Q2 2022 Surgery Partners Inc Earnings Call
Greetings and welcome to surgery Partners, Inc. Second quarter 2022 unequal.
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I would not I can tell the content over to T D.
Please go ahead Sir.
Good morning, and welcome to surgery partners second quarter 2022 earnings call, Dave Doherty, Chief Financial Officer, joining me today are Wayne Devine 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 morning's press release and the reports we file with the SEC.
<unk> does not undertake any duty to update such forward looking statements.
Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance.
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 surgery Partners' Dot com and in our most recent quarterly report on Form 10-Q when filed.
With that I'll turn the call over to Wayne Wayne.
Thank you Dave Good morning, and thank you all for joining us today.
We begin the call I would like to acknowledge and thank our colleagues and frontline caregivers for their relentless focus on providing the highest clinical care and quality to our patients and communities. You are at the core of our values as an organization and on behalf of the board of directors and the executive management team. Thank you for everything you do.
Turning to our second quarter results were.
We are pleased to report second quarter 2022, adjusted EBITDA of $86 1 million, a 13% increase as compared to the prior year quarter and nearly 18% growth when excluding cares Act grants.
In the quarter, we perform just over 149000 surgical cases, nearly 7% more than 2021, resulting in a 13% increase in net revenue.
We are especially encouraged by these results as we've continued navigating the macroeconomic challenges, including the broader inflationary pressures and continuation of COVID-19 variance.
As we've previously stated we are not immune to such challenges, but our business model continues to demonstrate its durability and resiliency.
We ended the quarter with strong momentum and are optimistic that we can continue to navigate these areas through the balance of the year.
We closely monitor and manage inflationary risk, whether it's labor or supply costs year to date. The team has successfully managed these costs in line with our expectations and to pre pandemic levels relative to net revenue.
As previously stated.
We believe we have a competitive advantage and consistent with our experience last quarter, our second quarter results again demonstrate and reinforce how our business model is uniquely positioned both now and for future growth.
Dave will share more details regarding our financial results, but a few highlights.
Same facility revenues increased almost 7% compared to the prior year quarter with nearly 2% case growth and 5% higher net revenue per case.
New physician recruiting efforts yielded 100, new recruits start facilities in the second quarter, bringing our overall new recruits in the first half of the year to over 250 with recruit spanning all of our core high growth specialties.
Previously we've shared with you the increasing contribution of our newly recruited physicians bring to our facilities.
Our most recent 2022 cohorts are no exception to this trend, bringing more cases with a higher overall net revenue per case, and our 2021 cohorts did in the same period last year.
And finally, the transition of procedures out of traditional acute care inpatient settings continues to accelerate.
Joint replacements in our <unk> were up 32% from last year, and our cardiac procedures have increased nearly 9% over.
Over the past three years, our total joint program has had a compound in aggregate growth rate of approximately 90%, while our cardiac program rate of growth is over 27%.
We will continue to focus on the significant shift in site of care in our recruiting efforts acquisition and de Novo investments.
We believe our strong financial results reflect the numerous macro tailwind associated with the benefit of our foreign procedures in a high quality lower cost patient and physician centric setting.
So the total addressable market of over 150 billion, our company is well positioned to capture its fair share of that market.
Moving to capital deployment.
Our M&A team continues its disciplined approach to sourcing and executing on strategically important acquisitions at attractive multiples.
Our team is currently managing a robust pipeline of potential targets.
In the second quarter, we acquired minority ownership positions in five <unk> through our relationship with value health and acquired a majority interest in a vascular focused AFC <unk>.
Combined we deployed approximately $90 million for these six ASC.
In addition, as we discussed on our last call. We acquired for in process to know was from value health for approximately $14 million.
Eric will speak further to the continued execution on acquisition opportunities related to our value health partnership we announced on our last quarter's call.
Our balance sheet remains strong with limited exposure to interest rate changes and no material debt maturities until 2026.
We believe our existing acquisition pipeline, coupled with our renewed focus on de Novo development further enhances our long term growth trajectory.
Based on our solid performance during the first half of the year and our outlook for the back half of the year. We are reaffirming our full year guidance for 2022, adjusted EBITDA to a range of 375 million to $385 million and revenue in the range of two five to $2 6 billion with that let me turn the call over to Eric Eric.
<unk>.
Thank you Wayne and good morning.
I will focus my comments on a couple of areas that will explain my optimism for the company.
Our guidance for the year.
First I'll provide a few additional highlights from our second quarter results, including statistics about our key organic growth initiatives.
Then I will share more details about the continued execution of our M&A strategy.
We are very pleased with our second quarter results.
Company continues its positive trajectory as it emerges from the pandemic with surgical case growth across specialties at levels consistent with pre pandemic levels.
We continue to see stabilization of our case mix, which is another data point that we have resume business as usual.
While we continue to have impacts from COVID-19, after dealing with this pandemic for over two years, our facilities physicians and patients have learned how to navigate outbreaks with less disruption to normal life and in most instances cases get rescheduled within a few weeks rather than being canceled.
