Q1 2021 Surgery Partners Inc Earnings Call
Greetings and welcome to surgery Partners, Inc. First quarter, 2020 one earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the form of presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference call is being recorded and will now turn the conference over to your host Tom Kelly CFO. Thank you you may begin.
Good morning, and welcome to surgery partners first quarter 2021 earnings call. This is Comcast Chief Financial Officer. Joining me today are Wayne device 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 of those statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we file with the SEC. The company does not undertake any duty to update such forward looking statements.
Sully 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 <unk>.
<unk> partners Dot Com and 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.
And while it's been only a few short weeks since we last spoke with investors our execution in 2021 continues as our team drives towards achieving over 25% growth and adjusted EBITDA. This year.
While January was a short month, that's all COVID-19 rates on the rise and February was impacted by winter storms. Our teams remained focused and delivered nearly 73 million and adjusted EBITDA and the first quarter of 2021, representing nearly 57% growth over the prior year quarter.
This strong performance and our early April momentum give us confidence to increase our full year outlook to at least $320 million of projected adjusted EBITDA.
Yeah.
As the country's inoculation rates increase and as the deferred care from recent COVID-19 spikes return, our unique position and the industry as a safe haven for patients and providers seeking surgical care remains steadfast.
Our strong first quarter performance showcases the value of our business model and the accelerated development of many of our key initiatives, including our physician recruiting efforts, which continued to outpace last year's strong results and grew new physicians by over 25% year to date as compared to the prior year period.
Total joint replacements, which almost doubled in 2020 compared to 2019 continue to grow in 2021, increasing over 120% and the first quarter as compared to last year.
And our total joint replacement growth is buoyed by our surgery robotic case volume with cases associated with our investments up over 65% versus the prior year quarter.
All of this comes together and our strong 17% same facility revenue growth with volumes up nearly 9% over the prior year quarter complemented by equally strong net revenue per case growth of approximately 8%.
As mentioned and our fourth quarter call. During 2020, we continue to prune our portfolio to allow us to focus on our core business of short stay surgical facilities. We are now prime to move on the offensive and capitalize on what we see as a major migration of cases from the inpatient to outpatient setting.
As we've discussed previously we believe that the existing market for surgeries that can be performed and our purpose built surgical hospitals and <unk> represents a $90 billion opportunity today and we further believe that there are approximately $60 billion of new surgeries that are migrating from inpatient settings into our target segments. The vast majority of which is muscular <unk>.
Total and cardio procedures.
It is with that lens that we raised nearly $250 million of deployable proceeds and January with the goal of leveraging our investments and our platforms to accretively deploy capital and our targeted markets and specialties.
We've spent the early part of the year identifying and negotiating with potential targets, while maintaining a disciplined approach to deploying capital.
Our pipeline remains remains robust with even more opportunities ahead of us and just a few weeks ago and our target remains to deploy $200 million or more and proceeds this year. Our goal, we expect to make progress towards over the coming quarters and.
In summary, we are a leader and an industry with a 150 billion total addressable market.
Significant tailwind with high acuity muscular skeletal and cardiac surgical cases transitioning to our purpose built surgical facilities and a platform for consolidating of highly fragmented industry.
Our company was built.
And for this moment in time.
With that let me turn the call over to Eric to walk you through some of our recent accomplishments in greater detail Eric.
Thank you Wayne and good morning, everyone.
Today, I will focus my comments on three areas.
First I'll provide a few additional highlights of our first quarter results.
Second I will provide additional details around some of our key strategic initiatives and third I'll spend a moment on our expectations for the rest of 2021.
We were very pleased with our first quarter results highlighted by the following our adjusted EBITDA that exceeded our expectations and grew nearly 57% over the prior year quarter.
Total company revenue growth of approximately 16% led by strong year over year revenue growth at our New hospital, and Idaho falls, which achieved revenues approaching $17 million and the quarter.
And same facility revenue growth of over 17% and with meaningful growth and both volumes and net revenue per case as well as increased mix of higher acuity cases, such as orthopedic and spine surgeries.
Also of note, we continue to see a rebound and Gi cases in the first quarter.
We are quite encouraged by the continued strength of our trajectory and April and are optimistic we will see these trends continue as we move forward into the rest of 2021.
Margin performance was solid and the first quarter with adjusted EBITDA margins, reaching 14, 2%.
Looking more closely at our underlying performance when you exclude cares grants recognition first quarter. Adjusted EBITDA margins are 12, 1%, a 160 basis point increase over the prior year quarter and consistent with our first quarter 2019 margins.
We are encouraged by this performance as we consider the substantial increases in both government payer mix and acuity mix that we continue to see and our first quarter results as compared to prior periods.
Moving on and some operational highlights.
Our ability to drive leading same facility growth is a direct result of our investments and physician recruiting targeted facility level and service line expansions and our relentless data driven and focused on managed care contracting.
We continue to see increased demand from new physicians for our short stay surgical facilities and our targeted physician recruitment approach has focused our efforts on the highest quality positions.
As Wayne mentioned, we continued to execute well and this area and we added over 25% more new physicians and the first quarter of 2021 as compared to a year ago.
Further we continue to focus both our footprint and our recruitment targeting towards higher acuity cases.
Over 25% of our Asp's performed total joint cases, and the first quarter of 2021 and importantly in March alone, we saw and over 30% increase and a number of physicians who are performing total joint cases as compared to the prior year.
