Q3 2020 Surgery Partners Inc Earnings Call

Greetings and welcome to the surgery partners third quarter 2020 earnings call.

This time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded I would now like to turn the conference over to your host Mr., Tom Kelly Chief Financial Officer for surgery partners. Thank you you may begin.

Good morning, and welcome to surgery partners third quarter 2020 earnings call. This is Tom Kelly <unk> Chief Financial Officer, joining me today are Wayne to bite 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 mornings press release and the reports we file with the FCC. 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.

It's posted on our website at surgery partners Dot 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 morning, and thank you all for joining us today.

Before we begin our call. This morning, I would like to acknowledge and recognize our colleagues and physician partners to continue to support the health care system and the needs of our patients.

These continue to be unique times, we're humbled by the to be affiliated with these heroes, who embodies our mission of enhancing patient quality of life through partnership.

We are grateful for your service and the sacrifices that you and your families you're making each and every day.

As we've previously discussed.

Management team has built and is executing upon a framework for growth.

We continue to take a data driven approach to decision, making focusing on high growth specialties and capitalizing on anticipated tailwinds such as a transition of many Medicare related procedures from inpatient to outpatient.

Our strategy was built to support sustainable long term double digit growth.

Our results support our conviction in this view.

The impact of the pandemic has pressure tested our business model and management team.

In the second quarter, our results prove both the flexibility and resiliency of our business model and the strength of the leadership team we've assembled with.

With that momentum going into the third quarter, we feel confident in our ability to execute in and capitalize on today's environment, which has accelerated some of the longer term tailwinds we've been anticipating.

Our third quarter results have confirmed our optimism. Some notable highlights include the following.

Adjusted revenues increased to 503.9 million nearly 10% over the prior year quarter.

Same store adjusted revenue per case increased by nearly 12% compared to the prior year quarter more than offsetting the slightly lower volumes as a result of the pandemic.

Finally, the transition of procedures out of traditional acute care inpatient settings accelerated during the quarter joint replacements in our S fees were up 115% as compared to the prior year quarter.

For the year, even with the disruption of coated joint replacements in our S. Each have increased by almost 90%.

As you can see these uncertain times are further highlighted the value of our short stays surgical facilities as patients physicians and health plans recognized the relative safety of our specialized surgical environment.

CMS has also been accelerating this trend by allowing more procedures to be done safely on an outpatient basis and leaving it up to the physicians to determine when inpatient care as required.

These trends, which are aligned with patient and physician preferences emphasize the importance of care delivery migrating to lower cost high quality purpose built settings like our short stay surgical centers said differently. We do not believe our results reflect soliah cobot rebound, but rather we believe there is a fundamental market shift.

Either way and we are marshaling resources to capitalize on these accelerating trends and gain market share.

Before I turn the call over to Eric I wouldn't like to highlight one last item.

We discussed the importance of pruning non strategic assets to eliminate distractions and to focus our investment of time and resources into our purpose built short stay surgical facilities.

Over the past several years, we have been intentional terminate these distractions.

Third quarter, we took an important step we're moving to assets that were not core to our long term growth strategy.

Specifically, we closed our Logan lab facility and completed the sale of certain anesthesia assets to a partner that can help us to optimize these capabilities and further enhance efficiencies in our facilities.

Well, Eric and Tom will provide more details.

Sales, such anaesthesia assets, coupled with our third quarter debt raise provide ample capital to further invest in to our long term growth strategy, both organically and Inorganically with that let me turn the call over to Eric.

Rick.

Thank you Wayne and good morning today I will focus my comments on three areas first I will provide a few additional highlights of our results.

Second I will outline some of the key initiatives and investments that have allowed us to navigate this crisis, while accelerating our long term growth trajectory.

And finally I will provide a brief update on cares Act guidance.

Tom will then share greater detail on third quarter financial results and full year outlook, along with insights regarding 2021.

As it relates to the quarter the strong momentum we saw late in the second quarter continued throughout the third quarter highlighted by adjusted EBITDA growth, excluding grants of approximately 7% over the prior year and same facility revenue growth of 8.4% driven by net revenue per case increase of 11.9%.

Our same facility volumes for the quarter averaged 97% of the prior year and in the month of September we achieved 99% of prior year volumes. Our best result, since the beginning of the pandemic.

We continue to see higher acuity cases, such as orthopedic and spine surgeries exceeding prior year prior year levels, while the recovery of lower acuity cases, such as GE I continue to slightly lag with results in the low ninetys percentile of prior year volume for the quarter.

Our ability to continue to achieve industry, leading same facility growth is a direct result of our investments in physician recruitment retention and targeted facility level and service line investments a.

A few examples.

