Surgery Partners Inc (SGRY) 2016 Q3 法說會逐字稿

Greetings, and welcome to the Surgery Partners third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. Is now my pleasure to introduce your host, Mr. Mike Doyle, the CEO for Surgery Partners. Thank you. You may begin.

Thank you, operator. I'd like to welcome everyone to Surgery Partners' third-quarter 2016 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 the 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 Form 10-K 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 and adjusted net income 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'll turn the call back over to Mike.

Thanks, Teresa. Surgery Partners continues to focus on our differentiated model that strategically aligns physicians through employment and partnership opportunities. Our value proposition is uniquely positioned as physicians gain access to our surgical facilities and our ancillary services, creating the most economical healthcare delivery system for our patients.

The continued expansion of high-deductible health plans has accelerated the focus of payers and patients to seek care in lower-cost settings. With the broad acceptance of the high quality of care that is provided on an outpatient basis, we continue to solve for the most challenging healthcare issue, which is cost.

Through our relationships with payers and physicians, we provide a much-needed solution for patients who face higher co-pays and deductibles and are absorbing a higher percentage of the increasing cost of healthcare. We appreciate the hard work of our dedicated physicians and employees who provide outstanding care to our patients in an accessible and affordable setting.

In the third quarter, we generated 18% growth in total revenue and 10.3% growth in same-facility revenue. Our total cases increased 9.1%, and our same-facility case growth was 4.3% compared to the third quarter of 2015. Revenue per case increased 8.1% in total and 5.8% on a same-facility basis.

The growth in the quarter was slower than experienced in the first half of the year, largely due to the softer-than-expected volumes in July. While we do not usually break out results by month, July results were uniquely impacted by physician vacation schedules concentrated in fewer working days in the prior year, in addition to the timing of holidays and compressed summer vacation schedules in the Southeast. The results of the month of July were temporary as our volume growth resumed a normal pace in August and September.

Our business and our strategy remain solid, with significant growth opportunities, as providers and payers are increasingly focused on pursuing a path of value-based care inherent in our network of outpatient surgical and ancillary services. During the quarter, we expanded that network as we closed on four acquisitions late in the quarter, an ambulatory surgery center in Louisiana; two physician practices, one in Florida and one in Idaho; along with an anesthesia practice in Arkansas.

The ambulatory surgery center acquisition in Louisiana provides us with an opportunity to expand our ancillary service offerings in a new market. The acquisition of the two physician practices and the anesthesia practice demonstrate our ability to successfully grow existing markets with our ancillary services, building an enhanced network of options for our physicians and patients.

We continue to see strong interest from physicians in our model, both from an employment and partnership perspective. We have made significant investments in our infrastructure, allowing us to provide an employment alternative to physicians. With this option, doctors are able to maintain many aspects of their independence and explore new opportunities for growth, ensuring that their practices will continue to thrive.

We also continue to expand our service offerings. We currently provide anesthesia services to 47 surgical facilities, including 38 facilities within our own network. Payer interest continues to accelerate around total joint and complex spine procedures. We are performing total joint procedures at over 20 facilities and complex spine procedures at over 30.

We are able to add a growing range of services as we attract new physicians who understand the appeal of providing high-quality integrated care for patients. As I've highlighted before, our dedicated team of recruitment professionals have played a key role in attracting physicians in specialties associated with higher-acuity procedures as we have expanded these programs in key areas. Our experienced team has a deep understanding of the coordination of physicians, staff, payers, and vendors required to continue our success in this area.

Collectively, our employees have been instrumental in building out a foundation of high-quality physicians throughout the communities we serve. This year alone, our recruitment team has added over 300 physicians to our network, including 20 employed physicians.

While these additions support the growth of our existing facilities and often lead to new acquisition or de novo opportunities, there is a period of transition associated with newly acquired physician practices. The process of onboarding positions is typically a 12-month process to achieve the consistent results found in our more mature practices. We have a system in place to manage those transitions so that it is a smooth process for the new physicians and the existing surgery centers.

Expansion of our outpatient care network makes sense to payers for several reasons, including the desire to improve patient access, strengthen patient-provider relationships, and save money. We continue to work with payers on ways to provide services in an integrated manner by providing an alternative to the traditional inpatient model, recognizing the physicians' key role in delivery of care.

During the quarter, we also entered into a relationship with a health system in Florida, partnering with the system to complement its outpatient strategy. This is a great example of a market we know well and have significant patient access points that are attractive to payers and health systems alike.

Our network now consists of 104 surgical facilities across 29 states and more than 50 physician practices. There are significant opportunities to grow our existing markets as well as in new markets, and our pipeline remains robust, with seven transactions under a letter of intent providing visibility into 2017. I'll now turn the call over to Teresa to review the financials for the quarter.