This has led to a 100, 122% increase and total joints performed and our <unk> and the first quarter of 2021 as compared to the prior year and exceptional result.
Another key component of this increase has been our investments and robotics across our ASC footprint.
The robotic cases were up nearly 70% over the prior year quarter on and installed base that has reached over 20 of our <unk> as of the end of March and continues to expand where we believe we can achieve and appropriate return on investment.
As we continue to improve and refine our operational excellence and execution. We also continue to look to add to our portfolio and deploy capital.
We currently have a pipeline of transactions under letter of intent that total over $125 million that we will look to close in the coming quarters. We.
We are also evaluating over $200 million of transactions at an earlier stage of the process.
While the acquisition activity is always cycle and is subject to change this robust pipeline of opportunities, which are at attractive multiples and and attractive specialties and geographies gives us a high level of confidence that we will be able to meet or exceed our capital deployment goals for this year.
Moving on to outlook for the remainder of 2021.
As we think about the momentum we have as an organization. We now believe we will produce at least $320 million of adjusted EBITDA in 2021.
We believe this floor for our performance this year reasonably captures the upside that we recognized and our first quarter results, while maintaining a prudent posture given how early we are and the calendar.
We continue to believe that continued strong operational execution additional cares Act grant recognition and capital deployment could represent further upside opportunities to this revised outlook.
To summarize I want to spend a moment thinking about some of the milestones we have achieved over the last several years.
We have made significant progress and focusing our portfolio selling non core businesses and closing our toxicology lab.
We have invested and our recruiting teams to earn new business and and our managed care teams to ensure we are paid fairly for the significant value, we create leading to robust same facility growth we.
We are focused on higher acuity procedures, and we now estimate that over 50% of our revenue is generated from our musculoskeletal service lines.
We have prudently managed our balance sheet, raising equity capital to accelerate inorganic growth and restructuring our obligations to achieve interest savings and defer maturities.
And this operational execution has led to robust shareholder returns, which will allow the company to convert our outstanding preferred stock into common shares and just a few weeks reducing future dilution.
We are excited by our progress so far this year and we remain confident that we can continue to build on this momentum.
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 first quarter financial performance before moving on to liquidity and some considerations as we move into 2021.
Starting with the top line surgical cases increased over 8% and the first quarter to over 125000 cases.
Revenues for the quarter were $512 million over 16% higher than the prior year period as Eric mentioned reported results included approximately $17 million of contribution from our new community Hospital, and Idaho falls, nearly an 85% increase as compared to the prior year quarter.
On a same facility basis total revenue increased over 17% and the first quarter looking at the components of this increase our case volume was approximately 9% higher than the prior year period, and net revenue per case increased almost 8% driven by acuity mix and pricing.
Turning to operating earnings our first quarter 2021, adjusted EBITDA was $72 9 million nearly 57% higher than the comparable period in 2020.
In the quarter, we received approximately $7 million of new grant funds and using guidance from HHS. We recognized an additional $15 million of cares Act grants in the first quarter as grant income increasing adjusted EBITDA by $10 7 million after accounting for non controlling interests.
At March 31, we have approximately $5 million of grants that have not been recognized in earnings and are treated as the deferred liability on our balance sheet.
We continue to actively monitor guidance from HHS to determine the ultimate appropriateness of grant recognition as we await clarity when the submission portal opens later this year.
Based on current guidance, we continue to believe it is possible that we will be able to recognize the majority of the remaining cares act grants on our balance sheet in 2021 and.
And the unlikely event that we are unable to recognize these funds in accordance with CMS guidelines, we expect to repay them to the government.
During the quarter, we recorded $9 4 million of transaction integration and acquisition costs of note first quarter transaction integration and acquisition costs included approximately $4 million of losses associated with our de Novo Hospital, and Idaho falls as that facility continues to make progress towards achieving profitability we expect.
Reported results from this facility separately through 2021 until the facility becomes profitable, which we expect and the second half of the year.
Moving onto cash flow and liquidity, we ended the quarter with a strong cash position of $542 million.
Which includes approximately $120 million of Medicare advance payments, we have held these advanced payments as deferred revenue on our financial statements Recoupment of these funds from future Medicare revenue commenced and the second quarter and will continue into early 2022.
Moving back to the first quarter surgery partners had operating cash and net inflows of approximately $50 million.
Generated approximately $248 million of net cash inflow from the February 2021 equity offering.
Deployed $13 3 million through acquisitions disposals syndication activity and Capex investments.
And made a cash dividend payment of approximately $5 million and the preferred stock to reduce dilution to common shareholders.
Looking forward to the remainder of 2021 some of the other material uses of cash include the tax receivable payment of approximately $21 million and the fourth quarter.
Continued funding for the Idaho Falls community hospital until it becomes profitable and approximately $75 million of projected repayments from Medicare advanced payments this year.
The company's ratio of total net debt to EBITDA at the end of the first quarter as calculated under the company's credit agreement decreased to six one times as a result of net proceeds from the equity offering and increased trailing 12 months adjusted EBITDA.
Normalizing for the impact of Medicare advanced payment funds the ratio of total net debt to EBITDA would have been six four times.
Additionally, subsequent to the quarter close on April <unk> surgery partners made its final payment of $32 million to the department of Justice relating to Logan labs of delayed payment that was agreed to as part of our 2019 settlement agreement.
