Surgery Partners Inc (SGRY) 2015 Q3 法說會逐字稿

Greetings. Welcome to the Surgery Partners, Incorporated third-quarter earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mike Doyle. Thank you. You may now begin.

Thank you, operator. I'd like to welcome everyone to Surgery Partners' third-quarter earnings call. Joining me on the call today is Teresa Sparks, our Executive Vice President and Chief Financial Officer. I will turn it over to Teresa to review our Safe Harbor statement.

Thanks, Mike. Before we begin, let me remind everyone that, during the 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 risk, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risk and other factors are set forth in the Company's earnings release posted on the website, provided in our final prospectus and subsequently filed on Form 10-Q as filed with the Securities and Exchange Commission. The Company does not undertake any duty to update such forward-looking statements.

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

Thanks, Teresa. We are very pleased that today is our first earnings call as a publicly traded company following the successful completion of our initial public offering in October. The offering was the result of lots of hard work over the past few years and I would like to thank many of the people involved, a number of whom are on this call.

From a strategic standpoint, we believe the timing was right for Surgery Partners to be a public company. As many of you know, while Surgery Partners is new to the public markets, the Company has been in existence since 2004 and over the last 11 years, we have built a national network of surgical facilities and complementary ancillary services. Our purpose is to provide superior care to our patients and management expertise to our physician partners. We expect to benefit from the market trend of rising consumerism with the focus of patients, physicians and payers on high-quality care in a more cost-effective setting.

We are pleased with our third-quarter results. Our total revenues increased 214% from $239.6 million, up from $76.3 million in the third quarter of 2014, reflecting the impact of the Symbion acquisition. Same facility revenue for the quarter increased 12.7% with our same facility cases increasing 6.1%. Adjusted EBITDA was $39.9 million this period compared with $16.1 million last year. On a pro forma basis, the Symbion acquisition adjusted EBITDA increased 15.1%.

Thanks to our employees and physicians, the integration of Symbion continues to be a great success. As you may recall, we acquired Symbion in November of 2014. This acquisition added 55 facilities and significantly increased our scale giving us opportunity for both cost savings and revenue synergies as we add ancillary services to the Symbion portfolio. We are on track with our targeted synergies from this acquisition. We have realized approximately $9 million on a year-to-date basis. We expect the acquisition to drive continued cost and revenue synergies over the next two to three years for a total of $30 million to $35 million.

From a development perspective, we had a busy third quarter. We expanded our employee physician practice network through the completion of nine in-market practice transactions, including two de novos. For the year, we have completed 13 in-market practice transactions, two of those being de novos. In addition, during the third quarter, we completed the acquisition of an anesthesia practice in an existing surgical facility market.

Our year-to-date acquisitions include one surgical facility in a new market, along with one surgical facility and two anesthesia practices in existing surgical facility markets. We have invested $50.5 million of capital during the year to complete these transactions.

Our pipeline is stronger than it has ever been with numerous opportunities to further expand our ancillary and surgical services. The model lends itself well to further same facility expansion as we add complementary ancillary services to our existing facilities.

Teresa will review the financials for the quarter in more detail, but I would like to take a minute to comment on a couple of industry developments. First, a topic that comes up frequently is consolidation. We continue to expect further consolidation in the outpatient services market. We are focused on new markets, as well as existing surgical facility markets where we see the most attractive synergies. We recently increased our revolver to take advantage of development opportunities and we remain well-positioned financially for continued growth and consolidation.

Second, CMS recently finalized its payment regulations for ASEs for 2016. With rates scheduled to increase slightly for our portion of our patients that are covered by Medicare, we do not expect this change to have meaningful impact on our results for next year.

I'd like to turn the call over to Teresa to discuss the financial details.

Thanks, Mike. As you just heard, we enjoyed strong results for the third quarter. Approximately 91% of our total revenues of $239 million were from our surgical facility with 9% from ancillary services and other services. As Mike mentioned, we continue to be successful in expanding our ancillary services in our existing surgical facility market.

Our revenues for the third quarter increased 214% to $239.6 million from $76.3 million for the third quarter of 2014, reflecting the impact of the Symbion acquisition. Our same facility results included facilities owned and operated since July 1, 2014, including our non-consolidated facilities. Same facility revenues for the third quarter of 2015 increased 12.7% from the same period last year with our same facility in cases increasing 6.1%.