To support this point, we performed over 149000 surgical cases in the second quarter, which represents approximately 7% growth over the prior year quarter.
On a same facility basis net revenue grew six 9%.
Our organic growth initiatives, coupled with our acquisitions completed over the past year has translated into strong top line growth of over 13%.
Adjusted EBITDA came in at $86 1 million with a 14% margin when you exclude the impact of cares Act grant delivering 50 basis points of margin expansion compared to the prior year period, which was in line with our expectations for the quarter.
As we mentioned on our last call, we closely monitor inflationary impacts to our labor and supply costs are enhanced reporting of labor and supply cost allows us to identify any new trends early and to react accordingly.
While we have done well overall and mitigating the impacts of these pressures we have seen elevated contract labor rates in certain markets, which can be explained by the enormous pressure. The omicron variance have had on our health care system.
With improved data analysis, we can evaluate if the use of such labor is the best option for a particular facility versus other options, helping avoid some cost pressures.
Premium labor as a percentage of our total salaries wages and benefits in the second quarter of 2022 continues to be consistent with the same ratio in pre pandemic period.
We attribute our high retention of key talent and recruiting speed to our favorable workplace environment, allowing us to maintain the high clinical clinical quality and exceptional patient experience. We are known for in the communities we serve.
We are also working with our GPO and key suppliers to understand inflationary factors that could impact our business.
In the second quarter supplies were approximately 28, 2% of net revenue.
80 basis points lower than the second quarter of last year.
Given the global environment and continued disruptions to the supply distribution chain, we acknowledge the potential for increased cost moving forward.
At this point, we are not seeing unusually large price increases in commodities and plant costs or deliveries, but we remain vigilant in managing this risk and have active initiatives underway to proactively mitigate it.
Moving on to our organic growth levers, we continue to benefit from our relentless focus on physician recruitment and targeted facility level and service line expansions.
These efforts contribute to higher overall revenue per case rates as well as generate the highest contribution margin for our portfolio.
Our physician recruiting team has been meeting the increased demand for new physicians and our short stay surgical facilities by targeting the highest quality position.
In the second quarter, we added 100, new positions spanning our key specialties, bringing our first half total to over 250, new surgeons using our facilities.
As Wayne highlighted each of our recruiting cohorts continue to drive strong year over year growth and we are encouraged by the early strength of our current quarter recruiting class as.
As I pointed referenced the average net revenue per physician in the 2022 cohort, it's already 55% more than the very strong 2021 cohort that we that we recruited last year.
All of this has helped fuel our growth and M. S. K procedures, particularly total joint cases in our ASC.
We performed approximately 25400 orthopedic procedures this quarter 12.
12% more than the prior year quarter.
We do not see this growth slowing.
And as we have discussed we are preparing for the next wave in cardiac procedures that we expect to migrate to outpatient settings.
With an increasing share of orthopedic and cardiac procedures moving into lower cost high quality short stay surgical facilities. We are considering all options to capture our fair share, including the increased use of robotics renovation.
Existing facilities, increasing our M&A pipeline and developing de novo facilities.
As Wayne mentioned in the second quarter, we acquired value health minority equity Stakes and management agreements and five <unk>.
We also acquired interests in four value health de Novo.
We expect to help these facilities grow disproportionately over time, leveraging our differentiated and specialized operating system.
These transactions represent the continuation of our partnership with value health as we maximize our combined strengths and capitalize on the rapid migration of high acuity cases to the high quality short stay facilities, we own and operate.
As we have discussed previously in market development of de Novo facilities as a core strategic growth pillar for the company.
The capital investment required for these facilities is low when compared to traditional M&A, but the time it takes the syndicate and build up the centers often exceed 18 months.
In addition to the initial syndicated projects acquired from value health. There are multiple other de novo's in development across our portfolio.
To summarize our M&A capital deployment through the first half of the year, we have deployed over $125 million in existing facilities and have invested $14 million more on de novo.
We are well on our way to completing our commitment to deploy at least $200 million in capital in 2022.
Given the results we reported this morning, along with our outlook for the remainder of the year. We are reaffirming our adjusted EBIT guidance range of 375 million to $385 million.
This guidance prudently considers that we are still in a pandemic environment and in a period of inflation that could pressure margins.
As you can see from our first half results. We are confident we can manage through these risks. Our teams are highly aligned and we are executing on our initiatives across business development.
Fruiting managed care procurement revenue cycle and operations to achieve our goals.
In summary, I am very proud of the team's accomplishments this quarter. Our company provides a cost efficient high quality and patient centered environment and purpose built short stay surgical facilities that provide meaningful value to all of our key stakeholders.
I'm also excited about our continued partnership with value health and the strength of our de Novo and M&A pipeline.
With that said I'll turn the call over to Dave who will provide additional color on our financial results as well as our outlook Dave.
Dave.
Thanks, Eric I will first talk about our second quarter financial results and liquidity before providing additional perspective on our outlook for the remainder of the year.
Starting with the top line, we performed over 149000 surgical cases in the second quarter of 2020, 267% more than the same period last year with strength across our specialties, especially in orthopedics, where we grew by nearly 12, 5% versus prior year.