As a reminder, Logan lads ceased operations in the third quarter of 2020.
As Eric mentioned on May three 2021, we also closed on a debt refinancing transaction, which extended the maturity of 155 billion of term loans to August of 2026, including refinancing approximately $119 million of incremental term loans incurred in April 2020.
The company has also and the process of extending its $1 2 billion of interest rate swaps to take advantage of prevailing market rates the.
Net of these transactions is that the company projects it will save over $7 million and annual cash interest, while extending important maturities and.
In light of the refinancing transactions and the equity capital raise that we completed in January Moody's upgraded the corporate credit rating of the company on April 20th.
Wed like to take this moment to thank our lenders and the agencies for their continued support of the surgery partners credit as we continue to execute on our growth and deleveraging strategies.
Finally in late April the company announced it at the <unk> noticed the gain capital of its intent to convert the entirety of being capitals preferred stock into approximately $22 6 million shares of common stock on May 17th 2021 based on meeting all of the criteria for conversion at the election of the company Inc.
Including achieving of volume weighted average closing price in excess of $42 per share for 20 out of the prior 30 trading days as of April 15th 2021.
Following the execution of this conversion the company will have approximately $82 5 million common shares outstanding Bain.
<unk> has been and continues to be a valuable partner and Investor and is being stated at the time of the conversion announcement, we remain confident in their commitment to supporting management as we execute on our strategies to drive growth and continued shareholder returns.
Throughout the first quarter of our continued emphasis on expanding key service lines, such as musculoskeletal and cardiology.
We're getting high value physician recruits and engaging and strategic rate negotiations have all continued to fuel our growth trajectory.
This core growth coupled with the capital we have available to deploy has enabled us the opportunity to go on the offensive this year.
We remain confident and our growth model and our first quarter performance has provided us the opportunity to increase our 2021, adjusted EBITDA guidance to at least $320 million.
Our revenue outlook remains unchanged.
Key considerations for our change in outlook include our strong first quarter performance, including the recognition of cares Act grant and a strong volume performance in March as well as tailwind from the delay of sequestration.
While we do not provide quarterly guidance as we think about the seasonal progression of earnings. This year, we would remind investors of our previous statements that we continue to believe that earnings would be more backend weighted in 2021 as deferred care related to COVID-19 returns and as our new community Hospital, and Idaho Falls achieves profitability and has brought into earnings.
As we look more directly at the second quarter, we projected it will represent approximately 25% growth over second quarter 2020, adjusted EBITDA of $58 2 million.
We believe our revised outlook remains prudent based on the early stage of the year and are encouraged by our April volume trends, which continue to show a rebound and lower acuity cases, as our higher acuity volumes persists and grow.
Further we are excited by the prospects to accelerate growth through capital deployment. This year and short we're off to a strong start and our team is focused on continuing that momentum throughout the remainder of the year and beyond.
With that I'd like to turn the call back over to the operator for questions operator.
Thank you.
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Our first question is from Brian <unk> with Jefferies. Please proceed.
Hey, good morning, guys, congrats on a really strong quarter.
Tom I'll start with you just since you mentioned the guidance.
And I think about the year beat in Q1 and the guidance raise is it right to just think that that's just conservatism that youre raising the year by a slightly lower number than your beat for the quarter.
Hey, Brian This is actually Wayne first of all good morning, and I appreciate I appreciate the question.
Let me, let me just start by stating.
The obvious for the quarter was quite strong.
And while we saw of heavy impact from the pandemic and January in particular, and we were equally impacted by the storms in Texas with the many facilities. We have down there. We obviously were able to cover all of those impacts and post 25%.
Our guidance still for the year.
I would simply say that.
It is still early in the year, and we remain prudent by giving and at least $3 20, but that being said if the trends we saw in the quarter and that we saw in March and that we're seeing in April were to persist we would clearly be raising guidance more by <unk>. So more to come but we think right now it's prudent to just maintain the posture, we're four months into the year.
No that makes a lot of waste and as I have you know.
And obviously same store performance has been really strong off the charts and if you want to call it that.
How are you thinking about your ability to sustain these high levels of organic growth going forward.
Yes, so it's interesting because Brian I think we're not as surprised as a management team at these volumes and growth because these were a multitude of investments that we had put forward over really the last three years, whether it be the community hospital that we built out and Idaho falls and the many de Novo afcs and as we've been talking about.
The compounding effect of our physician recruiting efforts and I'm going to ask Eric actually to comment on where that same store growth is coming from because I think the one thing I want to emphasize is that what we're most proud of isn't necessarily the company that we've built and the last three and a half years. It's really this culture of execution, which is emanating and all of our.
And so maybe Eric maybe highlight a little bit about when you think about that growth.
I think people will be surprised to see the debt, while the hospital and Idaho is driving some of that it's a very small piece of it relative to everything else happening, yes, Brian and thanks for the question clearly we're pleased with over 17% same store growth and I would point to a couple of things portfolio and said not surprised by this this is actually our expectation coming into this year as far.
And as where our growth is and what I would point out and it's really balanced growth. So if you look at that even if you even if you remove the Idaho Falls community Hospital, which came into the same store earlier this year from a growth standpoint, it's less and a couple of points of that growth. So you are still at 15 and I will tell you that as a balanced growth, it's not driven by one region. It's not driven by one facility of one type of facility.