For the third quarter of 2015, our adjusted EBITDA was $39.9 million compared to adjusted EBITDA of $16.1 million for the same period last year. On a pro forma basis for the Symbion acquisition, adjusted EBITDA increased 15.1%. From a margin perspective, EBITDA margins increased on a pro forma basis from 16.1% in 2014 to 16.6% in 2015.

Our revenue on a year-to-date basis increased 211.5% to $696.6 million from $223.6 million for the same period last year, reflecting the impact of the Symbion acquisition. Our same facility results for the year include facilities owned and operated since January 1, 2014, including our non-consolidated facilities. Same facility revenues year-to-date 2015 increased 9.6% over the same period last year, including increased same facility cases of 4.7%.

For year-to-date 2015, the Company's adjusted EBITDA was $114.3 million compared to adjusted EBITDA of $46.1 million for the same period last year. On a pro forma basis for the Symbion acquisition, adjusted EBITDA increased 11.1%. On a pro forma basis after taking into effect the debt paydown of $243.5 million in connection with the IPO, our debt on the balance sheet was $1.2 billion. Our pro forma ratio of total net debt to EBITDA as calculated under our credit agreement was 5.8 times.

Subsequent to the quarter-end, we amended our first lien credit agreement by increasing the revolving commitment from $80 million to $150 million. This increase provides us increased capacity to allow us to capitalize on growth opportunities. While we are comfortable with our current balance sheet, we continue to monitor the credit markets and explore various financing alternatives to improve our overall capital structure.

As of November 13, we owned surgical facilities and physician practices in 28 states. Our network includes 99 surgical facilities consisting of 94 ambulatory surgery centers and five surgical hospitals, plus a network of 43 physician practices. Our ancillary services include a diagnostic laboratory, multi-specialty physician practices, urgent care facilities, anesthesia services, optical services and specialty pharmacy services. With that, I will turn the call back over to Mike for his closing comments.

Thanks, Teresa. We remain well-positioned to build our existing network, add new facilities, expand our complementary ancillary service lines. Our business model provides patients with high-quality low-cost alternatives to higher cost settings through an integrated outpatient delivery model. As this is our first call post-IPO and given our third-quarter and year-to-date results, we are introducing our full-year 2015 outlook of $156 million to $157 million of adjusted EBITDA for full-year 2015.

In closing, we would like to thank our Surgery Partners physicians and employees who have worked hard to bring us to this point and we thank you for your interest in the Company. With that, I'd like to turn it back over to the operator for questions.

Thank you. (Operator Instructions). Brian Tanquilut, Jefferies.

Good morning, guys and congratulations on the first quarter as a public company. Mike, first question for you, so acquisitions. 13 deals year-to-date. So a couple questions there. One, if you don't mind just giving us the answer, maybe I should know this, but how does the de novo strategy play into that because I know you said you acquired nine, including two de novos in the quarter, so what exactly does that mean? And then second, how are we tracking relative to your original plan or internal plan from the beginning of the year with those 13 deals year-to-date?

Yes, so I will start with the de novo part of it. The de novo is just another opportunity to bring physician practices into markets where we have surgical facilities and complement those surgical facilities and the physicians that we work with in the market. So often times, we have the opportunity to recruit a physician just to come and do their cases at our facility, which is -- as we talk about our physicians, we have partnered physicians, affiliated physicians and employed physicians.

And then from an employed perspective, we have the opportunity to find an attractive practice in the market and instead of leasing new space, bringing a new physician in and starting a de novo, sometimes we will buy the assets of that practice and put one on the map that way. In other circumstances where there is not an appropriate asset in the market, we will employ a physician, lease new space and start that practice as a startup instead of acquiring the assets of a local existing practice. So that's the de novo piece of it.

From our plan for the beginning of the year, we are on track, so everything that we had planned on on accumulating from a deal perspective as we outlined. Earlier in the year, we would do 8 to 10 physician transactions from an in-market perspective and we've accomplished that this year and continue to have a very full pipeline. As I mentioned, it's been better than ever from a pipeline perspective both from the surgical facilities side, as well as the ancillary side of the business.