Thanks, Mike. As Mike mentioned, our underlying business trends remain solid. During the quarter, revenue increased 18% to $282.7 million, as compared to $239.6 million in the prior year. Total cases increased 9.1% for the quarter.

Our same-facility revenue increased 10.3%, reflecting a balanced mix of case growth of 4.3% and revenue-per-case growth of 5.8%, despite a softer-than-normal July. Our average same-facility revenue growth over the last seven quarters is 11.5%.

Adjusted EBITDA increased 12.3% to $44.7 million, compared to $39.9 million in the third quarter last year. Our expectation for the quarter included an EBITDA contribution from generic new development of approximately $2 million. We closed the component of this expected new development at the end of the quarter, and we are on track to close the remainder of our expected annual development by the end of the year.

From an adjusted EBITDA margin perspective, this quarter is 15.8%, compared to 16.6% last year. The lab rate reimbursement impacted our adjusted EBITDA margin in the quarter by 100 basis points, ultimately in line with the prior year on a comparative basis.

On a year-to-date basis, revenue increased 20.5%, to $839.4 million, as compared to $696.6 million in the prior year. Total cases increased 10% for the year. Our same-facility revenue increased 12.8%, driven by case growth of 7.8% and revenue-per-case growth of 4.6%. Adjusted EBITDA on a year-to-date basis increased 13%, to $129.2 million, from $114.3 million in the prior year. Our adjusted EBITDA margin is 15.4% for the year, or 16.4% adjusted for the lab rate impact, also in line with the prior year.

Turning to our guidance for the full year, we are affirming our full-year revenue guidance at the mid to high end of our original range of $1.12 billion to $1.14 billion, a 17.5% to 19% growth over 2015. We are modifying our full-year 2016 adjusted EBITDA guidance to a growth of 13% to 16% over 2015, with a range of $179 million to $184 million, from our original range of $184 million to $191 million, or about a 3% reduction at the midpoint. This change is due primarily to the timing of certain acquisitions, and to a lesser degree, a slower-than-expected volume in July, along with the impact from Hurricane Matthew in the fourth quarter.

Our new guidance still assumes that we close on our full-year development from acquisitions with aggregate annual EBITDA of approximately $28 million to $30 million. However, due to the later deals closing time, we expect to realize approximately $12 million to $13 million of EBITDA in 2016, versus our prior estimate of approximately $15 million.

The environment for acquisitions remains healthy, and pricing remains stable. We are actively working through deals currently under a letter of intent and scheduled to close this month and next. While slightly delayed, the completion of these transactions by the end of the year, combined with the current pipeline, gives us clear visibility into 2017. We will provide full-year 2017 guidance on our year-end conference call.

Lastly, we ended the quarter with cash and equivalents of $55.2 million and availability of approximately $115 million under our revolving credit facility. Net operating cash flow was impacted in the quarter primarily by an accelerated interest payment related to the amendment of our first-lien credit agreement of approximately $11.5 million, along with merger transaction and integration cost and a component of payments for acquisitions, totaling approximately $6 million.

At the end of the third quarter, our ratio of total net debt to EBITDA as calculated under the Company's credit agreement was 6.2 times. We expect to end the year with leverage in the range of 6.1 times and target a ratio of 4.5 times by the end of 2018. With that, I would like to turn the call back over to Mike.

Thanks, Teresa. Our strategy remains solid, and we look forward to continued growth of our existing operations and further expansion through acquisition. While we are not giving specific guidance for 2017, we remain very comfortable with the expectations for double-digit adjusted EBITDA growth.

As we look to next year, we will see relief from the Medicare lab rate cut that was a significant headwind for us in 2016, and we will continue to benefit from the maturation of our 2015 and 2016 acquisitions. Regarding the lab rate cuts we experienced in 2016, we expect the revised rules for 2017 to add back approximately $2 million in revenue. In addition, the final Medicare ASC update was better than expected at 1.9%.

As discussed on previous calls, the Affordable Care Act had little to no benefit to the Company. Therefore, we believe the election results will be a net positive for the Company, with a stronger focus on quality and the cost of care. Through our national network of facilities providing surgical and ancillary services, we remain well-positioned to benefit from the further developing trends, shifting procedures into the outpatient setting.

Our network of high-quality integrated services continues to receive a strong response from patients, physicians, and payers. Thank you for your interest and support, and I'll now turn the call back over to the operator to begin the question-and-answer session.

Thank you. The floor is now open for questions.

(Operator Instructions)

Brian Tanquilut, Jefferies.