We believe our volumes are near normalized levels as we have effectively managed the continuing impact of the pandemic through enhanced visibility and proactive efforts to reschedule procedures canceled.
Due to patient or physician illness.
Largely attributed to this growth we saw revenues rise 13, 3% over last year to $615 million.
This growth is a combination of the organic growth factors, Eric described and contributions from our prior year acquisitions and consolidated facilities.
As a reminder, many of our more recent acquisitions are in non consolidating facilities that provide us the opportunity to enhance performance through operational excellence and to buy up overtime.
Highlight this point as we are agnostic to the accounting treatment of the assets we acquire.
Our focus is to acquire high growth high quality assets aligned with our targeted specialties at the most favorable multiple possible.
On a same facility basis, which we report on a days adjusted basis total revenue increased six 9% in the second quarter with case growth at one 9%.
Net revenue per case was approximately four 9% higher than the prior year period, driven by solid growth in our high acuity cases, such as orthopedics.
Adjusted EBITDA was $86 1 million in the second quarter, which included approximately $100000 of benefit from the recognition of grant income from recent cares Act brands.
As a reminder, adjusted EBITDA for the second quarter of 2021 included $2 9 million.
Of grant income recognition.
Adjusted EBIT margin, excluding the impact of the cares Act grant.
Was 14% a 50 basis point expansion from prior year.
As I have mentioned before we are diligently managing inflationary pressures affecting our labor and supply cost.
Although we are not immune to these factors were not material to the results. We are reporting this morning.
Our salaries wages and benefit costs as well as our medical supplies costs were in line with prior year pre pandemic levels and our expectation.
Given the market dynamics, we will continue to carefully monitor these cost factors proactively deploying cost mitigation tactics to help offset potential pressure.
But it does continue to represent a risk to future results that we are incorporating into our guidance for 2022.
Moving on to cash flow and liquidity.
We ended the quarter with approximately $227 million of cash which includes approximately $17 million of Medicare advance payments recorded as deferred revenue on our balance sheet recruitment.
Recruitment of these funds from future Medicare revenue will continue through the third quarter.
We reported positive free cash flows in the second quarter with $42 million of cash flow from operation $61 million of distributions to our partners and Capex and $22 million.
Of repayment of Medicare advanced payment.
Year to date through July and excluding our de Novo investments, we've deployed approximately $135 million on 10 ASC transactions at an average multiple of less than seven five times on a trailing 12 month basis.
These sensors are primarily focused on MSA procedures and are well positioned to support and strengthen our same store growth trend in future years.
Our acquisition pipeline also positions us well to achieve our targeted $200 million of annual capital deployment.
The company's ratio of total net debt to EBITDA at the end of the second quarter as calculated under the Companys credit agreement was 6.0 times.
With our expectation.
We expect this leverage to float in the upper 5% the lower six times range in the near term as we continue to deploy capital for accretive assets.
As of June 32022, we had total liquidity of $430 million, representing consolidated cash of $227 million and $203 million of Undrawn revolver capacity.
This solid liquidity position supports both our local facility working capital investments and capitalization as well as our future M&A.
On the debt front, we have approximately $2 4 billion in gross debt at the corporate level of which $1 $5 billion is floating.
We've previously entered interest rate swaps and caps that have significantly mitigated our exposure on a 100% of this floating debt.
At the end of the second quarter, we hit our interest rate caps with.
But the benefit of our interest rate swaps and caps, our exposure to incremental interest expense with fluctuations in the market is not material.
In addition, we have no material debt maturities until 2026, and approximately 15% of our debt due by 2025.
As a reminder, the company has an appropriately flexible capital structure with no financial covenants on the term loan or our senior notes.
When combined with proceeds from ongoing portfolio management activities. Our current liquidity position allows us to approach the capital markets Opportunistically.
To be clear, we are confident in our ability to fund current and future M&A opportunities.
With the second quarter results. We released this morning, we are optimistic about 2022 and are reaffirming our 2022 guidance for total revenue in the range of $2 5 billion to $2 6 billion.
In addition, we are reaffirming our 2022 guidance range for adjusted EBITDA of 375 million to $385 million.
We continue to believe this range is prudent given the macroeconomic environment we are facing.
We anticipate the seasonal pattern of our financial results will be relatively consistent with pre pandemic levels.
With the third quarter earnings and net revenue representing between 24 and 25% of our projected full year performance with our best estimate of the impact of known extended vacations in the third quarter.
As we evaluate risks versus opportunities in 2022, we are confident in our annual outlook and continued to see strength and momentum across multiple product lines and geographies.
With that I'd like to turn the call back over to the operator for questions operator.
Operator, if you could open the line for questions. Please.
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The first question and Charles Winston Salem.
<unk> from Bank of America. Please go ahead.
Hi, this is going to be a gutierrez.
And so given this higher inflationary period, how are you thinking about commercial pricing can you get higher rates and how long will it take for them to catch up to the inflation.