We continue to see an increase in demand from new positions for our short stay surgical facilities and our targeted physician recruitment approach has focused our efforts on the highest quality positions year to date, we have recruited over 400, new positions, representing approximately 10% new additions to our medical staff this year and our average new position to date is generating.

21% more revenue and 25% more revenue per case as compared to the 2019 cohort.

Our ability to attract higher acuity procedures, either is even more evident when you compare the number of physicians performing joint replacements in our facilities as compared to the prior year, which is up 62%.

We continue to make prudent investments to increase our reach and engagement with prospective positions.

Notably we have launched an impressive digital outreach capability, which has been timely given the changes to our recruitment process during the pandemic.

We believe this data driven approach and digital innovation will be a differentiator to continue to accelerate our position growth.

Another example that supports our ability to recruit new physicians and retain existing positions is our willingness to expand our facilities and invest in robotics and other initiatives to improve the patient experience and to enhance our high acuity capabilities. We have consistently expanded facilities to capture new growth, while maintaining a disciplined approach to capital.

Deployment to ensure an attractive ROI.

Key AMC investments include moving multiple assay is into new locations locations, such as millennia facility in Orlando, Florida in our spine center in St. Louis.

Investing in surgical hospital expansions and capabilities by adding operating rooms at facilities in Georgia, Idaho, North Carolina, Montana, and Texas and building a state of the art 88 bed acute care hospital in Idaho Falls, which is helping to combat the cobot outbreak in that state as we speak.

We have also increased our installed base of robotics by 24% in 2020 and have plans to further expand in 2021.

On the patient experience side 11 of our 15 eligible surgical hospitals around a five star designation in the July 2020, HCAP Star rating as administered by CMS with the remaining eligible hospitals, all earning a four star rating.

We are extremely proud of this result, and what it says about our exceptional colleagues physicians and facilities. This.

This level of performance means that approximately 75% of our surgical hospitals provide a patient experience that is among the top decile in the nation and all of our surgical hospitals provide care and the top third of all measured.

These investments coupled with our high quality patient experience our facilities has enabled us to boast a 96% physician partner retention rate.

Finally, we are investing a new service lines. One we are particularly excited about its cardiology.

We now have three surgical hospitals and two AOCI that currently perform cardio procedures.

The Gses are early stage expansion in pilot programs, which are showing promising returns well our surgical hospitals continue to mature and expand their high acuity high acuity cardiology capabilities.

On a year to date basis, our cardio procedures are up 8% as compared to 2019, we are planning to more than double the number they see that perform cardio procedures in 2021 and continue to evaluate surgical hospital expansion opportunities.

In addition to our growth initiatives, we continue to mature our operating system to become a leaner more efficient organization.

Our second quarter results highlighted the highly variable nature of our cost structure and the various actions we were able to implement with agility.

As you can see from our third quarter results, we continue to invest into our facilities, while maintaining the spending discipline implemented in the second quarter.

Specifically, our third quarter salary and benefit expense as a percent of revenue was over 230 basis points lower than the prior year period.

We will continue these and other margin expansion efforts by pursuing consolidation and outsourcing opportunities and enhancing services to our facilities and vision partners.

Before I provide an update on the cares that guidance one final item that I would like to address relates to our strategic efforts to expand our footprint through acquisitions.

As Wayne mentioned, we have pruned additional assets from the portfolio and are using proceeds to reinvest in our facilities and to grow our platform. Specifically, we plan to continue to pursue high growth facilities that provide physicians and patients with more convenient cost effective options for care to.

To that end, we closed two transactions late in the third quarter and another in early October expanding our orthopedic and multi specialty footprint.

At the end of October we also completed the acquisition of a majority interest in Bakersfield Heart Hospital in California, a three operating room for Cath lab physician owned hospital with 47 beds that specializes in cardiology and orthopedic procedures. These transactions helped replace earnings from the sale of our anesthesia assets and other portfolio optimization efforts and.

Support our long term double digit growth goal.

As we mentioned we believe we are in a strong position to continue to take market share and expand our footprint. Tom will provide further details regarding our liquidity available for future investments.

The last topic I'd like to address relates to cares Act grants.

Year to date basis, we have received approximately $53 million in cares act funds of which we have recognized approximately $33 million as other income based on Mos revenues since the coke since the cobot outbreak.

As a result of updated guidance received during the quarter, we reversed $9.9 million of cares Act grants on the income statement related to the second quarter.

The remaining grant money received that has not been recognized as revenue will now be treated as a deferred liability on our balance sheet.

Based on new guidance release by HHS in mid October we will again update the recognition methodology for these grants when we report the fourth quarter.