Mike, you touched on the physician services part of your business in your prepared remarks. I just wanting to see if you could give us some more discussion on how that side of your business is different from, say, AmSurg, Envision, TeamHealth, and Mednax, especially in anesthesiology, because obviously, some investors are worried about their exposure to the ACA. I know you say you don't have any exposure. But I just wanted to get some color on what you think differentiates you and how that drives your business as well.

Thanks, Brian. I think from our perspective, as we mentioned on previous calls, we've had little to no exposure or benefit from the ACA, so although that didn't give us a tailwind or a benefit in the past, it also doesn't give us a headwind. As the thought process of what's going to happen with the ACA, how it's going to change under the new administration, and what that's going to look like.

So I think as we think about physician services, it's important to understand that our physician services are provided with surgical specialists that are providing services on an outpatient basis, so we own the physician practice. And they're not providing services to a hospital. They are not in receipt of exchange revenues, those types of arrangements that with a hospital that would be providing a service and having the similar payer mix as a hospital.

So from our perspective, there is little impact from, again, the benefit that we received from the ACA and probably very little downside. And from an anesthesia perspective, the vast majority of the facilities that we provide anesthesia services to are our own surgical facilities and surgical facilities in those same markets. So very little of our anesthesia revenue is coming from hospital contracts.

All right. Got it. And then towards the end of your comments, you talked about your confidence in double-digit EBITDA growth next year. So what's driving that? Is that primarily top-line driven?

And then the follow-up to that is, if you don't mind just giving us some more commentary on the complex procedures, especially ortho. And how much room do you have there, given potential capacity constraints, substitution of high complexity versus lower complexity of procedures, and how should we be thinking about all those factors as we think about double-digit growth? Thanks.

Yes. Thanks. So I think as you take a look from a growth perspective, there so many levers for growth as we take a look at our business and continue to expand the programs at our facilities. We are, again, in the very early stages as we continue to stay with orthopedics on joints. We now have over 20 facilities that are doing joints.

We should not forget about complex spine. We continue to get advancements from payers on what they will cover from a complex spine perspective, and we now have over 30 facilities doing the complex spine procedures, and in the early stages, a few facilities now doing cardiac cases. And that continues to be some great places to grow.

I think from a joint perspective, as far as moving the needle significantly on the overall same-facility growth, it will be somewhat minimal over the next 12 months. The Medicare aspect of that business is going to be very important to see how we begin to get access to Medicare patients and when that will happen. Again, a lot more conversation, communication about that, and we're very hopeful that will happen probably sooner than it did from a spine perspective.

And we can't forget the basics, and as we talked about bringing over 300 new physicians into our existing network of physicians, some of those being employed, but small portion of those being employed, about 20 of the 300. And those 300 new physicians are bringing cases. Again, a slow ramp-up, but again, these are physicians that will continue to bring cases on a year-over-year basis.

So the physicians we recruit this year will have the ability to do more cases year over year due to the partial-year impact that we have this year with them. And keeping that program and that team motivated from a facility capacity perspective, allowing them to recruit, not only in a program nature, but also from a specialty perspective, that a G.I. physician, a pain management physician, an orthopedic physician, on a per-hour basis, they all have very similar characteristics.

So we do look at it really on a net revenue in totality or year-over-year basis versus being fine tuned on a case versus net revenue for case. There can be some fluctuations in that that are absolutely acceptable and are the right businesses decisions to grow your facilities.

All right. Got it. Thanks, Mike.

Matthew Borsch, Goldman Sachs.

Hi, this is Tejus Ujjani joining for Matt. On the anesthesia revenue, if I recall correctly, that's reported within the surgical facility segment? You'd mentioned that you're providing anesthesia at 47 centers, 38 of your own. Just curious, on that external client anesthesia revenue, does that come in through the surgical facility segment, or is it coming in through the ancillary segment?

It's coming -- this is Teresa. It is coming through the surgical facilities segment.

Okay. So then, in terms of how you report revenue per case, that's total revenue per cases, but the case volume number is just your internal cases, so is there a way to think about external revenue, because it would be a mismatch in terms of your case volume denominator if that's external revenue, right?

The facilities or the transactions we picked up in the fourth quarter that were platform anesthesia companies, they primarily provide services to our facilities. And then along with those transactions, we did pick up some contracts related to other providers, but that's a minimal portion of the total revenue from the anesthesia practices. So I think as we grow that component of the business, we certainly can break that out, but currently, it's included in surgical facilities, just not a very small component of the total.

Okay. That's helpful, thanks. And then since you added capacity at the toxicology lab in Tampa, can you give us a rough sense of the current capacity utilization there and any rough sense of how much the lab accounts for in your ancillary services revenue versus physician practice revenue, other things?