Got it. And then organic growth, same-store was really strong at 12.7%. So if you don't mind just giving us your views on first a breakdown of that, ASE versus what's coming from the ancillary side of the business and also your outlook on the sustainability of an above-average organic growth at that level?

So I think from the overall standpoint from the sustainability, I think one of the things that we found attractive on combining the two companies was Surgery Partners had had a historically different approach to recruitment and bringing new physicians into the existing facilities and focused on specific programs to bring -- focused on multispecialty in all of our surgical facilities and combining the two teams and dedicating a team of recruitment professionals that day in and day out job of recruiting new physicians into our existing facilities is what they are focused on has been very successful this year.

So in the transaction, in the integration with Symbion, we now have a team of 14 professionals that are in our markets every day looking to bring new physicians into our existing facilities, as well as the opportunity of our in-market practice development and asset transactions, our practices that we'll have acquired year-to-date has allowed us to bring an outsized same facility growth from a case perspective.

And if you take a look at specifically the new physicians, we will have recruited over 200 new physicians into our existing facilities this year. So that's a big piece of it.

As far as splitting the same-store out between ancillary and the surgical facilities, very difficult to do because you've got a combination of the transactions flowing through on the surgical cases, as well as the physician practices and the other services -- anesthesia services that that physician uses. So I think our best thought process and that guidance is just to really stick with the same facility growth as a consolidated number.

All right. Got it. Thanks, guys.

Kevin Fishbeck, Bank of America Merrill Lynch.

Great, thanks. It was helpful to hear the comments on the Medicare rate outlook. What about pricing on the rest of the business and acuity? How are you thinking about that on the ASE side?

I think we continue to have success in discussions with our managed care team and the representatives that they are talking across on the commercial side of the house and I assume that's what you are talking about, Kevin. I think our opportunities from an acuity perspective continue to accelerate and that's been a great thing for us. We now have 16 of our facilities doing joint replacements. We have 24 of our facilities doing spine. So from an acuity perspective, we continue to see momentum grow from that perspective.

Our facilities have had great success and our physicians have great satisfaction on these cases being appropriate and successful on an outpatient basis. And the payers are very excited about that as well. So although they have an opportunity to save from a cost perspective, they also have the ability from our perspective to bring new cases into a new environment that's been tried and true.

We haven't got the traction on Medicare on the joints yet, but we do have it on the spine. So I think again acuity playing into that piece of the business overall and the acceptance from a payer perspective. The payers overall understand that we have a lower-cost setting and doing a case in our facility and our setting is cheaper than doing it in a hospital setting. And again, we seem to see that coming to fruition and coming to media and the general public a little bit more over the past several months than we have in the past.

Okay. And then just thinking about the segment margins, I guess normally we think of ancillary services being a little bit better margin than the ASE margin. This quarter, it was pretty much the same for the two divisions. How do we think about margin expansion over the next couple of years?

So we talked about -- just overall EBITDA margin expansion year-over-year has been very strong, so I would just point you to that metric first. Overall, 16.6% this year compared to 16.1% last year, so about a 22% conversion on our increase in overall revenue.

From a specific margin standpoint, our ancillary services, we talked about on the roadshow and in other settings that we started our in-network strategy related to our diagnostic lab in the first quarter of 2015. We had one payer that we were specifically focused on obtaining that contract. And so you are seeing that overall rate decline from that one contract impacting the margins at that level.

And then as we mentioned, this activity with non-physician practice transactions has costs associated with recruiting fees, some legal and then some startup costs related to the two de novo practices. So that's placing some pressure on the margins at that one line item. Overall, margins look good, but we are seeing a little bit of compression there at that line item.

Okay, but you would expect these things to kind of normalize and to be showing margin improvement into next year?

Yes. We will anniversary that contract, that out-of-network to in-network move in the first quarter of 2016. And so once we anniversary that contract, you will see that normalizing.

Okay. Then just one last question on the deal pipeline when you talked about ancillary acquisitions. Are you talking about physician in-market acquisitions or are you talking about adding potentially new lines of service?