We recognize the uncertainties that continue to exist with Covance as we enter the winter month and appreciate the government's flexibility in allowing frontline responders to retain such funds until this crisis has subsided.

If we are unable to recognize these funds in accordance with the CMS guidelines, we will repay them in mid 2021.

We believe that this crisis has fundamentally changed the way patients surgeons and health plans will think about the role that purpose built short stay surgical facilities will play in health care delivery, which continues to drive the shift of surgeries to our facilities.

This has been our company's differentiation strategy and now more than ever our value proposition is resonating with key stakeholders in the healthcare environment.

We remain very confident in our long term organic growth model and believe that scaled independent operators such as surgery partners are uniquely positioned to grow in this new marketplace.

With that I will turn the call over to Tom who will provide additional color on our financial results and outlook Tom.

Thanks, Eric first I'll spend a few minutes on our third quarter financial performance before moving onto liquidity and some considerations as we move into the fourth quarter and 2021.

Turning with the topline.

Surgical cases declined by 2.6% to just under 127000 in the quarter, primarily due to a slower return of lower acuity procedures, and our gastrointestinal and pain management service lines in the early months of the quarter.

Adjusted revenues for the quarter were $504 million, almost 10% higher than the prior year period reported results included approximately $17 million of contribution from our new community Hospital in Idaho Falls.

On a same facility basis total revenue increased 8.4% in the third quarter looking at the components of this increase our case volume was 3% lower than the prior year period offset by higher net revenue per case that increased almost 12% driven by acuity mix and pricing.

Turning to operating earnings our third quarter 2020, adjusted EBITDA, Excluding grants was 66.5 million a 7% increase from the comparable period in 2019.

As Eric mentioned using the September guidance from HHS, we reversed $9.9 million in cares Act grants during the third quarter, resulting in a 5 million decrease to adjusted EBITDA after accounting for non controlling interest.

To date under the September guidance, we have recognized approximately $33.2 million of cares Act grants translating to approximately 21.9 million of adjusted EBITDA impact this year we.

We will be updating this accrual again in the fourth quarter based on the revised October guidance from HHS.

During the quarter, we recorded $7.5 million of transaction integration and acquisition costs of note third quarter 2020 transaction integration and acquisition costs included approximately 2 million of EBITDA losses associated with our de Novo Hospital in Idaho falls as that facility continues to make progress towards achieving.

Profitability.

As I've noted before we expect were poor results from this facility separately throughout 2020.

Moving on to cash flow and liquidity, we ended the quarter with a strong cash position of $450 million, which includes approximately $120 million of the Medicare advance payments. We've held these advance payments as deferred revenue in our financial statements.

During the third quarter the deadline for repaying. These advances was extended by approximately 17 months to September 2022 with interest rates. After the repayment deadline reduced to 4% recruitment of these funds from future Medicare revenue will now commence in the second quarter of 2021.

As noted on the second quarter call, we raised an additional $115 million of gross proceeds by an add on offering to our 2027 notes to focus on growth related activities.

In addition, our liquidity position is further enhanced by our Undrawn revolver, which has a capacity of approximately 113 million after giving consideration to outstanding letters of credit.

Of note during the third quarter surgery partners had operating cash flows of approximately $27 million raise.

Raised an additional 115 million of incremental senior notes due 2027 as just discussed.

Completed the divestiture of selected anesthesia assets for an undisclosed price and invested in increased ownership in our surgical hospital in post falls for approximately $17 billion, a transaction, which is recorded in our financing cash flows due to our existing ownership position.

The company's ratio of total net debt to EBITDA at the end of the third quarter as calculated under the company's credit agreement was stable at approximately seven times, primarily as a result of higher cash balances offset by the pro forma impact of our anesthesia sales and lab closure.

Normalizing for the impact of Medicare advance payment funds the ratio of total net debt to EBITDA would have been 7.4 times.

The company has an appropriately flexible capital structure with no financial covenants on the term loan or our senior notes as mentioned on our prior calls the company's lenders under its revolving credit facility waved our leverage covenants for the remainder of 2020 and provided substantial flexibility for the calculation in 2021.

On August 30, Onest as part of our strategic efforts to focus on our core business. We made the decision to close look in laboratories, a component of our ancillary services operating segment, which was the driver of a $34 million goodwill impairment loss on our third quarter financials.

Our stated strategy is to focus on our short stay surgical business and our actions during the third quarter reflect our continued progress towards the strategic objective.

Through the third quarter, our increased emphasis on expanding key service lines, such as muscular skeletal and cardiology targeting high value physician recruits and engaging in strategic rate negotiations have all continued to fuel our recovery and growth trajectory.

