville, Florida, significantly strengthening our presence in the market with an ambulatory surgery center and integrated physician practice with multiple locations and related ancillary services. This expansion in the Northeast Florida market enhances our strategic focus of providing multiple complementary service lines in the five largest markets in the state.

With this latest transaction, we now own or operate 102 surgical facilities, including 97 ASCs and 5 surgical hospitals across 29 states. In addition, we own or operate at 50 physician practices across multiple states, employing physicians in over a dozen specialties.

Let me turn the call over to Teresa now to review the first quarter financials.

Thanks, Mike. As Mike mentioned, we were very pleased with the continued strong performance of our operations in the first quarter. Our revenues increased 19.2% to $267.1 million in the first quarter while same-facility revenue increased 13.3% with case growth of 11.6%.

Adjusted EBITDA growth was 6.8% over the first quarter 2015, and as anticipated our EBITDA margin was 14.4%. The year-over-year adjusted EBITDA margin change of approximately 160 basis points was primarily driven by two factors.

First, as we previously discussed, our results reflect the impact of the lab rate reduction from CMS which should be viewed as having a one year impact on our overall growth rate. The lab rate has an adjusted EBITDA margin of approximately 1.1%.

Finally, an additional 1% of our adjusted EBITDA margin change resulted from the anesthesia platform transactions completed in the fourth quarter of 2015. As anticipated, this service line has a higher first-quarter fixed-salary component which impacts overall margins.

On the acquisition front, as Mike mentioned, we acquired one in-market ASC that we merged with one of our existing surgery centers and two in-market physician practices for a total of $7.7 million. The larger transaction that we completed in April significantly enhances our presence in our existing Jacksonville, Florida, market. The purchase price for that transaction was $74.5 million including $16.6 million of contingent consideration. The purchase price was funded with part of the proceeds from the recent debt offering.

Our net operating cash flow including operating cash flow less distributions to non-controlling interest was $7.7 million for the first quarter. Free cash flow for the first quarter was $11.4 million as normalized for merger transaction cost of $3.2 million. In addition, the integration of our Great Falls, Montana, replacement hospital resulted in a one-time increase in accounts receivable of $5 million and capital expenditures of approximately $5 million along with the integration-related capital in the quarter of approximately $2 million.

Another key accomplishment for us this quarter was further strengthening our capital structure without a significant impact on our overall cost of capital. We completed an $80 million expansion of our first lien term loan to a fund identified transactions, one was which closed subsequent to quarter end. The first lien term loan matures in 2020.

We also completed in offering of $400 million in unsecured senior notes maturing in 2021. The proceeds from this offering were used to pay down borrowings under the floating rate second lien credit facility, repay the outstanding balance on our revolving credit facility and for general corporate purposes. As a result, we ended the quarter with cash and equivalents of $135 million and availability of $146.8 million under our revolving credit facility.

As expected, at the end of the first quarter our ratio of total net debt to EBITDA as calculated under the Company's credit agreement was 6 times, reflecting the financing of transaction costs. We expect to end the year with leverage below 6 times and target a ratio of 4.5 times by the end of 2018, driven by a combination of organic EBITDA and free cash flow growth along with capital efficient acquisitions. Overall, we're very pleased with our progress this quarter.

With that I would like to turn the call back over to Mike to discuss our 2016 outlook.

Thanks, Teresa. As discussed in our call in March, we entered into 2016 having completed more transactions than originally planned for the fourth quarter of 2015, and we continue to see many opportunities to grow our network of surgical facilities and related ancillary services. As demonstrated by our recent activity, physicians are increasingly interested in our strategy of engagement through employment and recruitment opportunities. We look forward to another strong year for Surgery Partners and we would like to reiterate our 2016 guidance for adjusted EBITDA in the range of $184 million to $191 million.

Thank you for your interest and support and thank you to our physicians and employees who deliver superior care to our patients every day. With that I would like to turn the call back over to the operator to begin the question-and-answer session.

(Operator Instructions)

Ralph Jacoby, Citi.

