Surgery Partners Inc (SGRY) 2020 Q1 法說會逐字稿

Good afternoon and welcome to the Surgery Partners, Inc. First Quarter 2020 Earnings Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Tom Cowhey, Chief Financial Officer. Please go ahead.

Good afternoon. And welcome to Surgery Partners' First Quarter 2020 Earnings Call. This is Tom Cowhey, Chief Financial Officer. Joining me today are Wayne DeVeydt, Surgery Partners' Executive Chairman; and Eric Evans, Surgery Partners' Chief Executive Officer.

As a reminder, during this call, we will make forward-looking statements. Risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this afternoon's press release and the reports we file with the SEC. The company does not undertake any duty to update such forward-looking statements.

Additionally, during today's call, the company will discuss certain 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 these measures can be found in our earnings release, which is posted on our website at surgerypartners.com, and in our most recent quarterly report when filed.

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

Thank you, Tom. Good afternoon, and thank you all for joining us today. And I want to start today by recognizing the crisis facing our nation. The COVID-19 pandemic literally impacts all of us as nothing else in our recent history has. And we hope that this day finds you and your love ones safe and healthy. This crisis has also shown us our collective strength. I'm continually humbled by the dedication of our and the nations frontline workers, doctors, and particularly, our nurses and medical staff, who are fighting this deadly disease each and every day and saving lives. Thank you.

While the COVID-19 pandemic has presented its unique challenges for Surgery Partners, it is a testament to the strength of the team we built over the last 2 years to see how quickly and effectively they responded to the task. We started the quarter with 2 months that saw same-store revenues and adjusted EBITDA grow at nearly a double-digit rate. March was also off to a strong start. Before COVID-19 began its exponential spread, we saw volumes drop by nearly 75% as some of our facilities reduced operations to a day or 2 per week, serving only the most critical patients.

Our team quickly mobilized to the task at hand, reducing facility level costs, reducing corporate overhead, slowing capital expenditures and distributions, while tightly managing working capital. Eric will talk about our actions in greater detail. But know that this team reacted swiftly, decisively and responsibly to preserve our business and liquidity.

To further enhance our liquidity in this uncertain environment, on April 22, we closed an incremental term loan raise that, when combined with assistance from government programs, should give us ample availability to weather this storm. Tom will speak to our liquidity efforts and position in more detail. But our ability to execute a financing transaction in this market, that was 13x oversubscribed, speaks to the power of our business model and the execution of our teams. Strategically, we've never felt stronger. Surgeries are back on the rise, PPE availability is increasing, states are lifting restrictions, and we are beginning the process of ramping our operations back up after the pause in operations our facilities experienced for the last several weeks.

Further, this crisis has demonstrated the power of our short-stay surgical model to the health care ecosystem. Now more than ever, patients, providers and payers recognize the value, convenience and safety of our facilities.

Our physician recruiting efforts in March and April have yielded strong results. Our pipeline of M&A and partnership activity remains robust. Stand-alone facilities have a new appreciation of the benefits of being part of a larger organization, and we are looking forward, over time, to return and potential acceleration of our previous growth trajectory.

With that, let me turn the call over to Eric to talk about the company's operations. Eric?

Thank you, Wayne, and good afternoon. Today, I'd like to review highlights of our most recent results and then provide an update on our COVID-19 planning. Tom will then close our prepared remarks with greater detail on first quarter financial results and liquidity before we take questions.

We entered 2020 with a strong plan to deliver another year of double-digit growth. Our investments in physician recruiting were demonstrating significant traction. Our managed care efforts were delivering robust rate growth, and our portfolio positioning over the last 2 years had created a stronger core set of assets that we were continuing to optimize as we matured our Surgery Partners' operating system.

As evidence of our progress, February 2020 year-to-date results saw adjusted revenues up over 12% over the prior year period, with adjusted EBITDA up nearly 10%, and a seasonally long March expected to further add to our momentum. Our confidence levels in our outlook were high. However, by mid-March, it was clear that troubles overseas had rooted themselves in our country as well. In response to the growing pandemic, on March 14, the Surgeon General recommended that hospitals and health care systems consider stopping elective surgeries. On March 15, CMS issued formal guidance on how to triage and delay elective surgeries to preserve personal protective equipment, PPE, and limit exposure to the virus. By that point, our command centers were up and running, and our executives were meeting daily to react to these measures and additional state mandates curtailing procedures and to make the critical and necessary decisions to navigate through what has become an unprecedented crisis.

By late March, our surgical hospitals were performing surgical procedures at approximately 20% to 40% of normal operating levels, with significant variability based on specific geographies. Our ASCs were performing surgical procedures at a reduced schedule of 1 to 2 days a week, focused on our most critical procedures, resulting in case volumes that totaled approximately 10% to 20% of normal operating levels.

In response to the COVID-19 outbreak and elective surgery restrictions, we took immediate actions to, first and foremost, ensure the health and well-being of our colleagues and patients as well as to help preserve our liquidity. While some of our costs naturally flex down with volumes, specific actions we took included: furloughing a significant portion of our workforce and reducing corporate headcount; converting salaried workers to an hourly rate; negotiating with the company's vendors and lessors for revised payment terms; and reducing pay for certain top executives by 50% and reducing salary for the majority of our corporate employees by 20%. These actions helped lower cash operating expenses by approximately 45% to 55%, and most were fully implemented by the end of March.

As quickly as we reacted, the impact on the quarter-to-date results of the company's rapidly declining revenues are evident in the results we announced this morning. Quarter-to-date March revenues grew at 6%, well below the pace we established through February. Adjusted EBITDA contracted by approximately 8% as compared to the prior year quarter.

Same-facility revenue was positive with large case volume declines more than offset by significantly higher increases in net revenue per case, both a function of our rate progress, but also indicative of higher acuity mix at the end of March, when only medically emergent or urgent cases were performed.