Hey, good morning, and I appreciate the question, but first thing I would highlight just as a reminder for all of our shareholders is that about a third of our contracts renew each year. When you think about kind of commercial contracting.
And in some cases, they have inflationary builds already into them as we've been going through the normal renewal process. So if you think about it purely on a on a top line pricing.
Generally you're going to get about a third each year that will run right into that that being said we are clearly in a unique environment and we have our managed care teams actively working with the payers.
To see if we can accelerate certain provisions.
Specially around inflationary provisions that are in there.
Thanks.
Thank you.
Just a reminder, if you would like to ask a question.
One.
Okay.
One question and one follow up.
Next question.
Ken <unk> from Jefferies. Please go ahead.
Hey, good morning, guys.
In the quarter I guess for.
For Winter day, as I think about the capital structure and the guide.
Guidance you gave that you guys spent $200 million since you're on acquisitions, Yeah. A lot of investors are thinking about just cash.
Cash cash generation and how youre thinking about the sustainability of that 200 beyond 2022.
Given the leverage profile of the company in the current market environment. So just any thoughts from you guys to share on your ability to collect on the acquisition side acquisition slide.
Yes, Thanks, Brian first of all good morning, and I'm going to have Dave in just a moment, maybe just highlight again, our current cash position and kind of where we stand I'm just talking about in general, though kind of the cap structure.
We generally target between 5% to six times leverage where we've always said, we'd probably be to the higher end of that simply because we can acquire assets such attractive levels would make sense to us to lower that leverage point that being said, we are generating positive operating cash flow now as an organization and expect to generate positive cash flow for the year. This is the last year that we have.
<unk> outflows both around the taxes that we have as well as around the Medicare repayment window and so as we move into next year, we expect to be in the 100 plus million dollars of operating cash flow that we will generate and of course that number will continue to grow.
So then the real question becomes that if youre deploying $200 million a year, what levers do you have available and I think one is as Dave will highlight not only the ample cash that we have available today on our balance sheet, but we're also going through a portfolio refresh that we do every so many years as we started back in 18 and 19, we do that again in one of the things we find is that we.
Have many assets that are in markets that we believe wild wall, while good markets don't necessarily have the same growth trajectory that some of our other specialties have rather assets have and so we also have unique opportunities to refresh the portfolio and redeploy capital at a very high multiple that we would sell certain assets and then redeploy at a very low multiple so net net.
I would say feel very good about our forward looking approach and it really starts with the idea that will generate north of 100 million of free cash flow as we go into next year, but with that Dave maybe highlight again, our capital position and some of the things that we've been thinking about around cash outflows in particular, the interest environment. We're in and why we're very comfortable with that yeah. Thanks. Thanks, Mike.
Whole lot.
By the way good morning, Brian .
So I think in addition to.
The opportunities that we have.
To raise additional capital funds through the portfolio management activity, which I just think as good hygiene for us as a company.
We also have done an effective job I believe.
And our kind of risk management from an interest rate perspective, and you know this is a company like we are we are forward thinking when it comes to kind of how to manage those risks in a couple of years ago, We did put.
Hedges on.
On our variable rate debt, our term loan and as you know that has.
That has done really well for us and kind of protected us in this rising interest rate environment and the fact that we don't have anything coming due until 2026 and in a material nature.
That exposure from a cash outlay perspective.
Is it really not there.
And so we feel really comfortable about that so now it's just about managing that conversion of earnings and again being in a strong earnings position gives us some degree some high degree of confidence when it comes to that coupled with the way our balance sheet and our revolver support is right now.
At this point not seeing any reason to deviate from that long term guidance.
I appreciate that and then I guess, Dave just to have my follow up will just be on the G&A line as they look at it yes. It was down about 11% sequentially is that the right baseline to be using for the rest of the year or just any thoughts on the G&A line that we need to be thinking about.
Yes.
It's a great question.
The activity that we do constantly just as part of our normal growth trajectory.
To kind of evaluate all of those line items on our G&A continued to find those efficiencies are clearly where.
We're navigating an interest environment or an interesting environment right now of inflation. So.
All of our energy is kind of spent kind of continuing to look at those.
We're not going to give guidance inside the debt components of our balance sheet, but as far as our income statement, rather, but I'll remind you we are Ah seasonality adjusted company. So inside the quarters youre going to see higher overall revenue.
As we go throughout the year is as we.
As we handle more commercial patients.
But on a long range basis, you can imagine we are going to continue to focus on all of those levers available to us, yes, and Brian on G&A. If you think about that that's something we look at constantly as we grow to gain efficiencies right. Our expectation is that should should fall over time as a percent of our total revenues and we manage to that very closely.
Awesome. Thanks, guys.
Yes.
Thank you. The next question comes from Jason <unk> from Citi. Please go ahead.
Great. Thanks, Good morning, guys I just wanted to ask about the volume backdrop, and I guess within the second quarter and as we look forward to the next couple of months are you seeing any.
The elevated level of cancellations or procedures, perhaps being pushed out because folks are perhaps re prioritizing their discretionary income is just given the high inflation backdrop or maybe just at a high level. How do you view the impact of this higher inflation on procedure demand and your facilities will be helpful. Thanks.