So we have mainly been focused on the physician side of the business as we speak about ancillary, so both physician and anesthesia. As we mentioned, we've had some anesthesia deals, in-market anesthesia deals that have come to fruition, so we continue to be focused on those. From a pipeline perspective, we continue to look at other ancillary service lines, but nothing that, as we mentioned multiple times, nothing that's in the pipeline that's actionable in the near term.

Okay. All right, great. Thanks.

Frank Morgan, RBC Capital Markets.

Good morning. Going back to your development backlog I was just wondering if you could characterize the backlog you have today, how much of that should we expect to be fill-ins in existing markets versus new markets or any general color around that?

Yes, so maybe I can break it into two pieces. From the physicians ancillary side of the business, the ancillary side of the business will continue to expand in existing markets where we have surgical facilities to really round out that delivery model on an outpatient basis. So from a physician practice, anesthesia side, it will really focus on those markets.

As we look at surgical facilities, that will be more of a one-off opportunistic process and looking at the pipeline that we have, we have a combination of some in-markets and some that will be new markets. So we will look to continue out of the 4 to 5 surgical facilities that we will look to acquire in the new year, would look for maybe one of those or two of those to be in an existing market, but the majority of the new surgical facilities, call it the three to four of them, to be in new markets.

Okay. And then just one more, as you look at that very strong same-store growth, could you give some general color or commentary around how much of that growth you would attribute to those in-markets versus the non-recent in-market acquisitions? Thanks.

From the transactions with the physicians, bringing the -- the transactions that we did in the third quarter, again, in the early stages of getting that volume and that volume coming into our surgical facilities. So although it is influencing some of that same facility growth on a case perspective, it is not the majority of it. It's a point, point and a half of it.

Yes, so as you see the trends, as we ramp up and have ramped up our case volume in the third quarter on a year-to-date basis comparably 4.7 to 6.1, you can see that activity continuing to improve our same-store case volume. But also the recruiting efforts that Mike mentioned are also a key driver to that.

Okay. Thanks very much.

Matt Borsch, Goldman Sachs.

Hi, this is (inaudible) joining for Matt Borsch. Thanks for taking the question. Just want to confirm for those two de novo physician practices for the quarter, I was curious what specialty were they related to?

Both of those were pain management in existing markets where we have a strong presence of muscle, skeletal, orthopedics and spine.

Great, great. And just a quick follow-up. I think from June 2015, you had anesthesia in 28 of the 99 facilities. Just curious is there any update on that kind of as of now how it's tracking?

Yes, currently, we are providing anesthesia services in 32 locations, so definitely continuing to penetrate our overall anesthesia service offerings into our existing markets.

Excellent. Okay. Thanks very much.

(Operator Instructions). John Ransom, Raymond James.

Hi, good morning. Sorry if I missed this, but looking in your notes, you had pro forma cases of [97,900] in the third quarter. Then you have same facility cases of [101,343]. What's the difference in those two numbers?

Our same facility definition, John, includes our non-consolidated surgery centers, so that's really the difference. Total revenue is related to total cases, but the same facility definition includes non-consolidated surgery centers.

Okay. And then, secondly, if we look at your implied fourth-quarter guidance, it's maybe $1 million or so below our fourth-quarter EBITDA estimate. Is there anything to think about there or is it just conservatism?

If you just kind of go with the implied number you just mentioned, really if you take a look at that, that would be a 12.6% increase over fourth quarter 2014. So while we think that would be a strong quarter, we are comfortable overall with our guidance for $157 million for the year and, yes, probably leaning more towards being conservative, John.

Okay. Now you bought -- looks like you spent $20 million and you bought nine practices. Is there a ballpark multiple that you paid for that aggregate block of business?

Yes. I will point you to the text where Mike mentioned that we invested $50.5 million in capital this year, so that capital is generating call it $18 million to $20 million of EBITDA, which is about a 2.5 times effective multiple.

Yes, I know. I was talking about the quarter where you spent $20 million. I got that for the year, but is that a similar type multiple for the quarter?

Yes, similar overall multiple for the quarter. We spent just on, I think your question, on the physician practice transactions alone, that was roughly $27 million driving $8 million to $10 million in EBITDA.