Our current data suggests that these late March trends stabilized in the month of April. And we're pleased to report that many of our key states either have already or will be soon reopening for elective procedures. We estimate these geographies that generate over 95% of our facility level EBITDA will be performing additional procedures in the month of May. Key geographies that we are closely monitoring include: Texas, which represents nearly 15% of our annual revenue and restarted elective procedures on April 22; Georgia, which also represents nearly 50% of our annual revenue and restarted elective procedures on April 23; California, which represents approximately 5% of our annual revenue and restarted elective procedures on April 24; and Florida, which represents approximately 10% of our annual revenue and restarted elective procedures on May 9. It's also worth noting that other significant geographies for us, such as Idaho, while impacted by the COVID crisis, never implemented elective surgery restrictions.

As we think about reopening and increasing surgical procedures over the next few weeks, we are focused on 3 key priorities: first, ensuring that our facilities are safe places to conduct procedures. We are strictly following CDC guidelines as well as screening patients, visitors and our colleagues to ensure compliance. Our facilities follow stringent cleaning policies, which have been further enhanced in focus and frequency, and most only see prescreen patients by appointment, which helps to reduce our overall risk profile, making our facilities highly attractive options in this environment.

Second, and closely tied to our first principle, we are focused on ensuring appropriate use in quantity of PPE. Our teams have been hard at work thinking about the supply chain implications of COVID-19 since January given the importance of Wuhan and the Hubei province to the world supply of disposable medical equipment. Our procurement teams have done an exceptional job this year, proactively managing our supply and actively securing alternate supply on the spot market. While appropriate use and conservation of PPE remains a focus of our entire team, our channel checks indicate that some of the most difficult items to find, like masks, should become much more widely available over the next few weeks. While demand for critical items remains higher than ever, we believe we have sufficient inventory to reopen and to ramp up our operations.

Finally, we have been focused on managing our costs to scale them appropriately with volumes. It will take time to get back to traditional levels of operation, and we are committed to adding staff and cost back into the system in a very responsible manner and commensurate to revenue.

One final thought. Our recruiting teams have never been busier. In the first 3 months of this year, we recruited nearly as many new doctors as we did in the first quarter of 2019 despite the COVID-19 crisis. We believe that this crisis has fundamentally changed the way that patients and surgeons will think about the role that purpose-built, short-stay surgical facilities will play in health care delivery. We also believe that scaled independent operators, such as Surgery Partners, will be uniquely positioned to grow in this new marketplace.

With that, I'll turn the call over to Tom, who will provide additional color on our financial results. Tom?

Thanks, Eric. Today, I'll spend a few minutes on our first quarter financial performance before moving on to liquidity and commenting on when we expect to update our outlook. Starting with the top line. Surgical cases declined to approximately 116,000 in the quarter, driven by COVID-19-related restrictions in the month of March. Surgical case volumes were up nearly 2% through February.

Adjusted revenues for the quarter were $451 million, 6% higher than the same period last year, including approximately $10 million of contribution from our New Community Hospital in Idaho Falls.

On a same-facility basis, total revenue grew approximately 1% in the first quarter as higher acuity mix and improved reimbursement rates contributed over 11% to this growth, partially offset by case declines due to COVID-19.

Our best estimate is that there were approximately 14,500 canceled or deferred cases in March due to the coronavirus outbreak, which would have generated nearly $45 million of adjusted revenue and driven quarterly adjusted EBITDA growth into the double digits, consistent with our previous full year guidance.

Turning to operating earnings. Our first quarter 2020 adjusted EBITDA was $46.5 million, an 8% decrease over the comparable period in 2019. The driver of the decrease over the prior year quarter was related to COVID-19.

During the quarter, we recorded $12.6 million of transaction, integration and acquisition costs. Of note, first quarter 2020 transaction, integration and acquisition costs included approximately $7 million of EBITDA losses associated with our de novo Hospital in Idaho Falls, which was modestly better than our projections. As I've noted before, we expect to report results from this facility separately throughout 2020.

Moving on to cash flow and liquidity. We ended the quarter with a cash balance of approximately $195 million of cash and equivalents. As previously noted, on March 18, the company drew down the available capacity under its $120 million revolving credit facility, excluding approximately $7 million of capacity that remains reserved for outstanding letters of credit.

Of note, during the first quarter, Surgery Partners had operating cash flows of approximately $29.2 million. We had distributions and noncontrolling interests of approximately $24 million. We would remind investors that, in light of the COVID-19 crisis, we project that second quarter distribution should be lower than historic baseline as distributions are reduced to preserve liquidity.

We spent approximately $12 million on capital expenditures in the quarter, primarily before our COVID-19 action plan took place. In the current environment, we are closely watching capital expenditures and generally only advancing those that are safety related. And we deployed approximately $5.5 million early in the quarter, primarily related to the acquisition of a new ASC in the state of Ohio.

As previously discussed, in April of 2020, we issued $120 million of new term loans for general corporate purposes. This highly successful offering, which was approximately 13x oversubscribed, was a critical part of our COVID-19 liquidity planning, ensuring that the company has ample liquidity this year.

The company is also closely monitoring legislative actions at federal and state levels, including the impact of the CARES Act and other governmental assistance on its business. Programs that may benefit the company include: The social security payroll match. The CARES Act provides for the deferral of the social security payroll tax match, which will be deferred for the remainder of 2020. The company expects that this will result in not having to fund approximately $15 million to $20 million of taxes in 2020. Half of this amount will have to be paid in December 2021 and the other half in December of 2022.

CMS direct grants. As part of its efforts to distribute CARES Act funds, starting on April 10, 2020, Surgery Partners facilities received approximately $45 million of grants. Our current view is that these grants will be recorded as revenue in the second quarter of 2020.