Thanks for the question. Good morning, Jason This is Eric. So we are we are seeing some cancellations and rescheduling. It's based on a couple of things one is that so that's the COVID-19 variant that's out there. The second is just summer vacations, we talked about extended vacations a bit those but those get rescheduled we track them very closely.
We have no reason or indication to believe right now that people are making different decisions on what we call. These elective procedures, but theyre needed procedures.
Haven't seen that change and so we'll be watching that closely clearly we're humble enough to realize as a different kind of economic environment than we've been in but given our high value physicians the need for these procedures to be done.
No we don't see that as a likely outcome, we're watching it closely on the vacation side, though and I'm kind of just summer stuff going on.
And the variant we are seeing a few cancellations typically we get those rescheduled within a matter of weeks and we're continuing to track that very closely but.
That's really all I can give you a color wise on that.
This is one thing.
One thing I would also remind our investors.
Our model is pretty unique in that if you consider historical patterns and while history is not necessarily an indicator of how the future will repeat.
And whether you are in the inflationary environment or whether you move into a recessionary environment. If you look back to even the kind of OE <unk> period.
When we went through the great recession, the opposite actually occurred and what you actually saw was that.
These high acuity procedures. These elective procedures actually grew exponentially during that window of time and it was a combination of individuals', where if they were losing their job moving to Cobra and the Cobra essentially absorbing a lot of those cost for them and then being in a position of recognizing that if there was a window to do elective procedures that they had deferred that was the.
A window to do it and so because.
Because they would be home and unemployed and so it's it's a little bit of an unusual thing to think about but our model seems to have some unique installation of history as to repeat itself going forward.
Got it okay. That's.
That's helpful. And then maybe just as my follow up here I guess on the guidance front look back back in mid January you kind of given this expectation for at least $370 million of EBITDA for 2000 to today, you've maintained that $380 million midpoint.
You've executed on I think $135 million worth of transactions year to date, which gives something close to high single to low double digit EBIT contribution dollar contribution for 'twenty two based on my math. So maybe just in that context do you see your business on an organic basis kind of coming in line with your expectations at this point or how would you frame, maybe the pluses and minuses versus <unk>.
Where are we kind of start off at the beginning of the year.
Yes, I would say organically being at around 7% same store is pretty strong in light of the environment. I think it's fair to say that we continue to see the impact of the variance I mean, the reality is people are still getting COVID-19 people are still then cancelling procedures and then while those procedures get rescheduled you do lose the days that they can't.
And youre not exactly back filling the day when somebody calls in and says I tested positive for Covid.
So I think it's fair to say that it is clearly having some of a headwind relative to our organic growth rate, but at the 7% same store were very comfortable with that especially in this environment and if anything we only see those trends improving not getting worse as we move forward.
And the last thing I would simply say is on.
On the M&A front as we think about the $200 million. We always recommend you use kind of a mid year convention I think about it that way M&A can be lumpy. So sometimes it gets accelerated sometimes it gets delayed but net net it is kind of where you land the plane. So overall relative to our expectations for the year, we're feeling pretty good we raised guidance in Q1.
I think it's no secret that the inflationary pressures are continuing for the industry broadly and.
And I don't think its any secret about the different variance, but we have a lot of confidence in that range and we have a lot of reasons to believe not only that will finish strong this year, but we don't see anything deviating from our mid teens growth going into next year.
Got it thank you.
Thank you next question is from Lisa Gill from JP Morgan.
Great Good morning, and thanks for taking my question.
I just want to go back to thinking about commercial contracting.
I think you talked about a third of renewal each year.
Last quarter, you talked about and the relationship with <unk>.
Can you really talk about what youre seeing around contracting as we think about value based care are the managed care companies and the commercial market starting to talk about contracting around value based care I would think that your company is very well positioned but we think about this.
Shift in site of care team.
Better outcomes lower cost. So if you could just maybe more broadly talk about that one and then two where you are with the Caribbean relationship.
Yes, so Lisa I'm going to ask Eric to comment on the <unk> relationship as well as anything he wants to add color commentary on the managed care relationship. Let me birthday and I don't know you can appreciate this is probably all of you on this call that we've been talking about value based care as an industry for about two decades now I kind of laugh about everybody has talked about it yet everybody has been trying to figure.
How to actually create the influence and I always remind folks at the end of the day you can build out the technology and you can build all the process, but you actually have to move the care to a quality environment that actually has a lower cost and that in many ways was the piece that have been missing in the industry. It was always kind of shifting from one price point to a similar price point with with with something.
Deteriorating either in quality or patient experience and in this case.
We believe we have not only the assets to offer better quality, but clearly the patient experience is through the roof. So relative to value based care real discussions are happening.
<unk> are really embracing it.
It's an easy sell for us because we go to them and say look.
We moved to volume for you you don't have to worry about it but if we can enter into these these type of BBC arrangements, we want to participate in the upside so I'll, let Eric expand a little bit on on how thats progressing with the previous relationship and what we're doing there, but I think the key component is as I've said in the last call. We are the value and value based care and now.