Well the evolution of this pandemic and to what extent the economy will improve is unknown, we have not yet seen a material shift in payer mix due to higher unemployment levels.

We continue to project adjusted EBITDA in the range of $250 million to $260 million this year.

This indicative range assumes that the volume levels and corresponding specialty mix payer mix and net revenue per case metrics that we've seen in the second and third quarters persist and improve consistent with prior years as we enter the seasonally high fourth quarter.

Yes, we do not see broad based elective procedure restrictions or stay at home orders issued on our key geographies.

That we can continue to make progress on our initiatives in the midst of a pandemic.

And that we can recognize modest incremental amounts of cares act brands in the fourth quarter based on the newly issued October 2020 guidance from HHS.

As is typical this time of year as we focused on finishing 2020 strong we're starting to look to 2021.

At this stage, we remain optimistic that we can outrun the short term impact of coated and get back on the multi year double digit adjusted EBITDA growth trajectory and profit levels that we had originally been targeting based on a pre cobot baseline.

As we look to 2021, we are closely evaluating the following key elements of our growth model and business.

We continue to believe in the value that our facilities offer and our recruiting teams continue to make excellent progress in recruiting new doctors to drive continued volume gains.

On the rate front, we continue to make progress in fixing historical when equities and driving towards fair market rates, but we're also evaluating opportunities to enhance long term value growth by making incremental investments in certain markets.

Our strategic initiatives continue to bear fruit as we work to standardize and enhance our procurement and revenue cycle operations and continue to find efficiencies in our infrastructure.

With respect to our portfolio optimization initiatives short term headwinds from the closure of a lab and the sale of anesthesia should be more than offset by the transactions. We have recently completed and we are focused on deploying additional capital to achieve our growth goals in 2021.

And finally, we continue to remain optimistic that Idaho Falls community Hospital will continue to advance towards EBITDA profitability in 2021, despite the challenges of opening a new hospital in the midst of a pandemic.

While there are still many uncertainties in this new environment. We believe we have demonstrated the value of our business model by successfully navigating through the challenges of this pandemic and look forward to continuing to report our progress in 2021.

With that I'd like to turn the call back over to the operator for questions operator.

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

You may prestart too if you'd like to remove your question from Nick.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.

To allow for as many questions as possible, we ask that you each keep to one question and one follow up.

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

Good morning, appreciate the commentary about how the trends were during the quarter and certainly how they did but im curious if you have any early indications is that trend continuing into October.

And any maybe discussions around kind of regional variations in the recovery and then I guess the last part of that would just be.

Obviously talk about our recent surge.

Any color around how thats impacting your markets and.

That's it.

Good morning, Frank This is Eric Kevin I appreciate the.

Question I.

I would start with despite looking at fourth fourth quarter. It's obviously early but it's been consistent with what we have laid out in our expectation when we talked about getting to a to 50 to 60 range. This year.

The Q4 is continuing our trend clearly there are hot spots around the country. When we think about those we've dealt with those already you remember early in the year, obviously, we have a big footprint in Florida, California, Texas Places that were impacted we managed through that quite well. The difference then of course was the PE shortage, which we've addressed it so I think about.

Our hot spots, we have to deal with today I visited many of these markets and certainly stay close to them.

I think our purpose built facilities and our ability to provide a safe haven for elective surgery positions us well to deal with them clearly, it's if you can't control all the impacts, but we feel our ability to manage through those even in many states, where we do face a surge is quite high so I would I would say that our our confidence continues in the fourth quarter, we can.

Thank you our trend and were monitoring closely.

Cold and hot spots, but so far.

We continue to manage them well.

Maybe just to appreciate the color and the reiteration of the 250 to 60 in terms of cash flow from ops, obviously weaker.

Weaker this quarter, but how should we think about our cash flow for mobs plays out for the year and just just to confirm just the 250 to 60 include work here is that in the fourth quarter.

Hey, Frank It's Tom as you think about cares Act you know we took a big reversal this quarter.

And we're still in the in reiterating the guidance the 250 to 60 right. So I want to make sure that you. Yes, you appreciate that.

The thing that's funny about the cures Act in the October guidance is that it isn't necessarily designed to aid growth companies right. So as you think about year to date same store, we're looking at about a 3% decline in same store revenues and so depending upon how much growth we see in the fourth quarter.

That may impact our ability to have substantial recognition of cares Act cares.

Cares grant in the fourth quarter. So we're watching that closely I would say our current outlook doesn't anticipate that we're going to get back as much as we've reversed.

Hey, Frank just to add to Tom's comment too about cash flow you asphalt in the quarter. It's an interesting dynamic because there is a lot of unique timing items in Q3. So for example, obviously, we hunkered down as did every company into Q not knowing what the future would look like and so account.