It really is kind of a combination of the <unk>.
Very specific physician recruitment efforts the service line investments of the focus on ortho obviously.
We are.
We're not we're not surprised by where the growth number came and we feel like this is what the plan was and we feel good about the recovery, but I would I would just.
Went out that it's really balanced it's across the way we are operating our facilities the way we're approaching growth.
And specific geography, no specific type of facility and.
Really pleased with the operators performance.
And then just as of note the Idaho Falls community Hospital will ramp up I mean that is going to continue to drive organic growth as the year progresses and as the several years progress you should know, though relative to that growth and represented less than 2% of our same store growth. So the other 15% plus is across our entire book of business and of course, we see that being an asset that will only.
Grow only more as we as we get further into the year.
And that makes sense and then last question from me Eric.
You talked about physician recruitment and the momentum Youre seeing there and I know you were very early you are one of the earlier guys and MSA right and building of that capability. So as we start thinking about cardio as an opportunity what are the those conversations like how different are those conversations with cardiologists and if any color you can give us in terms of.
What you are seeing the momentum there.
Yes, it's a great question and clearly we are excited about what the what CMS has done to open up cardiac too short stay surgical facilities right. So we see that as the opportunity I do think we're in the really early innings, though if you think about how many years, it's taken us to get the momentum and orthopedics, our and the early innings, but those conversations are going quite well I would tell you just like we've added totaled.
<unk>.
Five to 10 centers of year for the last several years I.
And I hope I hope is to get 5% to 10 cardiac centers of year started and and we're talking about from from a cardiac standpoint that does not mean cath labs. Initially that means conversations with cardiologists, who want to move over of cardiac rhythm management, we've been out of a health system partner, who is working with us to move some of that stuff out of their cath labs to create capacity and so we see some of those early steps have.
Turning.
Those established relationships and clearly the one thing that we have a track record of is when physicians experienced the way we run facilities are very patient centric approach and their.
And their ability to be really efficient we win them over time, but it's early innings as I mentioned earlier too.
A couple of things I would say we are also developing cardiac further and our surgical hospitals and so I would mentioned, we just and the last quarter, we had a hospital and open and open Heart program and we had another hospital that started for the first time doing cardiac rhythm management procedures. So we're seeing it and our and our surgical hospitals as well it is a market by market story when it comes to cardiology.
Unlike orthopedics when.
And when we first started it was not as consolidated from any of the physician employment standpoint. So there are many markets and the country, where all of the cardiologists are employed there are also many markets where theyre not so.
So the markets, where they are not obviously I think we will transition faster because they have less complex and less things to manage through other markets will take a bit of time structurally but when you look at the value creation opportunity and how much we can save the healthcare system by making sure of those procedures are done and the right location. We think it is going to be the same kind of semi multi year, but it's going to be the same kind of growth we have really.
Strong growth and cardio with the small and right now right. So we think that's going to continue it's going to be and outsized growth for a while and they will come of tipping point, where we'll be able to really start showing more of like ortho growth, but it's a ways out.
Awesome, Thanks, guys and congrats again thank.
Thank you thanks, Brian.
Our next question is from Kevin Fischbeck with Bank of America. Please proceed.
Okay. Great. Thanks, just wanted to confirm it sounds like the guidance doesn't assume any new cares money, but.
The guidance also doesn't include the cares of money received the data.
And I want to make sure we're on the same day Sir.
Yeah, Hey, Brian It's Tom I'm, sorry, Kevin It's Tom excuse me.
The the guidance is for what we believe will printed at the end of the year and so of incorporates the fact that we had nearly $73 million worth of EBITDA printed and the first quarter.
Okay, great and.
And then it seems like a lot of the growth that you guys are driving today.
And because of the physician recruiting that you're doing I guess, one understand where we are and that trajectory because I guess at some point I would imagine that the facility and start to reach capacity and you can.
Keep adding.
In addition, with the type of clip I guess, how much longer do we have this type of run rate.
And so it's a great question. This is Eric I'll just dive in on that one we clearly had we have a lot of runway left there are a lot of physicians still out there for us to work with and from a from a capacity standpoint as it varies by market, but I will say that what you don't see is that every year, we're adding capacity we're building new facilities to make sure. We're kind of ahead of that trend.
And we don't have a lot of markets, where we face capacity constraints at this point and where we face them. It's a relatively capital light way opportunity for us to add capacity and so we do try to watch that closely we don't we don't see any near term.
Change in our opportunity to recruit physicians and in fact I would add that.
As cardiology gets added as a whole new group of Docs, who are now in the recruitment opportunity for us from the same store perspective on the ortho side. Our success is actually allowing us to use those peer positions to help us recruit that kind of drive success in the market clearly the outcomes, we're driving on higher acuity procedures are getting physicians attention because they now see that it's a really safe great play.
And on the come.
And again coming out of COVID-19 I would just point out from a physician sentiment standpoint, we've made a lot of ground up because the a lot of docs, who maybe haven't tried it from the past had an opportunity and certainly they see the efficiency of of what we do but we don't see any near term change and that opportunity. Kevin One thing I would add too is we have been obvious.
The very data driven and our analysis of of.
Of of how we recruit and then how that matures over time in terms of volume and as we've talked about the compounding impact of getting doctors and retaining them and then how that grows over time I think what's been a nice surprise for us and some wages how COVID-19 has put a bigger spotlight to a lot of doctors that were maybe uncertain.