I'll start with just the capacity, the physical plants and what we've been able to build there. And from a lab perspective, we have taken the approach of centralizing our capabilities and the logistics of centralizing. Those types of services have been very helpful and allowed us to keep down our overhead in providing a service, and obviously have incremental margins from that type of a business.

The capacity that we built out is -- we're currently running at about 25% capacity. And the facility can very easily ramp up to handle, obviously, more tests. And that's really looking at a day shift. You could argue that there's capacity to run a night shift in those types of facilities. We would put us at about a 25% capacity of that physical plant on our day shift.

Then to increase that capacity, it's very minimal of a capital expenditure. Usually, it's just adding a machine. Our facility is, for lack of a better term, prewired for incremental machines, and those run about $250 to $300 a machine. So pretty economical way to expand that physical plant.

And as far as the lab as a percentage of total, it's about 2% of our total revenue.

Great. Thanks very much.

Frank Morgan, RBC Capital Markets.

A couple of questions here. First, just an update on the Symbion synergies, where you are today. And I think your goal was somewhere in the $30 million to $35 million range for either revenue or EBITDA synergies. Just any update there.

And then my other question was, on these 50 practices that you have now, could you break out, give us maybe a revenue contribution from those? Thanks.

I think we'll -- talking on the Symbion synergies and the revenue synergies, obviously, we continue to have great progress there. Our goal has been to be substantially complete with those by year-end FY17, and we continue to move along that path. It'll probably leak a little bit into 2018.

But we've also had -- achieving these in multiple ways. So we've acquired anesthesia practices in Symbion markets. We are currently providing -- I believe the latest update was in nine markets where we've implemented our ancillary services in our Symbion market, so continue to have success there.

Continue in our pipeline and in our active projects file, which is other things that we're doing that we may have to acquire, but we're implementing in Symbion markets. We continue to have a significant list of those both from a physician practice perspective and ancillary service perspective and an anesthesia perspective. So continuing to make great progress there. I would say largely on track and continue to find opportunities that are incremental to that original thought process.

And as we talk about the revenue contribution, we've talked about on previous calls that prior to the merger with Symbion Surgery Partners, had about 27% of its revenue from ancillary services, which, as we speak to it from that perspective, includes anesthesia. Currently, post merger, we dropped down to about 10%, and then today, we're up to the 15% to 16% range. And included in that, we touched on the lab, which is 2% to 3% on a year-to-date basis, and physician practices are roughly 5%. (Multiple Speakers) in the balance of anesthesia.

I think one important part of that, Frank, also, is that even though were focusing and looking at Symbion opportunities to continue to expand our ancillary services and capture those revenue synergies, there also continues to be a lot of room on the Surgery Partners legacy side. And we have a little bit of trouble coming back to legacy from our perspective. It's been integrated.

And we look at, from a market-by-market perspective, when we can add services to an existing market. We tend to differentiate a little bit less whether it's a Surgery Partners market or Symbion market versus just being a good business decision at this point.

Got you. What about any color on, regionally, around the country, on the same-store volume trends. I know you said July was a little soft, but was there any particular pockets where you saw any variation in volume trends?

And then also, just an update on the ramp up of Great Falls. I know that one is still in a ramp-up phase, but any update there on the sequential improvement? Thanks.

Yes, I think from a, just looking at the same-facility perspective, really, as we talked about in July, we had the Southeast stood out with the same-facility growth perspective. We had a combination of less days, a holiday in the month. With ophthalmology being a player in that region, we had less Mondays. As you know, on Fridays, ophthalmology is very difficult to do cases due to the follow-up requirement on the day post surgical.

And then as we looked at the data, just taking a look at the way the school year started, which is an unfortunate thing that is difficult to build into your planning, but with school starting in the Southeast in the first and second week of August, we really had a significant compression of the physician vacation schedules as those schools started in the Southeast in that first and second week of August. So that really did have an effect.

And as we looked at August and September, again, back to our normal pace of low double-digit same-facility growth, and that's really where we got our same-facility growth in the quarter. So again, we don't usually break out our monthly same-facility growth. We look at it on a quarterly basis. But it was a very unique and anomaly on the way July played out in this year.

And just touching on Great Falls, we really saw the improvement as we transitioned from the first quarter into the second quarter. You could see that in the surgical facilities adjusted EBITDA margin line. And we continue to see improvement there, and Great Falls has performed, in the sense of the relocation and the ramp up of services, according to plan.

Kevin Fischbeck, Bank of America

This is actually Joanna Gajuk filling in for Kevin today. Thanks for taking the question. So in terms of the outlook for the year where you said you'll reaffirm your view around the revenues, but then you reduced your EBITDA guidance, so can you help us reconcile why revenue is not impacted by the items that are impacting the EBITDA outlook?