It is just connecting the dots with the payers that shows them that it translates.
Yes, Lisa first of all great great questions and thank you for the question a couple of things I'd point out starting with the commercial rate three things to keep in mind. So we when we think about commercial contract negotiations, we think about a few levers it's not just rate right. We're never going to lead the market in rate, we certainly want to get paid fairly but we actually work very closely with the payers there's been some been some big.
Blues across the country that have announced 50% professional fee bumps.
For the right side of care for independent Asc's on <unk> and those are all to our advantage. We work closely with payers to think about levers that not just get us additional revenue, but also gives us additional volume. So I point that out that we clearly are talking about cost pressures and we're clearly looking for above market rates.
So it's too early to say the amount of success, we'll have in doing that but we want to make sure. We're locking in some of that mitigation in case, we see more pressure going forward. Then we have to date and then as a reminder, a lot of a lot of contracts in our industry on a percent of Medicare and so.
We saw yesterday were still reacting to medicare's slight improvement on what they offered is still not where the industry wanted it but better than the initial and so all of that kind of rolls through as well. So I would just say when we think about those commercial relationships. It's more than just the unit price. We certainly want to make sure we're getting paid as much as we can barely in the market, but we also really really think about how do we get that moving care because.
Going back to what Wayne said, we are a value based care in the fee for service World moved to our site dramatic reductions in cost going through BBC question. So look we.
We partner with trivia in Montana, we've talked pretty as a company that is very aligned with what we're trying to do which is to move patients to the right side of care their primary care docs are increasingly.
And advised by value based care contracts and or some kind of capitation contract those type of groups and there is more than just prettier, where naturally aligned with where we are an independent provider. We're not tied to health systems. We can we can we don't bring a lot of conflicts and so we see that continuing to happen happened. We continue to talk with <unk> about a broader relationship and obviously, we've talked a lot about.
Our value health partnership and their whole model is about working with payers to create the incentives.
To allow.
Cardiac orthopedics higher acuity procedures to move faster and so we're seeing it move quite fast you guys saw our growth numbers for the quarter and orthopedics, where 12%. So we feel pretty good about the speed of it but if we can accelerate that and I think there's reasons to be optimistic based on the fact that payers can see that they've got five figure discounts from what they are paying hospitals and many of these.
Procedures.
That's a place we're going to continue to lean in.
Okay. Thanks for the comments.
The next question is from Volkswagen with benchmark company.
Good morning, Bill are you there.
I am I couldn't quite hear the operator, how are you guys doing.
Got it.
Just a couple of updates on some data points, you've provided or clarification.
I noticed the same so the mix of the same store revenue growth kind of slipped in terms of the <unk>.
Case and revenue per case is this is kind of the mix that you are looking at going forward more than the first quarter was.
So, but we've talked about the recovery kind of across specialties and I think as we start getting further and further away from the height of the pandemic I think you will see more more of a normal 2% to 3% case growth. We're really proud of our case growth in the environment. We think that it continues to be industry, leading and we still have opportunity there.
But in total Bill I do think youre going to see some normalization you saw huge case growth and.
In certain quarters, where it was really about the recovery of some of that lower acuity business, whether its gi and tea etcetera, but yes, youre going to get back to some normalized rate we've talked for a long time, 2% to 3% case rate and volume. So that gets you to the 4% to 6% range without run that for quite some time, we expect we probably will for for a while because of rate and because of our ability to Rick.
Group positions and move sub disproportionately, but that that case rate to us feels feels about right.
Okay.
That's what I was sort of thinking about as well and I ask the question is the productivity youre getting out of the new the newer cohorts.
<unk>.
And.
Maybe.
Maybe a little color on where that.
Where you see those productivity drivers.
Kind of.
Sure.
The source of those drivers in these cohorts that you're bringing on.
I think a bill good morning. This is Wayne I think one of the things I would highlight though.
He is kind of the natural maturation of how our iOS have evolved during the pandemic and the reality is our ability to onboard these physician recruits even quicker the ability to get them. The block times Theyre looking for and the comfort levels that they're getting because of the number of peers have there is that we're getting recruited over and how soon they come over so if you look back all the way back to <unk>.
<unk> when we first started this journey.
He was a really long maturation period to get a position not only to join your facility, but you would actually see patterns of one or two cases a month.
That would eventually after three months go to four six cases that would eventually get to 20 and then they would get the full run rate.
That maturation window has compacted quite a bit in the last couple of years and again I think that's really just a function of the idea that that one we've shown that you can do these procedures in a safe environment to us their peer group.
Talk to one another and they're seeing the value of it and three is we've really figured out the scheduling I mean, we've just we've really got that nailed in our facilities now and how we can ebb and flow and getting people to block time, they need right. When we recruit them out of the gate. So that we can get that value creator and much sooner than before so I would say that's been the primary and then finally these COVID-19 variance continue to.
The acute care environment and I think these doctors become equally frustrated in that environment. When they are their surgeries continue to get canceled are impacted as well and so that just creates even further trends for us that says with US you get stability and you get a window to work in.