Thanks, good morning. Obviously a strong revenue quarter, but maybe can you give us a little more sense of some of the drags, the timing of cost, that maybe constrained even better margin performance? I know you talked about the lab rate reduction and then the anesthesia platform deals that you did, but anything else in the quarter that maybe caused a little bit of a drag? And then maybe help on sort of the timing, particularly on the anesthesia side, as we move through the year.

Thanks, Rob. This is Teresa. As you mentioned, the impact on the margins as we discussed from the lab and the anesthesia in the first quarter, which we expect to roll out of in the second quarter and improving second, third and fourth quarter from that front, also we mentioned the Great Falls relocation. That also had a slight drag on earnings -- on margins in the quarter. We are ramping up new service lines at that facility, and that's just the overall integration of that facility had a slight drag on earnings from a margin perspective.

I think just to add to that, we've also had -- these were expected and planned for, so from that perspective, we continue to see how they play out through the rest of the year and have included that in our guidance and our thought process on how we expected the year to start.

We expect to return back to margins in the 16.5%, in that range as guided earlier in the year.

Okay, all right. Fair enough. And there's been a lot in the market around balance billing and out-of-network. Can you just remind us maybe how much exposure you have here in terms of what percentage of revenue is balance bill and maybe what percentage is out-of-network at this point and just your general strategy around that?

I think from a overall, very minimal amount of our revenue less than 3% of our revenues are coming from an out-of-network or billed as an out-of-network. From a balance billing perspective, we're in compliance. We understand the rules. It really didn't change any of our strategies or our thought processes. Our out-of-network approach is usually involved in a negotiation with a payer.

It's rare or if a payer has closed the network, but again, very small amount of out-of-network and continue to pursue in-network contracts with all of our payers in all of our markets. When we do have that unique situation, from a negotiation perspective, where we have another network contract, we really focus on having those -- that reimbursement still look like and feel like an in-network rate. So pretty comfortable where we are, don't see any effects or we will have neutral effects from any changes around the balance billing piece of it.

Okay. All right, that's helpful. And then maybe just one more. Can you give us an update on where you are with the Symbion integration? How much synergy, I guess, do you have left to capture and essentially over what period of time? Thanks.

So I think as we've always mentioned, the integration of gone well, the cost synergies have been implemented and really realizing the last portion of our cost synergies on the $15 million we had outlined as we began this year. So all of those are in place and will continue to roll on with time. From a revenue perspective, continue to have great success there. As we mentioned, we see those completed by the end of FY17, maybe rolling into a little bit of 2018.

But having great success there. So we've implemented one or more ancillary services in eight of our Symbion markets now, having converted six anesthesia contracts in our Symbion market. So as we expected, having the traction and really gaining the momentum of those types of opportunities in 2016, we've had great success in the first quarter and continue to see that play out as planned over the next couple of years.

Okay, thank you.

Brian Tanquilut, Jefferies.

Good morning, guys. Mike, you mentioned something about the joint program in Florida. Do you mind just walking us through how that works for you guys in terms of economics and what drives the referral flow and what incentivizes either the doctor or the payer to drive more volume into outpatient settings such as yours away from the hospital for joint replacements?

I think this is a very practical arrangement with our payer as we continue to have discussions with all of our payers and really focus on new types of procedures that are gaining momentum in the industry, such as total joints. We have approached the payer and basically taking a look at the economics of the procedures and understanding that joints especially have a unique characteristic of having a significantly more expensive implant that's involved in the case and taking a little bit more OR time that we needed a little bit of a different arrangement on these types of cases.

So being very aware of that and the opportunity to have cost savings, the payer was -- looked at addressing this from a statewide perspective with us and allowing us to have the appropriate carve-outs for these types of procedures in our contracts across the state. Obviously, for the payer being able to move outpatient appropriate joint procedures to an outpatient setting is significantly cheaper. From a patient perspective, obviously more convenient, less risk of infection in our setting.