Medicare Advanced Payment Program. The company also received approximately $120 million of accelerated payments prior to April 26 when CMS suspended this program. Per the terms of the program, we expect to start repayment 120 days from receipt of funds, and we project that the vast majority of our advanced payments will be settled this calendar year.

The company's ratio of total net debt-to-EBITDA at the end of the first quarter of 2019, as calculated under the company's credit agreement, was up slightly at approximately 7.3x, primarily as a result of modestly higher net debt at March 31 and lower trailing 12-month adjusted EBITDA in the current quarter.

The company has an appropriately flexible capital structure, with no financial covenant on the term loan or our senior unsecured notes. Importantly, as part of the incremental term loan rate in April 2020, we the company's lenders, under its revolving credit facility, waived our leverage covenant on that facility for the remainder of 2020 and provided substantial flexibility for the calculation in 2021.

Moving on to our 2020 outlook. As you know, on March 23, due to the evolving unpredictable and unprecedented nature of the COVID-19 pandemic on the global economy and our business, the company withdrew its full year 2020 outlook. While we remain optimistic that the month of May could bring materially higher volumes than we experienced in the back half of March or April, the company is not providing an updated outlook at this time. We expect to be in a better position to provide an update to investors when we report June results later this year.

In summary, while Surgery Partners has had a strong start to the year, the coronavirus pandemic has impacted our business across the country. Through quick and decisive actions, our team has hopefully proven to investors that we are prudent stewards of your capital, and we bring that same level of diligence and focus as we reopen and prepare for the new opportunities that, we believe, will be available to our business on the other side of this crisis.

With that, we will open the call for Q&A. Operator?

(Operator Instructions) Our first question comes from Kevin Fischbeck with Bank of America.

Great. So I guess you guys have probably already been trying to reschedule procedures -- would like to see if there's anything -- initial color on what percentage of procedures that were deferred have already been rescheduled and back in the pipeline and what percent you think ultimately will be performing?

Kevin. Thanks for the question. First, let me just -- for all those participating, we appreciate you being here. We recognize that this is a little bit unusual, and that all of us are honoring the stay-in-shelter orders and it doesn't allow us to be face-to-face during this period as even a management team. But that being said, let me start by saying that we feel very fortunate, Kevin, in that. Obviously, these were not procedures that we were waiting to come to us, but rather many of these were procedures that, obviously, we've already rescheduled. We've been working with our surgeon partners. And as we started to shut down facilities, honoring the state and federal requests that came with that, we were regularly reaching out to those patients to find the right time when we would start to reschedule. So with that, I'm going to ask Eric to comment in a little more granularity and give you some color commentary around how things are actually ramping up.

Yes, Kevin, thanks for the question. A couple of things I would say. We're obviously, we're guardedly optimistic. There's a lot we don't know about the pandemic, and a lot of things could change. It's incredibly different by geography. But in general, we are very, very pleased with the amount of momentum we have in scheduling. So early returns show a significant uptick week after week. And so I would say this, that I don't want to get into giving you a specific percentage just because there are so many unknowns with how the pandemic will go, what will happen in a local market, how physicians react. I will tell you, in general, our physicians are anxious to get back to work. So far, our patients have been very open to coming back for procedures. We have facilities that are ramping up slower, and we have facilities that are already back to budget. And so giving you a percentage would be too early at this point. That's the reason we pulled guidance. But we're certainly pleased with the early results as markets start to open up.

All right. Well, then, I guess, when we think about the volumes coming back, I guess, at some point, this should get back to normal. And then do you believe that there will be pent-up demand that we could see potential periods of above-average volume? And if so, either way, are there gating factors to that volume coming back? And do you have enough extra -- excess capacity? Do you have enough PPE? Is there enough physician available in the day to get everything kind of back? And how do you think about those types of gating factors?

Kevin, this is Wayne. A couple of interesting comments. I'm going to ask Eric to elaborate in just a moment. But first and foremost, I think as you heard Eric say, while we can't necessarily tell you at what pace we'll get back to normal, we've been pleasantly surprised that we have some facilities already almost back to normal, which is a little bit surprising at this stage, but obviously, several are behind that. And so I think there's obviously a belief that we could get to capacity, maybe sooner than maybe many of us would have thought. And then the question becomes, well, what if there's excess demand? I would tell you, first and foremost, that I do think there are many reasons we could get additional incremental demand as the year progresses, emphasis added there. And that's because of what we've seen on the physician recruiting fronts. And I'm going to let Eric elaborate on that in just a moment.

The other thing that I would highlight is around capacity. That is not necessarily a concern for us. If you remember, we typically run normal hours Monday through Friday. We don't typically run past 6 p.m. It wouldn't take much for us to open a few more hours each day. We're typically not open on Saturdays and Sundays. As you saw at year-end last year, we can flex up and down and actually open up on Saturdays and Sundays. So the ability to add anywhere from 25% to 40% additional capacity is very much available to us if the opportunity presents itself. But I'm going to ask Eric to elaborate a little bit on the physician recruiting. Something that's really relevant of what we're seeing right now in this environment. And I also think, Eric should comment on PPE because, I think, that was a significant gating factor that we said was an issue when our country was first impacted by this. And he can kind of tell you where that stands today, and whether we think it will impact us going forward. Eric?

Yes, Kevin. So as we go in a little bit more detail. Certainly, I would just concur with Wayne's comments. As far as capacity goes, we feel very comfortable with our ability to flex up. And we certainly know that there is a backlog, right? So we have a number of cases that will need to be done. And the question by market, of course, is how fast those will get rescheduled? We're encouraged early on. And there certainly is a possibility we could end up with, I think, excess demand. There's some question, though, obviously, primary care is getting back up to speed. There's a lot of questions around just consumer behavior. But early indications would say, there's a real chance for that. And I would just say big picture, net-net. We feel coming out of this pandemic and coming out of the closure period, we are net-net better positioned for growth than we were before.