So as we've tracked through the year, we have been at the high end of the revenue guidance and consensus and been at the low end from EBITDA standpoint. The transition of our physician practices is one area that we've pointed to in terms of just some challenges related to margin and pull through. The other areas that we pointed to in the first quarter, Great Falls, as Frank mentioned earlier, being one of those, have done very well and improved according to plan.

So as you look at that surgical facilities, our core areas there, those margins have improved sequentially. And we've pointed out on the ancillary services side, just the physician practice integration and the impact there on a sequential basis. So we feel comfortable with our range of EBITDA for the remainder of the year, and really does reflect the impact primarily of the timing related to our new development.

Those transactions that we had teed up in the third quarter, those transactions experienced similar trends that we experienced in July, and so the prudent approach was to wait on the closing of those transactions to make sure that those trends followed the trend we saw in August and September and that those trends improved in the August and September, returned to normalized levels. So that was a little bit of the timing delay in the third quarter with those transactions. And then as we mentioned, we're teed up and ready to close on the remainder of our M&A that we guided to for the year.

Okay, great. And then so in terms of the change in the EBITDA guidance, you said that the slower closing of deals may be about $3 million or so, so can you quantify the impact of the hurricane?

Yes. So as we look to the lower end of the guidance or the high end of the revised EBITDA guidance at $184 million to $179 million, as you mentioned, about $3 million of that related to the timing of acquisitions, and then the remainder, roughly $1.5 million to $2 million related to the hurricane. And what we're seeing in October, obviously, as we have some visibility into, not the full picture from a full income statement impact, but we certainly have visibility into closures and case counts and those type things.

Great. And if I may squeeze the last one, on the ancillary margins, which were down year over year, you quantified a 100-basis-point impact. That's to the overall consolidated margin, or is it to the segment margin?

It was 100 basis points to the total. So we, on a quarter-over-quarter basis, it was 100 basis points. We were 16.6% in 2015 and 15.8% this year. With the lab rate impact, we would have shown slight margin improvement on a segment basis quarter over quarter. The ancillary services, the adjusted margin would have been normalized or adjusted to about 22% with the lab rate reduction.

And then also, the ancillary margins were actually also down sequentially, so is that because of the seasonality and the July month being slow for that business as well that explains the sequential deceleration, or rather, a worsening of margins in that segment?

Yes, I would say it really points to two things. One, the slower July volumes, which also impacted our physician practices and the lab, not just concentrated with our surgical facilities.

And then just the continued integration of our physician practices. When we isolate that on a standalone basis, we've definitely shown improvement in those facilities. Those practices are continuing to integrate and transition very well, but that did continue to some degree in the third quarter.

Great. Thank you.

John Ransom, Raymond James.

On the lab stuff, why wouldn't the commercial rates be helped somewhat by the Medicare rates? In other words, do you have an idea of what percentage of your commercial lab rates are based on Medicare rates?

Yes, so John, it's a little bit all over the board on that piece of it. From a commercial perspective, we have and have historically had commercial payers paying at somewhat under Medicare. We've had some paying us better than Medicare. And it's really circled right around that Medicare rate.

So our thought process, and as we take a look at the overall picture of rates and how the commercial players are working through that, we feel we do have some continued ability to have conversations with the payers and work more towards this new Medicare rate. So as they continue to absorb, and really, we've focused on starting those conversations once that rule was finalized. We are in the middle of that piece of it on having conversations with those payers and looking at the rates.

But again, I think at the end of the day, it may be a slight positive. But as you take a look across all the payers, you have some paying you below, some paying you above, and I think the normalization will not have a significant impact like it did on the Medicare.

Okay. And Teresa, you know this is my favorite question, but if we look at your year-to-date M&A spending, approximately how much revenue have you bought? What's the margin on that revenue? And how should we think about next year in terms of the progression of that EBITDA in terms of ability to drive even more margin through the machine?

Yes, so let me just recap just a little bit. So the first half of the year, we spent $117 million, and we acquired $18 million of EBITDA, and so that is obviously included in our numbers for the year. That's where we'll realize about $11 million. So that was about a 6 1/2 times.

And then as we roll into the rest of the year, again, we will spend the full CapEx as identified, $160 million. And again, we talked about on the last call that the spin has about $17 million of contingent acquisition consideration that we will reflect in next year and the following as it's paid out. So that $11 million that we'll realize in EBITDA for this year, we'll have revenue associated with it, probably in the $50 million to $55 million range of realized revenue.

So $50 million and $11 million. And what's the annualized $11 million, or is that -- I'm confused. If we annualize the $11 million, what's the full-year effect of that? Or am I missing that?