And about that change of moving procedures and doing that and by having that accelerate and happen that word of mouth of that fear factor of the unknown is actually spreading much faster than we thought and that's why the number of docs, we recruited and the first quarter I want to make sure that point that came through in our prepared remarks is up 25% net over where we finished last year, but if you actually took all of the deal.
So we recruited last year and the first quarter, we recruited that amount and 25% more of like we were really growing those positions that are coming on board and those new docs, because we're focused on the right procedures are and the right right acuity and the right volumes and I think as Eric said back in 2018 and 19, we really started looking at facilities that we thought would hit capacity.
<unk>. So we started we kind of take a two year lens when we look at capacity and if we see that there's a need there. We start building out then and so when you think about down in Tampa.
Our most productive facility was was at the seams and <unk>.
Year and a half later, we opened up of five of our state of the art facility that now has given us runway for the next decade, there and so that's the approach we take so always know that the company to our lens is always two years out because we always had this view that this growth is going to continue and Kevin from the organic perspective, one of the thing I would add it's not just the new physicians are.
<unk> positions every year CMS CMS adds new procedures that are allowed right and so we look at our docks that are coming to our facilities now and we look at what what volume are they doing and new procedures that they can now do of suddenly do at our facility. They already like us. So every year, we get that bump of new market share and then we're really focused too on if there if theres procedures that can be done and in an ASC.
And we have physician partners of physicians that use us and like us doing those procedures elsewhere why is that happening and that has really been the key driver behind the <unk> robotics has been such a big part of our story is we took a very data driven approach to figuring out what is it we can do to earn additional procedures from physicians, who already like us and a lot of it was simply just making sure they had the right.
Tools available and so we've been extremely focused on doing that thats allowed them to the already liked us and now they can do more of their book of business with us and so that's been a huge win for us.
Alright, and I guess when was the last question I guess with this guidance range.
And it's early to talk about slide slide two but.
And some of this is Curt I mean, you guys have given the double digit kind of compounding growth algorithm for us.
Is that something that we can apply to the newer guidance or is it still kind of.
Early and.
The COVID-19 impact the numbers, we still kind of think about the free 15 of the jumping off point for next year.
So.
Obviously, it's very mature early for us to be talking about 2022 and beyond but the cash.
Kevin we made it very clear that with the capital raise we did in Q1 of our ability to consolidate the fragmented industry plus our unique approach to organic double digit growth that we thought we would be.
And the low to mid teens growth rate going forward. So.
I don't know that I would necessarily change that outlook and.
And it simply will mean, if we're capturing the opportunity sooner. It just means we have more to go get later in the year for next year, So all in and I feel real good about about.
Wherever we finished this year that we will double digit off of that Kevin and I think it's important to realize that we've talked about and really have delivered double digit organic growth.
On a mostly organic basis right. There is some portfolio reshuffling that I think happened in late 2020, but as we think about the.
What we added and what we replaced we think we're at a little bit basically at par there and so when you when we think about the nearly $250 million worth of deployable capital that we received just from the equity offering our ability to deploy that at attractive multiples should drive kind of the third leg of the stool that.
Quite honestly, we haven't really been able to capitalize on as much as we might have wanted to over the course of the last two to three years and I think that's the real difference maker as you think about how do we get to something that is north of just double digit into kind of the teams, it's the ability to really deploy capital and.
And I think that's really the bridge here.
Alright Thats helpful. Thank you.
Thanks, Kevin.
Our next question is from Ralph Giacobbe with Citi. Please proceed.
Thanks, Good morning, I guess first was the weather and was there weather impact in the quarter or do you think you got all of that back in the quarter or maybe the spillover into <unk> and then what are your updated thoughts I guess on.
Pent up demand coming back I think it's hard for us the sort of see given the growth and your physician recruiting sort of just the adds of new physicians relative strength sort of some of the argument of kind of pent up demand and whether that's still sort of.
Something thats on the common and maybe just how youre seeing scheduling patterns at this point. Thanks.
Thanks, Ralph Let me, let me just start by saying, yes, we were impacted and Texas I mean, we had four surgical hospitals, several afcs and that market and we had the same impact of being shut down for a period of time, almost a week and many locations as everybody else was impacted during that window of time.
It's hard to gauge how much has come back and when it comes back as I always try to remind people. If you lose a week and a year you can never get that week back you might get the cases back what you lose those days of doing services, but nonetheless, that's another reason, we're very optimistic about the strength of the quarter. Because we do think some of those cases came back though and March in fact, we know.
And they did but we'll never get those days back this year.
But again optimistic about about our growth trajectory, there I'll, let Eric and Tom comment, maybe a little bit more about the kind of the kind of the rebound still and other procedures and how April has looked so far and kind of where we're going.
Yes, thanks for the question Ralph.
And we.
As we've talked about and we started the quarter pretty impacted by COVID-19.
March really really turned the corner on volumes for us and we can see and continued strength in April and I would say and both of those months ahead of expectations. What's interesting is when you talk to our operators. What they are seeing is and what they're hearing doctors' offices are busy or even our clinics, where we have physicians are really seeing a rebound and schedule.
And again Thats a process right. So they come in they start getting busier and the office and that starts to play out in the coming months and so I feel pretty pretty good. The fact that we're kind of ahead of expectations before we're actually seeing that refill and the offices coming through that's a positive trend and we also have a little bit of deferred care relative to just timing of.