And then from a physician perspective, just being able to perform these types of cases in a more efficient setting has, again, gained a lot of momentum. We have over 22, 23 of our facilities that are now performing joint procedures on an outpatient basis and we have to keep in mind that the way these -- the payer doesn't necessarily direct these types of procedures to our facilities. We really focus on giving our physicians the opportunity to treat their patients in the setting that's most appropriate for their patients. And by opening the opportunity of the payer being able to reimburse us appropriately for those types of procedures is really what allows the physician to have a choice of where to perform these procedures.

So again, really still focused on the volume of those procedures a there being driven by our physician partners and our employee physicians throughout the state. By giving us the opportunity that these are procedures that can be efficient economically as well as clinically in our existing facilities.

So, Mike, on an EBITDA per-dollar per-minute, if we look at it that way, you would say that these joint replacement procedures are coming in line, if not above, your current rate?

So, I would say from a dollar perspective, we, obviously, we realize more dollars on these cases. On both the per-case basis but also on a per-minute basis, but they're also a little bit more costly due to the implant. So they fall in line. Usually these larger cases will have a slightly lower margin, but still from a dollar perspective, and utilization of our OR make a lot of sense.

Got it and then you talked about the deal you just did in Jacksonville. So how should we think about the deal pipeline for the rest of the year, considering that this was a platform acquisition and balancing that with your capital structure and obviously the amount of leverage that you have in the balance sheet right now?

I think as we mentioned on our last call and we talked about these platform acquisitions, that we expected --and we had a little bit of a pent up pipeline through the Symbion acquisition and through the IPO, of getting these things done and really working on these end-market transactions, which obviously make a lot of sense. And each of these in-market transactions, or platform transactions, have the opportunity for us to grow upon them so our -- we continue to have success in our anesthesia company in Georgia, our physician practices that we have integrated and continue to have growth in those markets on those platform acquisitions.

Which over time will continue to decrease the effect of multiples on those. But we've been successful on bringing these platform transactions in at slightly accretive or neutral from a leverage perspective and then as we get into our normal process of M&A, we continue to have a very balanced pipeline, both ancillary and physician practice opportunities on a smaller basis, not necessarily a platform basis in markets where we have surgical facilities where we can really realize attractive and accretive -- at leverage-accretive multiples. So we'll continue to see that throughout the year and expect to end the year under the 6 times leverage in that college high 5s.

Mike, shifting gears, the Part B rule that has been proposed at CMS, how does that benefit or impact your pay management practices?

Really don't have any effect from the practice perspective. These practices are, for the most part, independent one-off practices that are outpatient-based and really have not -- don't anticipate any issues from that perspective.

Got it. Thanks.

Matthew Borsch, Goldman Sachs.

Yes, hoping you could just, on the debt leverage you were touching on there, what is your thinking at this point about where you go with that in 2017?

As Mike mentioned, we've been able to complete these transactions, large platform transactions, slightly accretive to leverage neutral. So below 6 times by the end of 2016, and then stepping down with our target at the end of 2018 at 4.5 times. So really think we can get there, have a very clear path through these leverage accretive, capital efficient transactions, overall growth in our EBITDA and are free cash flow and that would be sort of between the end of 2016, the end of 2018 stepping down to that 4.5 times range.

Okay, makes sense. And just on the very strong same-store case growth in the quarter, I am sorry if I missed something, can you just give it that, you know, it was really extraordinary, can you give us a little bit more detail on the drivers of that? Any geographic variation and so forth?

Yes, I think from an overall perspective, we have continued to have the conversations around our unique approach to driving volumes into our existing facilities. So it does sound like a fairly simple thought process, but a little bit more complex in implementation. Just having the dedicated team who, day-in day-out job is to recruit new physicians into our existing facilities.

So we are seeing a very -- very good results across the country, no really one geographic area that's standing out. The opportunity to recruit new physicians and bring in new types of cases into our existing facilities is something that this team is focused on every day. So great success on that front.