So high level, longer term, we feel like very, very bullish on the business. There's a lot of questions around just how fast it comes back, and we're certainly encouraged by early signs.

To go to Wayne's point, from a physician recruitment standpoint, it's notable that we were close to having the same number of new physicians even with the pandemic hitting. And we've been really impressed, too. I mean, the physicians we've added this year have been significantly higher producers and higher net revenue. And so we continue to be very, very successful in our focused physician recruitment. And that's not only on our traditional path, but in the time of this closure or slowdown, we've had a lot of physicians in markets that have reached out to us or that we've made contact with them are newly interested in having a purpose-built outpatient facility that's focused on these procedures.

So I would say my outlook is very, very positive. The timing is hard to know because of consumer behavior. We know that there's a pent-up -- backlog of patients that we're going to be scheduling. We don't know how fast new patients will return, although early signs are very positive. And to add to that, and I think Wayne's major point is, we do see real upside in physicians who have a backlog who maybe can't get into their hospital they're used to going to or maybe want a different location-based on patient request or their own comfort that's really just focused on doing outpatient surgery, which our facilities, obviously, are very, very specifically focused on doing just that. So overall, very, very optimistic longer term. In the short term, there's still a lot of unknowns that we have to manage through.

And then maybe just last question. As part of that longer-term growth rate, how do you guys think about the impact of a recession? It seems like we're heading into one that may last for some time. So how do you think about the impact on volumes and payer mix and if there's any offsetting cost items?

Kevin, thanks for the last question there. Let me first just start to remind folks that if you were to look at history, in previous recessions, and I would take you back to 2008 and 2009, it's important to recognize that what you would have thought would have intuitively been a behavior, which is that people would really hunker down and postpone elective procedures, we actually saw just the opposite. In fact, you can go back and look at how successful the providers who were in those early years of the recession and how much of an impact managed care companies took. And part of the reason is that what happens is that many individuals recognize that they have COBRA coverage, and they recognize that if they were going to be laid off for an extended period of time, this was actually a more opportune time to get those elective procedures done when they could have more time to recover and to do it while they still had coverage being provided by their employer. And so that's one dynamic that, we believe, could still play out.

The second concept I would make, and some people may question would say, well, aren't deductibles higher today than they were back then? But the answer is not necessarily the case. In fact, in many cases, CDHP had already worked its way through the system. And so -- and many employers have actually incentivized employees to go to lower cost settings by waiving deductibles. So if anything, I would call it net neutral and looking at deductibles from back then versus today. So I think from our perspective, we view this as an opportunity to ramp up rather than ramp down in the recession.

And then I would also simply add that because we're very focused on higher acuity cases, and as you know, Medicare has now moved TKAs to our environment, and hits are now in the HOPD setting, and we view that to be the next around the coming -- following year, I think we're really well positioned as well for the growth in Medicare, which is kind of a new piece of pie for our business model. So I don't want to minimize that there could be impacts with the unemployment. But I would also say, I think we're well positioned based on history and based on the new expansion that we're seeing into the outpatient setting for Medicare.

Yes. Wayne, the only thing I'd add there is, like you said, our ASC cost model is able to, in many cases, take on incremental government patients, especially of higher acuity and actually drive a nice margin. That's not as easy for the acute care hospitals to do, and that number obviously represents the savings versus the acute care hospital. So we feel like the government payers shift, obviously, it's not a positive. But as incremental business, it certainly is helpful.

And then on the payer side, look, it will be interesting to see how payers react coming out of this. We've already seen a few payers that have become more active and aggressive on actually creating professional fee increases to do cases in the appropriate care setting. So we think there's some offsets there. The one thing I wanted to go back to that I didn't mention that Wayne asked me, too. On the PPE, Kevin, one of the big reasons that elective surgeries were shut down early on was really this idea around keeping capacity to deal with the surge of COVID patients. And I think as that settles down and as we restock our PPE shortfalls and inventories, we don't see a reason, even if COVID were to come back. This is a very safe way to do care. We've had very good results even with the outbreak. And so my -- at one point, I think it's really important for everyone to understand is if we have enough PPE, I don't see a reason, even if there were an increase again in COVID cases, for us to not be able to stay open and provide great health care to patients.

Our next question comes from Brian Tanquilut with Jefferies.

I hope you guys are all doing well. I guess, my first question for Eric or for Wayne. As I think about the health care system exiting COVID, how are you thinking about the shift of procedures from hospitals to you guys? I mean, the hospitals are, obviously, also dealing with reramping. Should we -- do you guys think that we're going to see more doctors saying, I'll do more procedures in the ASC setting rather in the hospital since there's still COVID risk there or forget, for whatever reason?

I'm going to let Eric elaborate on this because we've had some pretty interesting experiences. Let me just highlight a couple of things to keep in mind. We've actually got a few of our facilities now with these hospitals without walls that have been licensed now to perform certain hospital procedures, which, we think, is an interesting dynamic in the environment. Two is, the physician preferences are going to be very relevant, and more importantly, their preferences are being driven by their patients and how they feel about going to an environment where you could still have a ER actively bringing in COVID patients. So it's been an interesting dynamic to see both how our surgeons feel now in this new environment coupled with how their patients feel.

So Eric, maybe you want to elaborate on some of our experiences in our different markets?

Sure. Yes. And I guess I'd start off with, net-net. Obviously, we don't think -- this in no way hurts the transition of patients from hospitals, and we do think, over time, the impact of the shutdown and just people focused on their health and wanting to be as cautious as they can about exposure, we think we're well positioned just given that we're focused on simply providing surgery, and we can do some things from an access and control standpoint that's hard for larger settings. So I think that's certainly a good thing.