Accounts payables get slowed down.

Our continues to collect but is collecting from Q1 as you get into Q3, you have less they are on the books coming out of Q2, and you're accelerating your accounts payable outflow as you're ramping up your business isn't getting back to as you saw 97% prior year volumes in the quarter 99 by September So first and foremost I would tell you the cash flow is purely a timing.

Issue very pandemic focus unrelated in terms of how its impacted that and then the last thing I would just say as Tom said, obviously, we're optimistic coming out of Q3, our run rate was strong as Eric said.

We like our volume that we can see in October we're still closing the books, though so we don't have the mix yet fully locked down but the volume looks good and our scheduling for November looks good. So I think Tom's important point here is trying to make sure people understand is if you're a growth company like we are.

The rules are not going to allow you to earn as much of cares grants as others may be able to earn and thats, okay with us because we think one we want to be socially responsible return what we can and to.

We think growth company is where we want to be we'd rather be having that run rate going into next year and feeling good about the business model.

Thank you very much.

Thank you. Our next question comes from the line of Kevin Fischbeck with Bank of America. Please proceed with your question.

Good morning, and good morning. This is actually Joanna gajuk filling in for Kevin. So thanks for taking the question here. So you guys I also want to stay on that topic.

I guess I'll now turn it back.

Also for next year I appreciate the commentary there.

Now could you just talk about some of the elements you are flagging. Some one item I was interested in is you talk about pricing. So there is I guess two pieces for acuity maybe higher this year. So how do you think thats going to comment.

Next year do you expect the high acuity Steven.

Service line extensions and ambitions and also maybe some of the Credo was this already know when people come back they are sick or and then the second piece.

It seems to me is also commercial contract pricing that you guys talk about in the past so where you are on that process. You know how much more there is to go what kind of benefit you know should we be looking for next year or over the next year. Thank you.

Let me, let me start because theres a lot of questions in there and so parts and so let me let me just start with kind of a bigger picture view and then I'll to your preliminary to add any color commentary to some of this so let me just start first and foremost as we look into next year I want to remind everybody that that our double digit growth is really based on three.

Very simple.

Promises right kind of pillars of growth. If you will one is we need to grow revenue.

By 4% to 6% on a same store basis, we continue to believe because of our physician recruitment and our managed care that we can we can outrun that four to six be at the high end it actually performed better than that and we think our results continue to prove that to be true, including this quarter in a pandemic environment and I'll, let Eric comment in a minute on our recruiting efforts and how our most recent recruits.

In class looks and how that will evolve the second component, we talk about as we generally want to get 3% to 5% improvement through efficiencies across the business a combination of procurement.

RCM Im really just being a leaner organization and.

I will tell you having sat through yesterday's board meeting my confidence and that is just as high as it's been in the last couple of years that the team continues to execute they have line of sight on everything they are pursuing and I feel good and then the third component is M&A and as you know we hit the pause button on that for a while especially when we got to cope it right. It was really important we didn't understand how long this would last that being.

He said, we were able to execute and eliminate.

Distractions in the quarter were able to quickly redeploy that capital as you or Tom talk about headwinds and Tailwinds the headwinds of the EBITDA of the things, we divested or closed have now been already fully offset by the recent transactions. We completed in late Q3 and the ones. We just completed in Q4, so any capital we deploy from this point forward and I'll, let Tom talk about it.

A moment about what we could have available for deployment over the next year or so.

In theory helps us towards our double digit growth so with that I'd like Eric just a comment very briefly on the physician recruiting and some of the recent trends and then I'll ask Tom to talk about capital that we think we could deploy in the next 12 months. Thanks Wayne.

So just to your question I think I'll start with acuity and this goes to recruiting you asked whether we think acuity is going to stay high next year and we absolutely do for lots of reasons you've.

We've we've kind of highlighted our growth and total joints, we've seen similar growth in spine cases, and clearly cardiac is a moving.

Moving service line from hospitals to outpatient facilities and so we look at our growth opportunity. Our recruitment is focused on those specialties you can see that showing up in our net revenue per case numbers and we believe that transition continues obviously hips are getting added next year premium from a CMS standpoint, and the acuity opportunity for us remains.

Quite large so from that perspective that we're pretty excited about that I would also say that on the commercial.

On the commercial standpoint, as far as our rate goes.

The commercial standpoint, we feel that there is still a lot of opportunity there as we add higher acuity services. The one thing I would point out is our value proposition gets stronger because that differentiation, we offer from a value perspective on higher acuity surgeries allows us to work with payers to create value for both sides and so we continue to that see that as an opportunity.