People getting their and vaccines and.
Some of some cases that affects when theyre able to have procedures or has the pain of injections and that.
The delay is real and so there's people that have a certain amount of time. They they have to put off care and so what I would say when we think about scheduling scheduling is now kind of running at or above expectation.
And Thats before some of these other things that we think probably do have some deferred care. It's early to say that and I don't want to get too far ahead of myself, but there's lots of reasons to feel.
The agree with the the consensus that we're going to be more back half weighted the normal and we are going to continue to see this rebound and I'll tell you. There's a lot more optimism amongst the physicians and what theyre seeing and clinics. So that's the kind of my high level I don't know, Tom what you might add.
And as you think about some of the specific categories right. That's maybe one of the easier ways to think about whether or not there is deferred care and so we saw some of our musculoskeletal and orthopedic groups were much less impacted in 2020, and particularly in the back half of March by.
The beginnings of the COVID-19 outbreak and we.
Saw you still mid single digit growth and those.
Over 2020 inside of the first quarter right. So really strong growth there really a function of the recruiting and the robotics and all of the things that we've been talking about.
What we actually saw for the what we did see and the pandemic, particularly based on the CMS guidance was.
Some of the GI procedures really dropped off right. Some of the ophthalmology procedures really dropped off and those of the ones that CMS, specifically targeted as surgeries that should be deferred inside of those early windows. We've now and the first quarter just gotten back to a little bit of growth on Gi over the 2019 level right. So a point or two.
And so as I look at things like that and I'm encouraged by the fact of its back but I know that there is a lot of other deferred care out there and I think about the growth that we're seeing and other lines of business and I know that there's more opportunity. There ophthalmology came back a little sooner, but still we think that there is more opportunity for growth and some of the pain management, just the simple injections, which are really part of the over.
Of all process or some of the larger orthopedic procedures as part of that that whole management of the chronic condition, which ultimately leads to a replacement. Some of those are really based on office visits and they're still well below 2019 levels and we think that there's opportunity for that to continue to come back, particularly as we see those vaccination rates continue to rise.
Okay got it very very helpful. And then just my last question can you talk a little bit about the margin profile of the company at this point guidance puts you a little looks like a little above the 14% range slightly higher than 2019.
The question is as you accelerate in the higher acuity should we see better margin or is that really going to show up the sort of top line and then as you accelerate M&A just given the two deals typically come on at lower margin or what's the ramp we should consider for that thanks.
Yes, so there's a couple of things in there.
Let me help you try to unpack some of it the.
The first thing is that we know because we've done the math that those high acuity implant cases per minute of operating room time generate the highest dollars of profitability across our portfolio right. So we want to do those every place we can.
And even if we had to pick and choose which oftentimes we don't but if we add two we'd rather fill and operating room with and implant case, then with a lower acuity case, because why the percentage margin may be better on the lower acuity gates. The dollars of contribution margin per minute are better on those implant cases that said we know the.
We have to now account for the cost of the implant in our margin and and we get paid for that and our revenue, but usually not of much of a markup and.
So first thing you should realize is that if you took the total company margins and you just normalize them for the pass through of the implant our margins go up by probably about 10 points or more right.
And so there is a really large impact there as you think about the impact of those implant cases, and the cost of the pass through on the implant itself the.
And the second thing that I think we need to be conscious of particularly as you look at the state of the first quarter margins, we've achieved parity with 2019, but we've done that with over 400 basis points of mix shift towards government relative to that 2019 first quarter and we have done.
That with your supply costs up well over 100 basis points, which is a function of the shift and the mix and part of how it is that we've made that up is exactly how we said we would which is an additional G&A efficiencies, which is helping to keep the margin constitutes.
And so as we think about the margin profile. We do continue to think that there are benefits to scale that we continue to push the capture by standardizing a lot of the processes that we do and leverage what we can provide a corporate and we're going after those each and every day, but there's going to be some pressure on those margins kind of of counter.
As we grow more inside those.
As we grow more inside those.
And those higher acuity cases, but we continue to believe that margin should drift upwards over time as we and.
I think something and on the long term and the kind of the mid teens area as appropriate for this business and that's the target that were driving towards.
Got it makes sense and then anything on the M&A, how we should think about that and those deals coming on.
The pipeline and as is.
The robust I'll going to let Eric comment since.
He has been doing a lot of these visits and that around the.
We commented in the prepared remarks around whats under LOI, but maybe Eric talk little bit about pipeline and our expectations of our goals of the pulp.
The exceeding 200 million of deployment. This year, yes, just to clarify I think you were asking about the impact of acquisitions on margins is that yes, yes, yes, yes, yes.
Good day, yes, I want to make sure I'm answering the right question here. So, yes, I would say that in general.
We bring we bring opportunities to centers, we buy right. So we expect that probably initially they're going to have maybe a little lower margin profile than our overall business, but we work pretty quickly to bring what we bring to the table, whether it's supply chain managed care revenue cycle and we bring all of those things and so our expectation is when we buy something that's part of how we lowered the <unk>.
<unk> of costs for our business right as we go in we.
As their margins, we find the opportunities to take our platform and and drive additional earnings. So I think youre, probably right in saying that initially when we bring something on it could be slightly margin dilutive, but the expectation over time as we get them to at least where the rest of our portfolio is and as we drive everything forward day will benefit from that.