I would say, across our markets, we have seen some early indications. We've got some physicians who, in the past, had not been interested in ASCs, that have become more interested. We have current physicians who, due to the situation, are bringing higher acuity patients to our ASCs with good results, and I think that certainly opens the door for us to continue to do that and make the case that there's more and more stuff we can do safely in our ASCs. So net-net, I never want to bet on consumer behavior, especially in the short term. I would tell you that I don't think there's anything that's happened that would make -- that would slow down the transition. I do think probably, net-net, it's going to pick up the transition when it comes to both consumers and physicians. Early indications would point to that. But again, there's a lot of uncertainty, a lot of things that could happen over the next coming weeks, but we are optimistic about the impacts on our business.

I appreciate that. And then I guess, Wayne, more strategically, you obviously loaded up the balance sheet with more debt, prudent move in this environment. But how are you thinking about future cash flows given the debt load? Are we at that level where, basically, most of your cash will be sucked up by the interest expense going forward?

Brian, thanks for the question on this one. Look, first and foremost, our priority was to prudently put as much cash on this balance sheet as we could possibly do. And I'm going to have Tom comment in a moment just so everyone knows the kind of cash flow we have. But what we didn't know is whether or not this would be incredibly prolonged. And we still don't know today. We think we should prepare for that. But I do want to remind everybody that, while we're very optimistic about what we're seeing in May already, we are still in the early innings, and we should all just keep that in mind. But that being said, look, I think long term, we were always planning to delever through growth, but we knew to really become offensive at some point. And we believe we were in a position right before the pandemic to move on the offense. We believe we are in the position to be even more offensive now, so we make even more opportunities that will present themselves that we will have to be thinking about other means and mechanisms to bring capital in the organization that will allow us to really put to work this chassis that we built.

And so we recognize the leverage is a concern right now, but we want everybody to be aware that, that cash we borrowed right now is sitting there and can easily be paid back down if we think things normalize sooner than later, or can be deployed aggressively for M&A because we have a robust pipeline, of which much is under LOI, but we have hit the pause button on that and not close any of those until we see how this progresses.

With that, Tom, maybe you might want to highlight a little bit about our cash position so people understand both our ability to pay down existing debt if we so chose, or to put it on the offensive at multiples that are below our current leverage.

Sure, Wayne, I would be happy to do that. We don't typically provide mid-quarter updates. But as you think about where we were at year-end -- sorry, quarter end, $195 million of cash, and you think about the advanced payments plus the proceeds from the term loan (inaudible). We're well over $400 million worth of cash and equivalents as we sit here today, which gives us a lot of flexibility, but it's -- we're prudent right now. We're being cautious. We'd like to make sure that what -- the shoots we're seeing in May are going to continue to grow, and we're going to see the business continue on a nice trajectory to recovery. And we want to see how close we get back to the line that we were previously on. But we believe that this business, if anything, is strategically stronger over the long run than it was before this crisis, on the other end of this crisis. And as you think about our goal of growing adjusted EBITDA by double-digit rates, really what you're talking about in terms of interest expense, should we leave that capital outstanding past the 1-year mark, would be really 4 to 6 months worth of pushback on kind of your breakeven point. So there's a -- it's -- I think it was a calculated move to really help our overall liquidity position. We think of it as an insurance policy. And it gives us a lot of option value as we think about how we might want to go on offense on the other side of this crisis.

Yes, I totally agree. I definitely understand the prudence of that. But I guess, last question related to those comments you made. How should we be thinking about modeling the cost structure at this point? I know you've had adjustments with the wages and all the other operating costs. So as I think about second quarter going forward, if you mind just helping us think through modeling the cost structure?

Yes. I'm going to ask Tom to comment on this in some detail. So one thing I want to remind all of our listeners is that our model is so unique that if you think about variable cost being around 40%, we took that out right out of the gate, and we actually then flexed fixed costs, which is highly unusual, but we flexed down. We asked our executives to take substantial pay cuts across the board. We took other fixed costs out of the system. And we did it with an intentional bias that we thought it was the prudent thing to do in this environment. But we did it also knowing we had to be able to flex up quickly if things begin to ramp up again very quickly. And so as you've heard from Eric early on, we are seeing positive momentum. But I would anticipate that we would flex up slower even with the momentum, then we flex down. I mean, flex down, you had to take the actions aggressively and immediately. And we started that in mid-March. The flexing up, I think we're going to continue to pull the variable cost as needed. But I think even some of those fixed costs, we're going to hold on for a couple more months until we can see if things are actually improving at the level we expect and see them improving. But with that, Tom, maybe you might want to highlight a little bit around some of the things that have been done, and how you feel about that timing?

Yes. I guess, as you think about the overall cost structure, and you look at some of the big line items on the P&L, there are some that are going to be variable in nature; supplies, which is a very large portion of our expense; the medical and professional fees, as you look at those, those pretty naturally flex up and down with volumes. There's some outside medical services in there. There are cleaning services in there. There's a variety of different factors. When you're only working a day or 2 a week, you aren't spending as much on some of those as possible -- as you might have been otherwise. And then it really gets into what have you done with your fixed costs? And I had a mentor who once said, "All costs are variable over the long run." And I think it's really just a question of how long is the long run. And for us, it was about 2 weeks. We converted salaried workers into hourly. We furloughed employees. We reduced corporate overhead. We reduced corporate salaries. We worked with lessors to get deferments. And we gave you the range of -- as you think about the quarterly, we gave you the fourth quarter, I think, we've got about $380 million worth of kind of cash expenses if you look at the cost structure ex D&A. And we're at, call it, 50% right now, 45% to 55% was the range we gave you in the 8-K in terms of where we thought we had flexed down to on a cash burn for those operating expenses.