And continue to evaluate the opportunities of acquiring practices in existing markets where we have surgical facilities. So really sticking to that process of not only recruiting new physicians in, which obviously leads to opportunities for in-market transactions, but continuing to have a really focused approach to not only recruiting new physicians and new programs into our facilities but ensuring that we are accommodating our existing physicians as their practices grow and as we have new types of procedures that can be done in our facility. Really ensuring that team is responsible for recruiting, is really involved with those physicians from a marketing perspective.

And as you look at the volume, can you make a read through on where you think the volume environment is. We are in a stage economically where maybe the anecdotes of increased demand for elective procedures, to what extent do you get the sense that you're seeing some of that in the volume as well?

I think if you take a look at what we have from a specialty perspective, most of the things are not things that are really going to be pent up for any period of time. As you take a look at GI procedures, which have -- there's a lot of diagnostic as well as other types of procedures in that specialty. From a ophthalmology perspective, 97%, 98% being cataract surgery. These are things that continue to have a pretty even or pretty limited ability to delay them.

From an orthopedic perspective, again, so the ability to delay them for the short period of time but I don't think we're really seeing that pent up volume. We continue to see strong employment which allows people to have insurance. I think we continue to see the ability for patients to have access to facilities and I think we're seeing a little bit of the consumerism. So although we've for many years said demographics will continue to drive higher volumes and patients get older they will utilize more healthcare I think we talked about that into we were blue in the face and never really saw that come to fruition.

And I think we're seeing a little bit of a consumerism so, although we for many years said, demographics will continue to drive higher volumes and as patients get older, they'll utilise more healthcare. I think we talked about that til we were blue in the face and never really saw that come to fruition. And I think we're seeing more of a consumerism perspective understanding that outpatient is cheaper, the higher deductible plans are drawing some more attention to that and I think are getting more traction on that than necessarily pent up demand or even necessarily demographics pushing that the elderly population into our facilities.

Great. Okay, thank you.

Chad Vanacore, Stifel.

Good morning.

Good morning.

So just taking the other side of the same-store revenue growth. Case growth was very strong, but the other side of that is revenue-per-case was only 1.5%. So why were volumes so strong and pricing so weak?

I don't think it's really that pricing is weak. If you look at our net revenue per case on a quarter-over-quarter basis, it's up $193 per case. With -- just on a consolidated basis 7.9%. We had some increase in lower acuity cases in our same facility mix.

A little bit higher mix of those lower acuity cases in the overall growth rate for the quarter. But our focus on our orthopedics continues to grow. We are still seeing that strong trend, still seeing a strong trend from our managed care pricing, but we did have kind of a higher mix of lower acuity cases in the quarter in our same store results.

All right so I mean we should expect that may be second, third, fourth quarter snap back to where it had been historically?

Yes, I think so. I think we will see that. We were several quarters, it was about 50/50, and then we sort of surged ahead this quarter with our case volume, which is obviously a good indicator of our business model and our success in recruiting and employing physicians. And so, those cases just happened to be a little more focused on lower acuity cases. So I think we will see that become more balanced in the next couple of quarters.

All right and that kind of feeds into my next question. Teresa, you had mentioned about margin ramp by the end of the year, about 200 basis points, what's going to drive that expansion and how do we get there quarter over quarter?

Some of the -- just a couple of things I mentioned. Obviously, the lab rate is something that we will continue to see throughout the year. But the overall impact from the anesthesia business, that's sort of isolated to the first quarter with those higher fixed cost salaries in the first quarter. You will start to see that kind of normalize as we move out into the rest of the year.

Also, the integration of the Great Falls Hospital, ramping up those service lines have been largely completed. So that will improve from a margin basis as well as, we closed three platform transactions in, call it the last two weeks of 2015, and so those were obviously in and integration phase in the first quarter. That works. That heavy lifting has been completed and also just the transaction we announced in the second quarter will have favorable impact on overall margins.

So a lot of things that we're -- have accomplished in the first quarter, and completing that transaction at the beginning of the second will aid with that overall margin expansion towards the end, improving throughout the rest of the year.