Now that we have not fully taken advantage of but we've made progress and I'm really proud of the commercial rate progress. We've made so I would reiterate what Wayne said, we feel we also feel really good about our acuity physician recruitment is backing that acuity is we're focused on those physicians as we've talked about from a data driven perspective that have the highest quality and move those procedures to our facilities and then last.

Lastly, we certainly feel like there is still a lot of opportunity for us to.

Share more of the value, we create with payers as we as we raise our high acuity services.

And Tom maybe maybe just elaborate that now now we're really in a position to start that third pillar more offensively now and maybe you could talk about whats available from a liquidity perspective, yes, yes.

Theres, obviously, a lot of cash on the balance sheet.

At September Thirtyth and some of that is obviously the advance payments that will start repaying and small part in the second quarter of next year, but as we think about the capital that we've recently deployed and we think about the liquidity that we have available I'd say our goal we've talked previously about wanting to deploy 100 mesh.

On a year to try to build up that M&A pipeline and to build up that that third leg of the stool I think we still have the capability to deploy $100 million to $150 million over the course of the next 12 months to help generate incremental earnings.

Great Thats, great color I'll go back to the queue. Thank you.

Thank you. Our next question comes from the line of Bill Sutherland with the Benchmark Company. Please proceed with your question.

Hey, good morning, Thanks for taking the questions.

One question.

How do you guys think about the.

Likely impact of seasonality this year being so unusual and comping against.

A more normal.

Quarter last year. Thanks.

Hey, Bill this is Eric I appreciate the question and it's a it's a good one right I think that this is the first quarter. This is the first fourth quarter, we've had posted pandemics I'll have a little bit of Hum.

Humbleness on our ability to predict this I would say that early on it looks like a normal fourth quarter as we talked about so we are seeing our trends year over year comparatively.

Turning up with what we've been seeing in the third quarter, which makes us feel good there are a couple of offsetting factors as you might guess you think about there may be less pressure or maybe less opportunity for people, who met deductibles, but there's also a fair number of people who may have waited and so it's as we see some of our lower acuity service lines like GE recover.

We still think there is some of that fourth quarter push we're seeing that obviously and so until we have data to prove otherwise it looks like a normal fourth quarter, but its I will keep a little bit of a.

Coated unknown there that we just have to be aware of that were obviously planning as if it is it's so far so good.

Understood and then if I could sneak one more in on the on as you guys think of profit potential impact with the additional procedures.

Medicare is now reimbursing.

How how much of a factor is that as you look into next year.

Well it clearly clearly influences our confidence as we think about our double digit growth rate and.

It's hard to know whenever whenever CMS first puts out procedures. It takes a while for physicians to embrace it and it varies by market how fast it's embraced we do think that the general sentiment among physicians to move higher acuity procedures to our facilities has increased dramatically during the cold shutdown. So.

Yes, we're optimistic about it certainly gives us confidence in our ability to to continue on our double digit growth platform.

Platform and we see it as an upside for sure Hey, Bill one thing I want to add and good morning by the way is.

One of the things we take pride in as a company is how we are data driven and so many decision, making and yesterday, we spent a decent amount of time as a board of directors with our management team talking about the splitter.

As we refer to it where we have individuals that are doing commercial business in our facilities today, but have a fairly sizable book of Medicare business that historically could not be done in our facilities and and I would tell you. The opportunity is quite vast with positions that are with us already and so the concept that as Eric said I think we have a whole new wave coming in.

Not just the positive recruiting efforts of what we're doing as a company, but the idea of really getting to the pain points for surgeons as to what will it take for you to move your Medicare Your splitter business. If you will over to our facility in a lot of it comes down to what we've said over the last two years, which is they want block time and they want they want turn.

Overtime quickly in those in those rooms and that is the one thing we excel at and so.

I'm with Eric I think the opportunity is vast but but I want to make sure you understand that that that the team is really at a granular level of data driven approach then on how to target not only what is available to us, but whats really in our backyard today that we can now pursue with physicians that know our facilities already and know our nurses already.

Okay.

Thanks for the color guys I appreciate it.

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

Thanks, Good morning, I, just want to go to 2021 sounds like you're comfortable with double digit growth.

First I don't know if you're willing to sort of narrow that at all is that sort of low double digit from this vantage point.

Teens.

At this stage and maybe.

If you could also help with sort of the baseline is that do we consider that off the 250 to 60 or do we need to make adjustments and think of a different baseline.

Hey, Ralph first of all good morning, and.

So this one is a tricky one that's easy to answer though.

Not off the 250 to 60, it's what a pre cobot baseline would have looked like so clearly we've we fully anticipated our year being stronger than 250 to 60, where we started this year and so in the simplest math I can give you is we're not going to commit to whether its low double digits or teams or anything what we will tell you is we've been very consistent in saying you can look at where we finished last year.