As we -- on the way back up, we've got to be really cautious to let those back out, and our operators are doing an outstanding job on this. They are pulling together ships in a way that is the most profitable for the organization and for our partners. We are thinking about what the staffing levels are, and we're rethinking how we do certain things to try to take advantage of this really unique window to try to reimagine the way that we do certain things. And so it's hard to tell you exactly what it's going to look like on the way back up, only to say that we wanted to trail the volumes a little bit because we want to make sure that we don't have to do this again and take 2 steps forward and 3 steps back.

Our next question comes from Whit Mayo with UBS.

Eric, I'm just trying to think from like a perioperative standpoint, can you talk a little bit about how cases are logistically working now? And I guess what I'm really getting at is, can you operate as efficiently on a, per-case basis? I think the answer is no. But just wondering how you're looking at case time throughput, turnover, any new processes or technology that you guys might need to look at to enhance productivity?

Thanks for the question, Whit. So yes, I mean, obviously, there's additional steps we're taking in the perioperative space, whether when it comes to cleaning between cases, the PPE that's required to be changed out between cases, we're thinking about air flow changes. There's a lot of things that we're putting in place to make sure we keep our colleagues, physicians and patients safe.

With that said, I think within our setting, we have capacity, and we have physician patients right now, as you can imagine, they're pretty patient in understanding of what we're trying to get done. And so we absolutely believe, while we will lose some efficiency, I don't think it's so monumental in many of these kind of shorter cases. And we definitely believe that we can work around those. And part of the way we're doing that, too, is this downturn has given us a chance -- or this downtime has given us a chance to kind of reevaluate how we think about block scheduling, work with our docs to change out the way we scheduled various cases on various days, and we've actually created, I think, some more capacity during this time with the way we'll do things going forward. So net-net, yes, there's going to be a little bit of extra time on case turnaround. Some of that is managed in the ASC world when you're able to use a couple of rooms when physicians are able to bounce a bit. But I would just say, in general, we don't -- we do see it as it's going to slow us down on turnaround times. We don't think it's so significant that it's going to create any kind of true capacity issues for us, if that answers your question?

Yes. No, that's really helpful. Maybe just a follow-up on Kevin's question for a second back just to the economic impact. And you sort of alluded, Eric, to maybe looking at government business a little bit differently that historically hasn't been a payer that has been necessarily that attractive for surgery centers. Maybe if you could just elaborate a little bit more on how you may be approaching this differently?

Sure. So a couple of things I'd say there. So let's start with Medicare. I'll differentiate between Medicare and Medicaid. With Medicare, because we're doing higher acuity cases with Medicare patients, the reimbursement, given our cost structure on those cases, it tends to be okay for us. We can drive a margin, whereas the hospitals might be negative. And so -- and where you get the big benefit when you think about growing that Medicare share is when physicians bring those Medicare patients they tend to bring all their patients. They don't want to split their day. And so we see Medicare patients, in general, as a way for us to grow our overall business, while clearly not as profitable as commercial patients. They are profitable for us. We're able to manage our cost structure in a way that a lot of hospital systems aren't going to be able to get there. And so we feel really good about that ability.

And then on the Medicaid side, it's a state-by-state issue. Some states are pretty good on helping make that work. And certainly, even with Medicaid, because of our cost savings, there's some room there to find ways to make that work. And it's again, state by state. There are some cases where -- or some states where Medicaid is really hard for us to figure out how to make work. But I have a feeling, given the cost pressures, we're already -- as I mentioned earlier, we've seen some big blues across the country really take aggressive stance to raise professional fees for physicians who do cases in ASC setting. I think there's going to be opportunities for us to find whether it's shared savings, which we're doing with some payers across the country, or other models to actually make some of those cases work, where in the past, maybe they weren't things we consider. So I think it -- there's a lot yet to be seen, but I'm optimistic, given our structure versus the rest of the health care system, that we can find ways to add that volume and make it work in our facilities.

Okay. Maybe just last one for me. I was really curious, Wayne and Tom, to get your perspective on just COBRA? And how you think consumers may look at COBRA? And I guess 30% of patients signed up for COBRA. Last go-around, it's obviously a lot more expensive. There's not a lot of premium support today. So I'm just kind of curious how you guys think that COBRA may work out in this recessionary environment?

Yes, Whit. Again, it will be interesting to see if what we saw back in '08 and '09 continues to play. I think I said, COBRA is always more expensive than what the employees used to. The question is what alternatives are available to them? And in many cases, it's a better alternative than what is immediately available to them. Now any folks will research and figure it out. But again, we know the behaviors we saw last time with COBRA were uniquely different and that people actually did utilize it, did enroll and did get elective procedures that were postponed actually completed. I do think they are one of the more unique changes as well as if you go back almost a decade. The shift to ASO has grown meaningfully in the last decade. It was rapidly moving away from fully insured to ASO, and it's continued to move. And so the other thing to keep in mind is that, with that ASO shift, large employers and even medium-sized employers have become much more intentional, though, in finding ways to incent behaviors to take elective procedures out of high-cost settings into lower-cost incentive environment. And so the comment I was making with -- earlier was that even if you model and assume there's some kind of a cost shift that's higher than what it was 10 years ago, I think that's true potentially on the premium side, clearly, maybe a bit on the deductible, it would most likely be offset, though, by the various incentive programs that have been built in the last decade to have people actually get the elective procedures done because those end up being meaningfully less than what they would have experienced a decade ago.

So unknown environment, but history would say that people actually get procedures done, not stop them. And again, for what it's worth, we're only 1 month, in the month of May, at this point, halfway through when states are opening, but we are seeing volumes move up faster than we had anticipated. And in states that have been open for over a week or so, we've had a few of these already, where they're already getting to our original run rate budget. So early indications would say, behaviors would say, people are going to go get these procedures done if they can get them done.