So actually, the $11 million is what we'll realize with first, second, third, and then what we're planning on in the fourth quarter, which will be very little EBITDA recognition just with the timing. So that's where we'll get to, roughly $11 million, $12 million of realized EBITDA from transactions this year. And sorry, let's just take it all the way through the end of the year, that will be about $63 million in revenue, $60 million to $63 million.

So $11 million is full-year run rate? Or that's just what you're realizing this year? I'm sorry; I'm thick.

That's what we're realizing this year, and the $63 million is what we would realize in revenue this year.

So if we were to think about next year, what's a good way to think about the impact on calendar 2018 versus calendar 2017?

Calendar 2018 you said?

I'm sorry. Excuse me. Calendar 2017 over calendar 2016. Sorry. It's been a long week.

Yes, it has.

We understand.

Well, as we look at next year, our spend would be in the $60 million to $70 million will be more on a normalized approach to M&A. We'll have revenue acquired of, if we break out that split between four to five surgery centers and 8 to 10 physician practices, that would be roughly $60 million of revenue acquired and probably about $8 million of EBITDA acquired.

But I'm saying the $11 million, that's not a 12-month number. That's just what you realized this year. So if we take into account timing, so you'd add $8 million for next year and then add a little bit for timing for a full-year effect, and maybe getting some more margin. That's what I was trying to figure out.

Okay, yes. So I gave you -- let's just recap because I gave you what we'll realize this year from the transactions, that'll be about $20 million of acquired EBITDA

So $11 million realized this year, but $20 million if you do the full-year effect?

Right. That's right.

So the way we should think about next year is if you get the additional $8 million and then maybe you buy another, say, $10 million in EBITDA, so it should be something in the range of $15 million to $20 million of EBITDA from full year this year and acquired EBITDA next year?

That's correct.

That was what I was trying to figure out. That wasn't that hard.

Well, I'm always trying to decipher exactly where you're headed, John. You never know. So that --

When you figure that out, please let me know where my head is at any point in time. The other thing I was wondering, if you look at stuff in the pipeline, Mike, what are you looking at now, and what's the mix of surgery centers versus physician practices? And frankly, where are you seeing the best returns?

And are you seeing any change in the competitive environment for physician practices just given the fact that some of the staffing companies are going through a lot of mergers and leveraging and other things like that?

Yes, so I think we're seeing, from a physician practice perspective, to start with that, we continue to have a significant pipeline. We're tending to focus on really three areas, new surgical facilities, both in existing and new markets. Physician practices. When it's physician practices only, there we're looking for surgical specialists, and we're ensuring that they are in existing markets.

And then we've really began to develop a pretty healthy pipeline around a third category, which are physician practices that are on the market in combination with maybe some ancillary services and a surgery center. So as we take a look at just physician practice with some ancillary services in a new market, we're not as necessarily as interested in that, but when it's combined with an ASC and they can put the three of them together, those have continued to grow as a piece of our pipeline. As we take a look at the pipeline, it's probably evenly distributed a third, a third, a third between each of those types of entities.

From a competition perspective, it's about the same on the ASC side. The physician services has been pretty light on competition, and that really hasn't changed. We're not going after the same assets as a team and a shared-in and those types of providers because we're very focused on surgeons and providing cases to our existing facilities.

Okay. And then my last question, I'm really intrigued. I know it's a small piece today, but your deal that you're doing with the payer in Florida, the way I understand it is you can bundle the surgery, the anesthesiologist, the surgeon, and the post-acute care. And so in doing that, what procedures, and how much do you think you're saving the payer, and are you making money on the risk side of doing this, or is it something you feel like is just a necessary evil to keep your market share.

I think it's a couple of important points. The types of cases that we're doing these types of arrangements on are new cases. They're cases that are higher acuity that we didn't have capabilities under the managed care contracts to do. So we're bringing in the higher acuity cases, negotiating a specific rate.

It takes different forms. They'll have inclusions of different pieces of the services, probably to a lesser extent, not as much on the rehab side unless we're working with physicians that have that capability within their offices.

But from the physician, anesthesia, implant, and surgical perspective, those are things that the payers are very interested in, so we're really focused on being able to bring those types of cases in. They're new, so were actually gaining market share in a new service. It's not something that we're accepting and saying, oh, it's just a necessary evil to do. It's actually incremental business.

And from as savings perspective, we're saving about 50% on these cases on what they would be paying, from a payers perspective, be paying to a hospital or an inpatient setting. So there's significant savings for the payer.

I think that the head scratcher has been and will probably be for some time, I think we're gaining some momentum on making the smart business decisions, but it's been head scratcher for quite a while on why payers will pay for the same procedure in a hospital twice as much as they'll pay for a surgery center roughly. So I think as that seems to be a motivator and has gotten the spotlight more recently, we continue to see a lot of momentum there and a lot of opportunity there.