You can add 10% to that for this year you can add another 10 for next year and you can kind of do the math and that ought to give you at least a a baseline of what we see is our targeted growth rate and so clearly based on the 250 to 60 that percentage of growth will be much higher than than low double digit. So I. Just so again I wanted to give you the right baseline, but I think just take last.

Take 19.

Double digit to what that would have been this year and had double digit to that and that's what we went to dissipate for for 2021.

Okay, very very helpful and then I.

I guess this quarter you didnt see as much margin pull through on a pretty hefty topline print is that just the higher cost that comes with acuity did you have other costs in the quarter or does it reflect some of the the sales or divestitures that you did and maybe just how you're thinking about that kind of margin trajectory at this point, obviously expansion sounds.

Given the growth that you put out there, but just any way to sort of frame, how you're thinking about the margin expansion opportunity. Thanks.

Really appreciate that question Ralph Thats something that we spent a lot of time and let me first start by giving the simple answer the margins are actually strong and.

And it's exactly what you highlighted if you were to look at three items. One is if you look at the mix as you know we focus on highest dollar contribution dollar per minute not margin and because of our higher mix in total joints and how much we're growing those as you know the accounting for those puts the full cost of the employee.

Both in the revenue and in the Cogs and as a result, it artificially create what looks to be a lower margin. When in fact, if you were able to strip out those costs components, you would see the margins or even much higher second thing is keep in mind that our highest margin business is very low acuity, which is GE.

And GE is the slowest to recover of all the factors out there now we saw it get much stronger by September those trends are continuing in October. So I think you'll start to see just the mix of higher margin lower acuity business is coming back in and then finally I don't want it to be lost some of the comments that Eric made in the opening remarks, but we're making a lot of investor.

It's in the business, we see a very unique opportunity to to really accelerate certain investments to really drive further value in Q3 was a strong quarter and we chose to make those investments in this quarter and end of Q4 continues as Weve seen in Q3, we will probably make investments then as well.

Okay, great very helpful. Thank you.

Thanks Ralph.

Thank you ladies and gentlemen, our final question today comes from the line of Brian Tanquilut with Jefferies. Please proceed with your question.

Brian are you there you might be on mute.

There you guys all right thanks for that.

Good morning, and congrats on the quarter.

So most of my questions have already been addressed but I guess I've got a couple.

And robust how are you thinking about the rollout of that and.

How should we be thinking about the capex required for that and if you can throw kind of like a number more or less that you're thinking in terms of the robot strategy.

As part of the recruitment process for docs so.

So I'll, let Tom talk a little bit about kind of the financing of it I would say this Brian just to give you a little context, we have a lot of markets, where we have physicians, who use our facilities today, who have additional cases, they would bring with the appropriate technology, often robots and we look at each of those markets independently of the side of it.

It is the right investment to turn that business and we're finding more and more markets where that makes sense. Its high acuity business, it's new business, it's able to be done in our facilities safely and so its about existing docs also expanding their business. It's also a way to to open our doors to this two procedures and a book of business that we just didnt have the opportunity to get in.

Higher times and so we're working closely with managed care companies and our partners at health plans working closely with the local markets to ensure that it make it accretive but ultimately we see real opportunity to grow acuity earn business move it from a higher cost setting to a lower cost setting and actually a lot of winners there that helped us into winter the patients given our patient.

In scores are winners the physicians like it and so market by market, we're making those investments you've seen this year, it's been a pretty dramatic increase there and we actually do see big books of business. When you think about how physicians are trained.

Big books of business in ortho and spine that are growing but also when you think about de Vinci. Its general surgery, it's basically weigh in and so we're going to be.

Yes, it and finding ways to compete for that business and provide the value. We can uniquely so I don't know Tom if you want to talk a little bit about the investment profile. You know the installed base of robots that were that we have is probably in the range of 25 to 30 across the portfolio right and probably be close to that of that high end number by the end of the year.

As you think about that we've been adding them into some of our SCS, but in particular, because a lot of those are in the surgical hospital today.

Added a handful of Makos for example, this year.

Hey, the vendors have been working with us and we obviously have financing capacity for these the economics on the pilots that we've done at the Gses have been have been quite promising.

So while I don't see us putting a robot every facility.

We are going to think about every facility where it makes economic sense.

To drive EBITDA in those multi specialty centers, where this is going to have a good ROI and so we're piloting it now we're expanding it but the early read looks quite good.

No that makes sense I guess, a follow up to that to a question from earlier.

And your prepared remarks about the.

Salaries being down year over year, how should we be thinking about the durability of the cost structure from this point salary from modeling perspective.