Got it.
Thanks, a lot I appreciate it.
Thanks Bill.
Thank you.
Next question.
Neil SDB Carrington.
Hey, Thanks, good morning.
Just a couple of clarifications Youre Wayne I think you said.
Earlier that you expect 100 million of cash flow next year I just want to make sure that we're defining that are you, saying the internal expectations for $100 million of free cash flow after cash in Ci after capex.
How are you defining that $100 million.
No. It just as you saw we expect 100 plus million, even after Capex and.
In our core investments of free cash flow that can be deployed for M&A.
Okay pure discretionary free cash flow okay great.
And.
Dave what was the bank defined EBITDA.
In this in the second quarter I think you said leverage was six times, but I may have missed misheard you.
No you heard correctly.
6.0.
This quarter compared to I think in line with our guidance point that we have out there.
And our calculation of credit agreement EBITDA, which we put in our press release I think you can see in the.
That's part of it it's fine with just under $440 million.
Little bit higher up than what we had in the.
In the second quarter I'm, sorry in the first quarter.
<unk> exclusively related to the acquisitions that we've completed.
Right right that makes sense.
Can you maybe just update on some of the acquisitions in the last six months or so it feels like.
I totally get the organic numbers I mean, you are comping off against a ridiculously high number from last year. So I think people need to probably put that in perspective and look at the sequential growth, but the M&A seems to be a little bit light of sort of where I thought they might be tracking. So if you could just maybe update us there and then also on Idaho falls. Thanks.
Yes, so on the M&A front actually.
We're very pleased with where we're at on the M&A front.
What I would highlight though is that with the value health arrangement one of the things that we find quite compelling.
Is that we are able to selectively buy into facilities, where we can take over management of the facility. They are minority interest initially.
But we have the flexibility and are showing the value we bring as SP and then buying up over time, what that does do and that was the comment Dave made about being agnostic to the accounting treatment is that in the short term you won't get the revenue bump that you usually used to seeing from M&A, because you don't consolidate but nonetheless, the EBITDA is there and I would tell you that.
Multiples are highly attractive even even below our seven times multiples that we've been getting them at and as you think about that that's a trailing 12 modest synergize basis. So we're actually very encouraged about the pipeline, we're being a little more judicious, though because of that because we actually have.
A large opportunity with the value health assets and then we compare those as we look external to those assets. We can take immediate control, but generally with immediate control they require a higher multiple.
But I would say pace wise no concerns at all from our and if anything we have under LOI over 100 plus million right now under LOI as well, so I would say confidence in getting the 200 million as high this year.
And having the ability to potentially flex up or down as we get into the last quarter as we move into the new year. It really just comes down to the quality of the assets. We're looking at but what I would say no no delays from our end and if anything I would say, it's quite robust yeah, Idaho falls I would just say that look we still love that market.
Above our expectations this year from a hospital perspective.
The community Hospital, we continue to see as we talked about it was delayed opening in AR during the pandemic, but we've now added a lot of those programs, we expected to add trauma center, we've added Nicky capabilities in the market.
Market for us that's been quite compelling for a long time, it's above our expectations. This year, we still see it.
Getting to that level, we've talked about for a long time in our in our credit agreement EBITDA in that market in total is performing extremely well and just going back to Wayne's point I would just say you guys have talked about value help quite a bit to date, we've done seven existing seven de Novo you think about 14 transactions in the partnership so far we're very very pleased.
With the opportunity to grow together on that and it continues to be something as Wayne said that gets a lot of confidence.
Our ability to meet and exceed what we expect to get done on the M&A front.
Thanks, guys.
Thank you. The next question we have is from Ben <unk> from RBC capital.
Thank you very much guys I was wondering if you staying on the M&A topic. If we could dive ended you the value based Allison I'm trying to value health acquisitions, and the others and just how they fit on the overall acuity spectrum.
And especially focus and then specifically with vascular ASC. If you could talk about how if that is something.
That you expect to position you incrementally better for the growing cardio. Thanks.
Yes, so on the value health front.
Actually they did their facilities are a little bit in total.
Higher acuity when it comes to orthopedics than ours and so this company has been very much built on orthopedics. So.
So when we think about what we're buying there it actually matches up very well with our targeted specialties, particularly orthopedics in total joints and so that's been a great part of this transaction is that we were highly aligned on the high end specialties, we're going after which certainly aligns with their model to on trying to create these.
Incentives for.
For all the stakeholders to move business out of acute care hospitals is kind of their bundled model.
That is matched up extremely well.
When it comes to your second part of your question was around sorry.
Moving past value vascular OCI. So cardiology. So we yes, we bought a vascular center in the last few months, we haven't we have some more cardiology and our pipeline I will say this cardiologists and vascular surgeons in general are extremely interested and.
And moving into this space.
Few more the reason this isn't going as fast as maybe some people would think it's because there are a few more kind of obstacles, meaning a lot of these docs haven't done this in the past <unk> theyre employed heavily throughout the country, but if you look at the vascular center, we picked up that the center that we're very excited about we have cardiovascular synergies in that market lots of capacity to expand.