Great. Thanks so much.

Josh Raskin, Barclays.

This is in (inaudible) for Josh. This quarter, a few providers have highlighted labor pressures. Are you seeing any of that? Is getting more expensive to recruit new doctors?

I think as you take a look our, from a salary perspective, we had talked about our first quarter having a little bit more of that due to the anesthesia business. But we continue to have, from a labor perspective, a big piece of our labor is coming from our nursing staff, our clinical staff. We continue to be the provider of choice and the employer of choice in those types of jobs. So as you work in a surgery center as a nurse or a clinical staff person, there's no nights, there's no weekend, there's no call. That is a preferable situation for many nurses and clinical staff.

From a physician perspective, we're not seeing any increases in the cost of recruitment. What we have seen is a little bit of overlap as we're bringing in physicians and replacing or retiring physicians or physicians that are moving out of the area. But pretty stable, I think, from a -- we're performing as expected on that area.

Okay. Great. If I could just ask you one quick one, going back to the ACA, is there a way for you to track if a patient is on an exchange plan versus a regular commercial plan?

It's difficult, but we've worked through that piece of it through, in the early implementation, we had seen an influx of patients coming in looking for authorization on these types of plans and these exchange plans and had difficulties as this was being implemented to get those types of patients authorized. And so we have a great way of identifying them as they come in.

And we've had to put in systems and processes to flush out the thought processes they have. The types of benefits that cover the types of procedures that we're going to provide in an ambulatory surgery center or in our physician practices? And again, it's the ACA-type revenues are probably more concentrated in California than they are anywhere else, and they're probably right around 1% or less than 1% of our total revenues.

Okay, great. Thank you.

Ralph Giacobbe, Citi

Can you give the month-to-month volume just given how unique it was in the third quarter? And then just wanted to go back to the timing of the deals. Obviously, impacted 3Q; impacted the guidance as well.

Just want to make sure I understand that this is nothing more than timing. Is there anymore competition? Are you finding it any more difficult to close deals, or are valuations moving up, et cetera. Just any context there.

I'll start with the last part first. Then I'll let Teresa talk about the breakout. From a competition perspective, again, the competition has not been any greater, but by no means, any less than usual. We're not have any difficulty closing these types of transactions.

I'll talk to the surgery center piece of it to start with. Those multiples are staying about the same. Competition is staying about the same. And obviously, we're very experienced in closing those types of transactions.

As we take a look at the physician practice transactions, again, very limited change in the competition of those practices. I think what we're doing is spending a little bit more time around up-front preparation and evaluation of the ability to integrate these practices quickly and what that plan should look like. So we are changing some structures of the physician practice acquisitions and the end-market transactions in that area.

But taking a look more at joint venture arrangements with physician practices and large physician practices instead of just doing some of these contingent purchase prices that are showing up in no-so-great places on our income statement. So from our perspective, we see some changes there, but it's not delaying us from getting these things closed. I think we've just taken a little bit of a different structure on some of these larger practices.

And just from an M&A perspective, so we were scheduled to close roughly on $45 million of M&A capital in the third quarter. We actually closed about $17 million, and so that was the delay there. As we mentioned, as we looked at those facilities, they had a similar result for July, and so it made a lot of sense to make sure that their trends returned to normal just like ours did.

And on that note, for us, our July same-facility revenue was essentially flat, and then we averaged about 13.6% in August and September. So August was a really good month for us, and September was good as well, but August was the better of the two months, which is, again, not unusual, but they average to about 13.6% same-facility revenue.

Okay. All right that's helpful. And then just my last one. Hoping that you could maybe talk through the final hospital outpatient site-neutral rule, how it may or may not impact you.

Do you think it will hamper at all some of the relationships you've talked about on the payer side in the future? And then maybe on the other side, how it may or may not impact discussions or partnerships with hospitals going forward.

Yes. It's a unique dynamic. So as they look at the neutrality and having the same payment structure, you're seeing that dynamic between -- you've always had a difficult time on having hospitals empty their ORs on their hospital campuses and move these types of cases to a lower cost setting and decrease their revenue.

There's been, obviously, some motivating factors for them to do that. And it's really a health-system-by-health-system approach on whether that's something that they're interested and motivated and have a strategy around doing.

So from a payer perspective, I think they still have the competence on not only the surgical aspect of it, but the other pieces of care that are associated with it on being in a lower cost setting if you are on an outpatient basis and that continues to be a focus from payers that we're speaking with and having those relationships, and I think it really turns into more of an opportunity.

A lot of these health systems have had difficulties in operating even under the higher rates. Now they have a situation where they're going to be and have the potential to be operating under lower rates and trying to provide the same type of services and have these facilities run very efficiently. And in the third quarter, we signed one agreement to complement the outpatient strategy of a health system in Florida. That's been going very well.