Yes. No, that's helpful. And I guess, it's way too early from a revenue cycle perspective to think about collection changes, I presume that it's just too early, right? Tom? Yes, I guess...

Yes. There's a couple of things that we're doing on that with, #1, just as we think about disruption to the payers' claims processing, we've been monitoring that very closely. And actually, we've been pleasantly surprised with what we've been seeing come in from the AR. So that's been a positive. On the self-pay side, we're actually looking at some new alternatives to help there to try to make that as easy and as smooth a choice as possible for as many consumers that want to get that care. We think that's really one of the things that could really be a differentiator moving forward with some of those patients.

Our next question comes from Ralph Giacobbe with Citi.

I may have missed it. Did you give April and, perhaps, first week of May trends? I know you said surgeries were sort of back on the rise. Just hoping to get a little more quantification around sort of volume and revenue would be helpful as well?

Ralph, we did not give specifics on April or May, but we'll try to give you some broad goalposts. And Tom, please elaborate further if you think it's warranted. But keep in mind, around mid-March is when the vast majority of our facilities were either mandated to be shut down, or because we were preserving PPE for the greater good of the country, we started to substantially reducing procedures. And so, come mid-May, you can gauge what we did disclose, which is we think -- I'm sorry, mid-March, excuse me, Ralph, that we thought it was about -- we were down about 14,500 surgical procedures just due to COVID. And that kind of 2 week window towards the end of March, that was really kind of like door shutdown, very little activity happening. Those trends continued in April. So I would tell you that it was pretty much what we saw in those last 2 weeks of March, has been almost exactly for the entire month of April.

That being said, as the country is reopening, it has already grown exponentially. And now it varies by state, varies by facility. But the ramp-up, at this point, we would say is at least double of what we saw in volume in April. But keep in mind, April is very low. And the question will be, will those trends, a few weeks into May, continue for the back half of May, and then will, in fact, those continue into June as the rest of the economy opens? And those are the unknowns for us, which is why we really don't want to even comment on May at this point other than to say what we see scheduled so far and procedures that are either happened to date or certain to happen are running almost 2x what we saw in April, but still low with how low April was.

Tom, anything else you want to elaborate on, or Eric?

No. Wayne, I think you covered it pretty well. The -- we said that what we saw in March was kind of stabilized in April, and May looks like it's starting back up. You can see from -- actually, ASCO has got a wonderful website that kind of just talks about all the restrictions and when they're listing -- lifting. And so a lot of our key geographies are opening back up. It's a function of how quickly they get back online and when the patients start coming in to see what that trajectory looks like. And we'll have a better feel for that and what that might portend for the rest of the year when we report June.

Yes. And the only thing I would add is, obviously, our physicians are very confident in coming back in general. We hear from them that they are expressing their confidence in their patients and so far, that's proving out. And I think as long as that happens, and it's -- again, it's a market-by-market thing. We do continue to believe that we'll make progress month-over-month.

Okay. Great. That was part of my next question. Just more -- a little bit more on the demand side. So it sounds like, from a physician standpoint, not so much sort of apprehension from them. Anything more on early conversations with patients sort of willing to come back now versus wait? And then any concern about this sort of early bolus from kind of pent-up demand and then, perhaps, a falloff because just the pipeline takes a while to fill? Or any other thoughts just around there in terms of some of that trajectory?

Yes. That's probably the most difficult part, Ralph, right now, is that probably the best way for me to say it is, having seen April, I think we took a very cautious view that April would continue for May and June, and we took actions to reflect that it would continue for the entire quarter. Obviously, that cautious position is not proving out just a few weeks into May. And so -- which is good. I mean we've taken the right actions to take cost out of the system. And obviously, we're seeing much better uptick. We're hesitant to become overly optimistic because it's such early stages at this point. I would say it clearly exceeds even our kind of worst-case scenario expectations. I would say even kind of our -- what I would call more moderate-case scenario. It's performing better than that through May in terms of scheduling at this point. But it's so early, right? And as the country starts to reopen and as people start to get out more, and then how this, ultimately, gets reported around the potential spread if the pandemic does continue to spread, and how that, ultimately, influences then both patient behaviors as well as surgeon behaviors is such an unknown that it's really hard for us to articulate that we expect these trends to get back to normal by June. It's just too early. But give us 2 more weeks, and we'll start to know kind of how things look in; give us 3 more weeks, and I think we'll all be even more confidence. But what -- again, what I would say is, every data point that we would want to see to give us optimism right now are happening. And that includes both patients being open-minded and wanting to get procedures scheduled; physicians wanting to get back to work; new physicians wanting to have a place that's safe that they can recommend to their patients and using our facilities; the government being available and helping with all the PPE means now to the point that we are getting the access to ramp-up at a rate that we don't think will cause an access problem to PPE; and honestly, our employees are excited. They all want to get back to work. And so I feel like we couldn't ask for right, at this point in time, more tailwinds around optimism other than it's 2 weeks in, and we probably also just hold that breath a little bit longer and make sure we get through May 1. But Eric, anything else you want to elaborate on?

No. I mean, I think you covered it really well. I guess on the patient-specific question, it varies by market. We've had some markets where they've had virtually 100% success with rescheduling, and other markets where it's been a little more cautious. Obviously, that has a lot to do with the local impact, and it has a lot to do with the local physician community. But I would agree with Wayne. I mean, I think, we are positioned really well. The early signs are good. It's a ramp faster than we would have expected. And beyond that, I think we'd be foolish to probably try to predict too much of the future.

Yes. Okay. Fair enough. If I could sneak in just one more. Wayne, I may have misunderstood or misheard you, but I thought you mentioned looking at alternative ways to get capital into the organization to take advantage of growth. I was hoping you could flesh out those comments or if I misinterpreted? Anything -- any more details there would be helpful.