All right and just thinking about that anaesthesia expansion, I think the last update you were in somewhere around 30 plus locations of your ACSs. Can you give us an update where you are now?

Yes, we are 34 locations. The transactions we completed in the fourth quarter covered three existing markets and added other contracts in those markets, and then we picked up another location with the transaction we completed in the second quarter.

Okay

So making good progress there

Is that 34 locations that cover more surgery centers or is that just 34 overall?

Well, that's 34 locations of our surgical facilities but the transactions, for example, we completed in the fourth quarter have multiple contracts outside of our network. But the 34 is just referencing the number of anesthesia contracts we provide to our network of surgical facilities.

All right, thanks. That's it for me.

Thanks.

Kevin Fischbeck, Bank of America Merrill Lynch.

Great, thanks. Maybe just to follow up on that question. So, as you think about the penetration between ASCs with ancillary services into your facilities, what percent are you penetrated right now or I guess how much of your revenue is coming from ancillary services as you kind of -- you said a finding of 27% before you bought Symbion, where are you now?

Yes, if you look at it on that same comparison, that 27% on a historical basis as we spoke to the 27% included anesthesia. And that same number on a comparable base is about 15%.

So we are -- that's where we thought we would be in this year as we completed these transactions in the fourth quarter and in the second quarter that have a higher focus on -- well the anesthesia services and the physician practices. So we are right in line with kind of where we thought we would be this year as a percent of total ancillary services.

Okay. And then on the deal pipeline, I guess you guys include deals in your guidance. And you said you're going to do probably a big deal this quarter. I guess, what percent of the M&A that was in your guidance have you completed so far?

Yes, so as we talked about the guidance about 50% of the overall growth was coming from 16 new developments. About 70% of that total growth from new development was identified, and the biggest component of that identified new development was the transaction that we closed in the second quarter in Jacksonville, Florida. So we are well on our way to achieving those targets from a new development standpoint.

Okay and then I guess can you talk a little bit about multiples? What kind of multiples are you seeing in the market today?

I think the multiples, as you look at both the ancillary businesses in the surgical businesses, I think the surgical businesses have been very consistent for many years, still seeing them in that 7 times range. And then from the physician practice and ancillary businesses, we're seeing a wide range in that 4 to 6 times and again seeing a very consistent year-over-year on the surgery side and the same on the ancillary side. So we're really not seeing any expansion of multiples.

And obviously as we saw some lower economic times in 2007 in 2008 and we thought the multiples would go down in that timeframe on the surgery side, they didn't. So kind of test well on both sides. They don't really have much downward mobility nor upward.

Okay, all right. Great, thanks.

(Operator Instructions)

John Ransom, Raymond James Financial.

Good morning. Sorry for the background noise, at the airport here. Teresa, the big deal you did in the second quarter, maybe just a little color on revenue and EBITDA contribution in the second quarter moving forward? Just for that one because it seemed like a big one.

Yes, from a revenue standpoint, we will have about, call it about $8.5 million, $8 million to $9 million, impact in the second quarter and about $3 million from EBITDA. So again, tracking well with that component of the 2016 guidance that was attributed to 16 new development, identified new development.

Okay. And could you just give a little more color as this mostly you described is kind of an integrated deal, could you just give a little more color on that particular acquisition?

Yes, from the -- one of the places that we already have been involved with in the state of Florida didn't have a big presence was in the Jacksonville market. So the ability to expand that transaction to include physician practice, another surgical facility, anesthesia services and other related ancillary services for that market really gave us an expanded opportunity in the Northeast part of Florida and as we take a look at what we have done in implementing and integrating ancillary services across the state, we have now been able to do that in five or the largest markets throughout Florida and continue to have success in doing that. So really working through in these major markets the ability to have an integrated approach by having employed physicians when it makes sense and in this case being able to have a large physician practice with nine locations, a surgery center and other ancillary services was a big addition to complementing existing market that we already had a smaller physician practice and surgery center in.