Okay got it thank you.
Our next question is from Bill Sutherland with Benchmark Company. Please proceed.
Hey, everybody.
Thanks for taking the question.
And good start to the year.
Follow up on Rob's question on M&A, and just Eric maybe a little more color on.
Focus.
And the comp.
Valuations are doing right now.
Sure. So as we mentioned earlier, though we're we're really.
Pleased with our pipeline, we have a lot of attractive opportunities and attractive geographies focus is highly of matching what our current portfolio is like we have a lot of focus on orthopedics, we see strong opportunities in orthopedics.
There are some cardio opportunities and certainly we also see our bread and butter kind of Gi and ophthalmology facilities, we have a really nice.
The pipeline of single gases that are multi specialty to add to the company. We're also looking at a few kind of multi center opportunities and surgical hospitals and so we look at the balance of what's in our pipeline. We feel quite good we've talked we have high confidence, we will get to that $200 million plus of M&A.
As I mentioned and that my comments, it's always a little cycle right. You don't want to get ahead of this but valuations are and our historical range.
And we still find very attractive valuations of very accretive evaluate evaluations and.
And we've got some just great physician groups, we're talking with across the country, we expect.
To be able to execute on those we are of very experienced team that's focused and as we mentioned of $125 million plus under LOI, We got a bunch of other stuff, we're looking at it and new opportunities coming in every day. So it's a highly fragmented industry is still really attractive multiples and we have full confidence we will get to that $200 million plus of deployed capital this year.
Great.
And.
Tom I guess, you mentioned the pick up.
And the government mix and the payer mix.
Help us think about the trend and payer mix is it.
That is the <unk>.
Piece of it and.
And also thinking about maybe.
The degree to which you start to do work directly with employer self insureds.
Yes.
Great question the second one in particular the the.
The mix as you think about government.
And is.
As you look at the year. It is less intense in terms of the migration, but as you think about the quarterly progression. It clearly has an impact.
As you look at some of the headlines of deductibles and it doesn't seem like the rate of change is quite as high but as you think about what's happening with even the HMO and PPO deductibles on regular way of course consumers of paying more out of their pocket and in times of economic uncertainty that.
That helps the influence their decisions and so part of what we're doing the combat that is to actually think about new payment models, where we can try to pull some of that.
And as that utilization to the left on the calendar by helping them to finance their deductible spend but as we think about quarterly progression of earnings it's clearly something that.
Has impacted us over the course of the last couple of years and we expect that trend to continue which is why we're trying to be creative and and how it is that we help with patient financing.
Eric I don't know if you, yes and then.
And the direct to employer and I'd like to say just a couple of things on value based care and how we think about this so let me just start by kind of ground and you guys on the fact that we see.
Save the health is from a bunch of money just in our flat fee per service right. So if I had and so I'm thinking about our of our place and the value based care World, just simply working with insurers and working with employers to get patients to the right side of care, where they have a great experience and better outcomes saves a tremendous amount of money. So when we're thinking about like where do we go and value based care.
Negotiating against ourselves and we're such a value proposition is interesting and it can be challenging and so a lot of.
Our first step is just by ourselves we are naturally value based care and we save the health system hundreds of millions of dollars versus the alternative.
And so when you think about going direct to employer and maybe taking on risk.
Lot of posts to it if there's the right model and certainly we'd love to share and the savings, we're creating and we try to do that as much as we can but I think the amount of opportunity that still exists just working with our health plan partners and working with employers to get patients to the right location. It's huge and so we we are naturally value based care and then we're looking for ways clearly where there is an employer.
That has an interest or there's a local local markets that want to take a different approach we're absolutely open to that.
R R.
Our way of doing services provides such a value of that it's sometimes it's hard to go beyond that until we first captured that.
And you do and.
And it looks like.
Just population.
Mcgrath of <unk> et cetera that the Medicare.
Yes.
Just the larger pieces of the.
The total mix.
Yes, I think over time, we're seeing that but I would say to the first quarters of little bit of anomaly, we have seen year after year after year that as well.
Part of the CMS is actually opening more things to us and we're getting more Medicare market share rate part of it British and part of it. This year is you do have a group of folks who were.
Probably the least likely to want to come out during COVID-19 that now I've gotten vaccinated and probably move that a little bit more than normal, but yes, I think over time, you're going to continue to see that go up I think the good news is over time, we're also.
The opportunity to gain commercial market share so to us at the at the end.
And it's not just Medicare alright, great.
Okay. Thanks, guys I appreciate it thank.
Thank you Bill.
Our next question is from Frank Morgan with RBC capital markets. Please proceed.
Good morning.
I know you touched a little bit on this acquisition pipeline and the amount of deals you have $125 million under LOI.
Could you share with us what kind of revenue contribution you think of $125 million of acquisitions could be.
Yes, I don't know if I have the top of my head, but it is.
And I would say this that.
We've talked historically about multiples the multiples are staying very competitive with what we've been able to execute on the last couple of years and the margin profile is pretty similar so we can get to that number of pretty quickly and Tom's kind of I think and through it but yes, it's probably 80 to 100 million it could be a little more it depends on what the margin profile of the businesses that we're acquiring are kind of.