And we've found multiple inbounds from health systems that are taking a little bit of a different approach and don't necessarily need to have a three-way joint venture and don't necessarily feel that it's an issue for us to employ physicians in the market and provide the ancillary services, that they see that as an advantage versus a threat, and that tide has been changing a little bit for us. So it is an exciting area for us, and we continue to see more opportunity there from a growth perspective.

Okay, great. Thank you.

Chad Vanacore, Stifel.

So Mike, whatever happened to kids starting school around Labor Day?

I don't know. I came from the North, and the day after Labor Day was the most dreaded day of the year. And it seems that's moved to into August, which where I grew up, if you had to go back to school in August, you missed your summer.

Yes. I just figured it would be way too hot the Southeast to start in August. So you went through the same-store revenue impact. Can you quantify what the impact of the slowdown in July was on EBITDA from your expectations?

Yes. So as we look at just compared to consensus, it's about a $2.6-million miss, $2.5 million to $2.6 million, and so roughly $2 million of that was from the timing of acquisitions, and then the balance was related to the softness in July primarily.

Okay. Thanks, Teresa. And then right at the end of prepared statements, you talked about 1.9% increase, and I missed it. Was that on your ASCs overall, or was that just the labs (multiple speakers) and they've -- Go ahead.

I'm sorry. I thought you were done. Go ahead.

No. Go ahead. So what was the 1.9% increase specifically?

So the end of the remarks, we really talked about two things. We talked about the lab rate. Obviously, significant headwinds in 2016 that we face.

And somewhat unheard of, Medicare has given their final ruling that they will increase the testing rate, so some form of an admission that they cut too deep, and we'll see $2 million to $3 million of revenue increase on same testing on a year-over-year basis in the lab. And then Medicare had put the CMS ruling for the rate increase in the ASCs was initially put out there at 1.2%, and that has been adjusted to 1.9%.

So again, I don't think we'll get used to having our expectations exceeded by CMS, but we're in a situation this year that we are obviously getting a lot of surprises, so we'll take both of those. Both of those are welcome news.

It's always nice when you get the revised up. In comparison to the 1.9% Medicare rate increase, what are commercial rates increasing at?

We continue to see those happening in that 3%, 4% range. It gets a little bit complicated because we take a look at it as a blended rate across all CPT codes or all types of procedures. And in some places, we're getting the results than that because we're adding some of these higher acuity procedures, and we're sharing that cost savings for the payer on those larger, higher acuity cases across the full spectrum of our other procedures.

So as we save them money in one area, they're willing to be favorable in some of the other types of cases that we're doing and not necessarily completely localizing that benefit in just one procedure code, but spreading it throughout the types of procedures we do at our facility.

So those continue to be very successful. We find ourselves in conversations on increasing rates with payers. We don't find ourselves in situations where they're looking at making cuts, so that's been helpful.

Okay great. And then just one last one for me. What EBITDA multiples are acquisitions being done at now, and can you separate it from ASCs versus physician practices?

Yes. ASCs have just continue to be consistent. They've been in that seven to eight times range, six to eight times range, depending on specialty location, whether they have a CON or not. So that's been very consistent.

We don't find ourselves in situations where we're finding abilities to pick up surgery centers at five times because as we saw softness in the economy. We had tried that, and even with the softness in the economy, there's an unwillingness of physicians to transact surgery centers at lower levels. With that said, the industry has been very disciplined, and we don't see people coming in, with the rare exception of a hotly contested location that health system may be involved in as well, we rarely see them, those multiples, move up, so they've been very consistent.

On the physician practice side, again, very consistent. We're seeing in that four to six times range as we integrate and bring those into our system. We're finding that we're getting a turn or two better on an effective multiple once we bring them and integrate them.

That integration is probably taking a little bit longer than we expected. We had expected to be able to do that within six months. We're finding that it's probably taking us closer to 12 months to get those practices fully mature most post acquisition.

So again, very stable. As we take a look at more of the platform transactions where we're finding a surgery center and a physician practice in the same space, we'll break the valuation between the two components. Maybe a little bit of a benefit on the physician practice by having that integrated model, but pretty minimal change in those types of assets.

All right. Thanks a lot.

No problem.

Thank you. At this time would like to turn the floor back over to Management for additional or closing comments.

Thanks, operator. Appreciate everyone joining us today. Again, we continued to have great success in growing our facilities despite our softness in July.

Again, having that same-facility low double-digit growth has been something that we've been very focused on, continuing our strategy of both acquisitions, and having great visibility into our pipeline is something that we are excited to continue to talk about as we get into the new year. And appreciate you guys joining us today.

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