Okay. Great. Thanks a lot.

Chad Vanacore, Stifel.

Good morning. All right, so on the regulatory side, are there any rule changes in the final CMS release that we should be paying attention to, or is there anything in the US budget deal that might affect surgical centers?

Nothing from a surgical center-specific. I think there's a lot of talk around HOPDs and what that looks like. The OIG had sent out some stuff yesterday as well on just they are going to be taking a look at HOPDs and taking a look at that. So I think from the perspective of the talk and the looks at it is really taking a focus on what is the differential from HOPD to freestanding ASEs. They understand that there's a differential in reimbursement and are there other ways to look at how we should get price increases and how we should take a look at that price differential. So we feel that that's giving some opportunity. We believe it's neutral or positive for us. I don't think they're going to run out with significant increases in reimbursement at this point, but we feel that that is neutral to positive news for us as being mostly freestanding surgical facilities.

All right. Thanks, Mike. And on the same-store volume growth, it was strong in the quarter, but we've seen acute care hospital volumes growth slow. Is there anything you would point to that would suggest ASEs are taking some outpatient surgical volumes from hospitals?

I think just by the nature of the momentum we are seeing in joints and spine, I think more probably from a joint perspective. Spine has been again gaining momentum, but has had momentum for some time. Joint seems to be gaining from a joint replacement perspective gaining more momentum, so there's only one place for these types of cases to come from is from the acute care hospitals. Whether that's moving the needle on the overall volumes from hospitals, I think that's hard for me to discern. I will leave that to others. But from our perspective, we are seeing some momentum in cases traditionally done in a hospital setting with our commercial payers that are not yet Medicare approved being done at our freestanding ASEs.

All right. Thanks a lot for taking my questions.

John Ransom, Raymond James.

Sorry, Teresa, I just want to clarify something you said. So looking at your third-quarter cash flow, you have $20.5 million of investments in new businesses and then you have capital spending of $6.5 million, so that totals $27 million. So when we think about the acquisition spend, we should add those two numbers? I think we were just thinking it was the $20 million, but it's really the $20 million plus the $7 million?

Yes, there are -- there's a couple of transactions that are reflected down in the financing section of the cash flow. There was a note that we gave as part of the proceeds and so we can help you bridge that. But just by classification, yes, the CapEx line is just maintenance CapEx, so we've kept that pure, but then the cash invested in acquisitions, there's a combination of some activity that's reflected in the financing section just by virtue of the transaction itself and we can help you bridge that.

Sure. And I should probably know this, sorry, but the breakout of the revenue was a little different than what we were thinking. So you have the ancillaries and the surgical facilities, so 220 and 16, but when you talk about same-store revenue, you are including the ancillaries in that number? You combine the two when you talk about same-store of 12.7%? So you break it out, but it's added back for same-store, right?

Let me kind of answer -- hopefully, this will get to your question -- but our same facility definition includes both surgical facilities and our ancillary services. Those ancillary services are there to support our existing surgical facilities and therefore included as part of our overall same facility growth, or same facility total. They're currently about 9%, as I mentioned in the text, our ancillary services are about 9% of our total revenue, but our strategy is to develop those ancillary services to support our existing surgical facilities, grow those markets and therefore, we've included those in our same facility definition.

Thank you.

(Operator Instructions). Frank Morgan, RBC Capital Markets.

This one has been asked on every earnings call this quarter, so I would hate for it not to get asked, but any commentary from your perspective about labor or wage inflation that you are seeing at your sites versus some of these other facilities? Thanks.

No, from our perspective, the focus of what we have -- you will see some increases in salaries, but mostly associated with the physician practice transactions and having more physician salaries as part of the Company. But from a facility level staffing perspective, really not seeing any pressure there. If you take a look at our staffing compared to hospitals, a little bit of a different situation. We are usually dealing with work that happens during the weekdays. There's no nights and weekends. There's no calls. So a little bit of a different labor pool and we are not really seeing that pressure or inflation in that part of our business right now.

Okay, thanks.

At this time, I would turn the floor back to Mr. Mike Doyle for closing comments.

Thanks, Rob. Appreciate everyone joining us today. Hope you have a great weekend and we look forward to talking again soon.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.