The pre corporate margins on the business. We're generally we start with the two right and so if you think we're buying at our historic multiple of seven times and just tick of 20% margin and I'll get you like 80 and $90 million worth of revenue.
No.
Clearly it can be accretive I don't know thats, probably a rough rule of thumb just to think about it obviously, how it rolls and we will be very specific to the individual deals and transactions and the type of business that they are focused on right. So as you have the again that higher implant business mix you could see of large.
The revenue contribution and then kind of the rule of thumb might otherwise failure and in some cases I would reiterate to like we have revenue opportunities typically when we buy into the business. Some of these centers, we might buy into maybe they've done orthopedics and the past, but they havent been all of the set up of total joint program, we try to find pent up revenue opportunities with our acquisitions, where we bring expertise so.
Yes.
Hello.
We're still here, Frank sorry, sorry about that yes.
Okay.
Okay, and then also on Idaho falls, but I appreciate the color on the $17 million of.
Of revenue when this thing finally sort of matures and stabilizes out of a year from now or whenever that point is.
What should we expect the revenue and EBITDA run rate to be there.
The EBITDA run rate, we've talked about as part of the credit agreement adjustments right. So it's about $25 million is kind of the the run rate EBITDA contribution.
We're expecting.
And you can you can take a look at where the revenue run rate is now and where it was and the fourth quarter, we think.
It's starting to get to the to the point, where you can get a reasonable estimation based on the last couple of quarters, and probably a little bit of expected growth. There. So it should be north of $100 million.
Got you and my last one just.
Could I get a little more color on the specifics of the volume recovery and Alt.
So the mix.
Kind of as you went through the months of the first quarter and then just to kind of get a I mean, it sounds like obviously you have a lot of good momentum going on but just trying to get a better picture on the sort of the magnitude there so.
Any color on kind of of how volume trends accelerated month to month as well as the overall mix of business and I'll hop. Thank you.
And frankly, that's a.
Tough one to answer for a couple of reasons not because I don't have the data, but because I think in some ways the data could be a little bit misleading right. Because you have a as you think about January two less business days worth of business day focused company. As you think about February we had a loss of about a week of cases per.
<unk> and the southeast and so im not sure that they are particularly good comps right. As you think about what the year over year looks like we do think that the calendar definitely it was helpful and the month of March.
We do think that we saw some rebound of those and some rescheduling of those February of cases in March but as we look kind of year over year at the overall quarter, we're still looking at musculoskeletal growth year over year, that's up mid single digits same thing with ophthalmology year over year first quarter the first quarter.
We're looking at kind of mid teens on Gi right and Youre looking at double digit growth in some of our other categories as well. So it was a strong rebound. It was really focused in the month of March which obviously the back half of March in 2020 makes that of funding comp as well.
Overall kind of net net as we think about it same store or almost 9% volume growth.
And we're really encouraged by as we think about scheduling for April we're encouraged by what it is that we're seeing today.
And we're hopeful that that momentum will continue.
Thank you.
And before Eric makes the closing comments I just wanted to make one comment on behalf of the board of directors and and while we're very excited about these financial results that this company has produced and this management team has executed on.
Actually more excited about the fact that they've built a real high quality high safety company and.
We continue to see these come through on every national recognition platform, we can have and and I cannot emphasize enough that those are paramount to how we view. This company right building of great Catcher's Mitt only matters, if you offer superior safety and quality to consumers and as you're very much aware of only 8% of for example hospitals and the country received the coveted five.
Star rating and over 75% of our surgical hospitals have that rating, but even more recently, there's over 6000 hospitals and the United States and <unk> recently came out with those that received the highest score around definitely recommending these facilities and only 27 out of over 6000 and the entire country.
In that list 27, and several of ours are on that list of 27 and I. Just emphasize every day that we have built this team has built really and exceptional company.
And this is why we have so much optimism as we go forward and really believe as the board of directors and we have tremendous runway in front of us around the opportunities that are available for us. So I want to make sure that nobody loses sight of the fact that the quality and safety continues to be Paramount and really what you're seeing these financial results are simply a reflection of what this company is built around those two those two factors.
With that Eric I'll turn it over to you, yes. Thanks for those comments and clearly our product is the foundation of the company right. So.
Before I conclude our call as I always do I want to take a moment just to say thank you to our over 10000 colleagues and over 4000 and physician partners and positioned to work and our facilities for their contributions.
We collectively serve over 600000 patients a year and obviously its a growing number thousands of patients each day and water often their most vulnerable moments I want to give a special shout out to our nurses and clinical caregivers and the next weakest nurses week.
And that certainly the foundation of our company and a proven once again this past year wide nursing as the most trusted profession and the country, we take the trust and faith of our physician partners and patients and colleagues that they place in us incredibly seriously and our privilege to make a positive difference and so many people's lives.
I am excited about and continue to be humbled by the opportunity to lead this company as we work to more fully deliver on our mission, which is to enhance the patient quality of life through partnership and our efforts. We clearly are part of the solution to many of the challenges facing our nation's health system and are extremely proud of the value, we're creating for our stakeholders as we execute against our goal to become the <unk>.
<unk> partner for operating short stay surgical facilities across the U S. It is the daily efforts of my colleagues of this company and our physicians that will get US there. So thank you for your time today, thanks for joining us and we'll talk again soon.
And good day.
Thank you and this does conclude today's conference you may disconnect. Your lines at this time and thank you from your participation.
Okay.
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