Lastly, we're seeing organic growth acceleration or picking up right and.

You've obviously.

Your cost structure there the pandemic so how should we be thinking about the growth on the cost line other than supplies going forward.

I'm hard pressed to say that I think we're going to keep all of it because I think a little bit of visit as a function of how we manage the shifts in light of the lower volume, but I would say that I've been extremely impressed by our operator's ability.

To take a hard look at their cost structures in the Miss this pandemic and I think that some of the changes that we've made are going to be durable.

And so we're actually obviously the mix that Wayne talked about with the higher acuity procedures passing through the cost of the implant lowers the percentage margin, but we continue to believe that we've got run rate cost efficiencies that are going to be durable that have come out of some of the restructurings that we've done across the portfolio over the course of the.

The last six months.

And we have other initiatives underway that we think will deliver additional gene that cost savings over the course of the next calendar year. So we continue to be.

To really go after those costs to try to provide a better service and be more efficient for our customers. Our surgical facilities you, Brian one thing I want to add to I think it sometimes gets overlooked I'm really proud of what this team's done on the core infrastructure investments that had to be made when we started in 2018 with this journey.

There was not a data warehouse today, we have over 97% of all of our facilities on a single data warehouse. So as we do acquisitions and expansions now we are migrating them on day, one like Thats our priority.

We did not have a single HRS system. So the fact is that today over over 95% of our facilities or on a single HRS system. What does that mean, we can flex up and down now our nurses are staffing models et cetera based on facilities and we can look at it real time.

And that did not exist even six months ago, we've been doing all the heavy lifting the last two years to do that migration, which we did in the first six months of this year and that's where we're at today and so yesterday as a board we got to actually see real data that gives us even more agility flexing up and down.

And then revenue cycle management as Tom talked about those investments are almost completely behind us now and so we're finally at this stage now where we get to capitalize wishing to capitalize on those investments and I think over the next year from an M&A perspective, there's tweaks on my call there might be a little more investment here, the harvester, but that heavy lifting investment.

And that kind of running dual systems and processes and people running manual. While we were also trying to build the platforms that is now substantially behind us and so as we go into next year I actually think to Tom's point I think there's a lot of sustainability.

In the DNA structure, even with the growth platform coming and we ought to see even more value creation now having better data.

Now that makes a lot sales and when it's actually a really good segue to my last question.

It seems like everything is finally clicking right I mean, you had to do a lot of heavy lifting from 2018 through 19 and we did.

Yes.

Has that runs recovered and now finally clicking so you talked about that part of the strategy you talked about organic growth picking up M&A going back to that well. So we put all that together it feels like we're ready we're getting ready to see an acceleration inorganic growth is that fair MSR in overall growth to what maybe.

Mid teen level is that a good way to be thinking about.

Overall EBITDA growth.

You know Brian first of all let me just say you couldn't have said towards better everything is clicking. This is this is we're at a point, we all set as a management team. This quarter, we we kind of hit that sweet spot. We got rid of the last few distractions that being shed cobot is such a big unknown and I just want to get over my skis. Because the fact is volume is still down versus last year.

And so the question is can we can we grow out of it faster than everybody else. So far we think the answer is yes.

Can we can we take advantage of that and to really get that more accelerated growth.

I would say all the tools in the toolbox are there now and it's just a question of how do behaviors change and this is this post cobot environment, and and where ultimately we land as a as a country around around those behaviors. So all in.

I would say the optimism is there I would say, we we got a preview of next years with management and we like the number of initiatives, we have in front of us and I'll leave it at that I think as a management team. We think it's always prudent though just to commit to double digit ended just deliver and if we can outperform that low end on that great and so right now I think we would not probably get ahead of ourselves until we.

How cobot and the pandemic plays out.

Now it makes sense I appreciate it thanks again.

All right appreciate everyone's time today before we conclude our call I also want to take a moment to say thank you to our 10000 plus colleagues in 4000, plus physicians for their contributions surgery partners collectively serves over 600000 patients each year in and thousands of patients each day and what are often their most vulnerable moments we take that truck.

And faith that our physician partners and patients placed in us incredibly seriously and are privileged to make a positive difference in so many peoples lives Im excited about and humbled by the opportunity to lead this company as we work to more fully deliver on our mission of enhancing patient quality of life through partnership in our efforts were clearly part of the solution to many of the challenges facing our nation's healthcare.

System and are extremely proud of the value, we're creating for all of our stakeholders as we execute against our goal to become the preferred partner for operating short stay surgical facilities across the US. It is a daily efforts at each and every surgery partners, calling in physician that will help us get there. Thank you for joining our call. This morning, and hope you all have a great day.

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