And this, Mike, this deal you did in Florida with the payer, for joint, is it kind of a global price for certain procedures where you price out the facility fee, the doctor, the anesthesia, are you taking a risk or is it that discounted fee-for-service? How are these new arrangements evolving?

So the arrangements are -- will be different and again these are -- these aren't necessarily at risk arrangements. It depends on the payer. So we have some of these deals that we are doing with specific payers in specific locations that they wanted a bundled payment and we have risk in those.

This one was a little bit different, it continued to be a fee-for-service arrangement where they did not have great mechanisms in the contract to provide for implant reimbursement and allow for them to be economically sound for the surgical facility to do. So we basically addressed that, although all of our contracts are written on separate paper, we work with the payer to provide an opportunity for all of our facilities to have the ability economically to perform these procedures and then allow physicians to have the option to bring their patients that are appropriate for an outpatient setting for total joint into our facilities. So this one here was a big step forward with this particular payer to allow these types of procedures to be done in our facilities.

So is this a payer that you formally had a relationship with but this is an expansion or is this a new payer relationship altogether?

No so, again, when -- in pretty much all of our locations we have payer relationships we have payer contracts. So this is just enhancing an existing relationship we had with a payer where we're coming to them and say we need to add something to the contract that will be mutually beneficial. So again, it's continuing to work with the payers on a facility-by-facility, state-by-state basis to ensure that all procedures that can be beneficial for our facility but also for the payer or from a cost savings perspective are economically sound for us to be doing in our setting.

Great. And just last one for Teresa, on your M&A spend, how much will you think you will have spent by the end of the second quarter, relative? I know you, I think you were going spend $150 million, $160 million for the year, so how much of that will be done by the middle of the year?

So we spent about $8 million in the first quarter and then the Jacksonville transaction was about $74.5 million, now that had about $16.6 million of contingent consideration. So that takes us, excluding that contingent consideration, we're about $69 million. And I mean our pipeline supports the remaining $80 million and I think with the exception of one transaction, it will be more heavily weighted towards the third, end of the third and fourth quarter of this year.

Okay, great. Thanks a much.

Thanks.

Brian Tanquilut, Jefferies.

Thanks for taking the follow up. Teresa, just a question on sequential payroll tax expense. How should we think about the sequential change in payroll taxes? FICA tax.

Sequentially from -- going from fourth to first or kind of rolling into the --

Sorry. Q1 to Q2.

Yes, I think we will see some overall improvement there just from a payroll tax standpoint but also those salary costs are fixed and usually matched with lower volumes when you think about that, what I mentioned earlier, that we picked up contracts not only at our facilities, anesthesia contracts at our existing facilities, but other contracts to other providers in the markets that maybe didn't have the same level of volume, good volume that we had in the first quarter so you are seeing those payments associated with -- or that revenue associated with a higher fixed cost. So we will see that improving in the quarter probably, maybe 50 basis points, 31.5%, 32%, in that range of salaries and benefits as a percent of revenue.

Okay, and then last one for me. Provision for doubtful accounts went down a decent amount during the quarter. Is there anything you want to call out there that we should be thinking about?

No, I think it was just unusual from the standpoint of just some higher collections at some particular facilities. I think a normalized rate for us is 2.5%. 2%, 2.5% and we've been pretty consistent in that range. So I think it's just an unusually high collection quarter for us in the quarter, but last quarter we were at 2.3% I think we will stay in that 2%, 2.5% range.

Got it. All right, thank you.

Thanks.

Nick Mattock, CVC.

Hello, guys. Thank you so much for taking the question. Just one quick follow-up. You had mentioned, Mike, your multiple range for acquisitions 4 to 6 times range. Is that fully integrated, meaning you have the full benefit of improvements or is that gross just when you get the acquisition?

That's pricing multiple.

Thank you.

You're welcome.

We reached the end of our question-and-answer session. I would like to turn the floor back over to Management for any further closing comments.

Appreciate everyone take the time today and getting up to speed on our most recent quarter. Again, very excited about what the year has to offer and we will look forward to talking you guys again next quarter. Thank you, Operator.

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