Yes. Thanks, Ralph. I would not read too much into the words I chose in that. What I would tell you is, we were feeling very good about our company. And when we saw how strong our January and February was turning out, with not only the double-digit growth, but the fact that we were driving the vast majority of it through same-store and the M&A pipeline was growing so much that we've been talking to our Board for a while now about opportunities to get more capital into our company and to potentially go on the offensive. But as with any discussion we have with our Board, that has to be weighed against trade-offs and what that looks like, and how is it net value-creating for all of our shareholders. And so I simply want you to be aware, though, that we spent 2 years building this chassis. This chassis was exploding in January and February. We were prime to really take off from there. We've got to manage this short-term window, but that's not going to stop our discussions with our Board around the fact that we want to get back on offense now, and we've got a plug-and-play model now that really works well that people want to be part of. And so, at some point, if we really want to accelerate the M&A machine that we have here, it's going to require more capital than we have today.

That being said, I just want to remind you, we've got over $400 million plus of consolidated cash, and we have choices today. And if May continues to ramp up and June continues to ramp up from there, we can either use that capital to delever, which will be a Board decision; we can use it to deploy into M&A that's not under LOI at multiples below our current leverage ratio. And so we have a lot of optionality right now. But don't read more in the comment beyond the idea that we want to go on offense, though, once this passes.

And Ralph, one thing I might add there is, I would remind you that double-digit growth that we talked about was without M&A, right? So our company organically is performing really well. And that growth that we can drive between just operations, all the different initiatives we talked about over time, we feel good as a way to help us grow and, obviously, hopefully, help drive down the leverage over time as we grow that. But clearly, the M&A pipeline was as strong as it's ever been coming into this. We feel like it's only going to get stronger. So we'll be continuing to talk about that. But the good news is, I want to go back to our double-digit growth model this year, did not assume M&A in it. And so, obviously, we've had an impact in Q2 that's going to change that. But going forward, that's still our outlook.

Our last question comes from Frank Morgan with RBC Capital Markets.

Quick question. I appreciate the color on your most important states and the timing of when those reopened. But as you've looked at those individual states, are you seeing any variation in terms of the kind of business that's coming back in terms of surgical mix in those really important states, the Texas and the Florida? Are you seeing 1 particular type of surgery, maybe it's a higher dollar procedure volume versus others? Just any color there. And then just any general color on -- I think you mentioned certain geographies are back to full capacity. Just any particular logic behind where you're seeing that capacity normalize the quickest? Anything you could attribute to?

Frank, it's good you asked this question because Eric, Tom, and I were literally having a discussion today looking at trends, trying to see if we could see trends that would point to one acuity over another acuity, et cetera. And so I'm going to let Eric comment on that since he's been the one diving in and really digging into this.

Relative to locations, again, it's been interesting. You look at some of the states that have opened, that have really not quite seem to have the same impact like you saw in New York, where we have no facilities today. And you look at states like Texas, that has had really good optimistic rescheduling, Florida, and California. So when you start thinking about warmer states, we don't know whether that's coincidence or not, and so it's hard to tell. But Eric, maybe you can comment a little bit around kind of the acuities and then other trends because we have other markets, though, where we haven't seen much impact, like Idaho and Montana. And those are other examples where, over time, meaning there's been impact, but we feel like those are also up and running. And so again, those are, obviously, colder environments. So hard to really pinpoint if there's any unique nuance out there. But Eric, anything you want to highlight?

Yes. So Frank, I would start with -- I'm not going to read a lot into a trend that's couple of weeks old, but certainly by market, we're seeing most of the states that are opening up showing positive trends and actually momentum that we think starts to move us back towards a normal world.

From a specialty standpoint, look, I want to reiterate my point earlier, which is around PPE. With PPE pipeline getting rebuilt, and again, we're not out of the clear in the country, we feel good about where we sit today, there isn't a reason that all of these procedures can't be done safely in our purpose-built focused environments, whether it's our surgical hospitals or our ASCs. And so when you think about that, we aren't seeing a difference on acuity. Now I would say what we are, obviously, doing is we are prioritizing higher acuity procedures that are causing pain, discomfort for patients. We're prioritizing them on the schedule first. But even our single specialty centers that might just be GI or ophthalmology, we're not seeing that to be an impact. Really, the idea is, if you have a GI procedure or you need a cataract fix, trust me, if you're that person, it's something you want to get done, and we can do it safely as long as we have the PPE. So I don't think that's actually going to play out as part of this. I think we should be able to accommodate all of these needed procedures. And early on, you might see a bit of an acuity jump just because of the importance for that patient being prioritized from a pain and urgency standpoint, but I don't think it's going to affect our mix.

This concludes our question-and-answer session. Well, go ahead.

I would like to add to what Eric said, some final comments. I guess, again, I just want to reiterate that there's reasons to be optimistic, but we would recommend caution at this point until we really see how things open and progress. It's still very early stages of reopening. But we do appreciate, really, I want to say, on behalf of the Board of Directors of Surgery Partners Health, much -- we've been encouraged by the position this management team has taken, how aggressively they've moved on many things, and how they've really positioned us to really be available to help the patients. Eric, any final comments you would like to make?

Yes, absolutely, Wayne. Before we conclude the call, first of all, I appreciate everyone's questions, and nice to be back with you today. I did want to take a moment just to join my colleagues and say, thank you, to our over 10,000 associates, our over 4,000 physicians for their contributions and their efforts throughout this crisis. And more importantly, their commitment to really delivering on our mission statement, which is to enhance patient experience through partnership. We are humbled by the efforts of doctors, nurses and other first responders across the nation as they fight this pandemic and save lives. And I just want to thank you all for joining the call today. We hope you all remain safe and healthy. And Wayne, if you don't have anything else, I think that concludes our call.

Nothing else from me. Thank you, Eric.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.