We do expect more of these kind of opportunities.
Because of the nature of these procedures much like orthopedics higher acuity higher net revenue, we do expect to have more EBIT permitted. We know we'll have more idea permitted in these facilities than we do on average it's going to more more closely monitor orthopedics. So we're very very excited about that center and we have a we have a number of more in the pipeline that matches.
Thank you.
Yes.
Thank you next question is.
How cute.
Michael Please go ahead.
Hey, good morning, so the Medicare proposed rate growth was two 7% in July and we've seen that the finalized three or four other providers were probably 1% better how do you feel about that maybe high <unk>, 3% in USD payment when the final rule came out how does that compare to you.
Although top Costco from next year.
So this is Wayne.
Good morning, one thing I would highlight is we never quite know where these rates will finally fall. So we always plan for more of the worst case scenario. So anytime we see the rates improve between the preliminary versus final.
That is a positive from our perspective as we think about how we build our plans for next year.
We're still in a very unique inflationary environment, and we don't plan to take our foot off the pedal just because the rates have improved because we really do believe this this this has some sustainability to it in the near term.
As we've seen some of our peers have to manage through and it's why we will continue to put a lot of aggressive behaviors on what is in our care and custody, which is around how we control those costs.
Both our round implant costs as well as just our broad G&A in our labor costs. So.
We're pleased to see the rates improve we're always pleased with that but we always prepare for for more of the preliminary level as being a more worst case scenario.
Got you ink so my second question.
Dave you know the capital market has changed decidedly in the second quarter and we saw that some of the leverage gains were in our favor.
You mentioned earlier that you're still confident on existing capital deployment plans.
Remember that you raise some equity last year, maybe in the $30 ish level.
Where do you feel how do you feel about your leverage today.
Would you be more comparable come to the market at some point.
So thanks for the question, Yes, again, I'll, just I'll remind you kind of where we are from a.
Strength of balance sheet perspective, I do agree with you the market right now looks looks choppy, it's been choppy for a lot of us not just surgery partners.
But we are not in an environment right now that we need to go into the market. So we will we will we can look at this market today is purely opportunistically.
<unk>.
Strong cash position strong support in inside of our revolver and as Wayne mentioned earlier, our ability to convert earnings into cash on a predictable basis gives us that confidence to be able to.
To be there.
Got you so the clients due to delever through growth.
Yeah or remain kind of in that five to six range, which we think we are comfortable with us if the disciplined approach to M&A that we have continues to deliver.
Equity value compared to the price that were paying we will always look at those levers.
That are out there so right now we're not changing kind of our view.
Upper fives low sixes for that leverage rate.
Got you sounds good thank you.
Yes.
Thank you Omar question Mitra <unk> from Barclays. Please go ahead.
Thank you I wanted to go back to your earlier comments on the commitment to robotics purchases and how it fits into your strategy.
Can you give us.
Some comparison on how your robotics investments ROI compared to like.
Like M&A or other uses of capital and then when we look at your Capex, how much of that is actually going toward.
Got it.
Thanks for the question Sarah I'll, let I'll, let David give some specifics on kind of the way, we arrange those well I can with.
A lot of those a lot of those are funded locally and.
And we don't spend a lot of Capex on these the payoff and return on these is quite strong. So the ROI I would say is probably internal investments and same store growth.
It's better than anything else, we can do when we find those those are the first things we're going to fund.
I would point out for those cases, when we use robotics and this is very different than when I was in the acute care world robotics in the acute care world is often a way to try to keep procedures and youre transitioning start to robotics that we used to be opened et cetera et cetera for us. It's always an offensive play, meaning we've got a group of docs, who want to be in the ASC environment, maybe theyre already bring us some.
Cases, and they would bring us more if we had the right technology. So we're always using this to play offense.
So therefore, it's a net gain that's quite powerful for the model, we're not transitioning existing cases do a little bit higher cost technology. We are opening up the door to more technology and I'd say, we've done it dramatically in orthopedics, we do have our first.
Center that has a da Vinci program at the ASC level, we expect that's going to grow over time I think payers are increasingly.
Open to this idea that we should not be doing patient having towards patient procedures at higher cost setting simply because a piece of technology and so we're working with payers and others to figure out how do we solve for that issue. So we get patients to the appropriate side of care for the best value and so that's going to be an ongoing investment opportunity for us. That's our first thing we do we think about organic.
Growth our focus on organic growth over the last couple of years, it's finding ways to grow within our existing facilities that the best return, we can get I don't know, Dave if you want to add anything on kind of how we approach it.
I'll say this.
From a return on investment perspective.
What Eric described is spot on right.
We use it as a to support a recruiting tool we've continued to.
Deploy this kind of where necessary last year, bringing nine robots into our environment. This year, bringing an incremental four in there.
There.
What gives us confidence when we do that ROI analysis is the advancements that we've made on our recruiting team. So we have good strong confidence both in the way we talk to recruited physicians as well as.
Their history, which we have good visibility into so.
That gives us confidence in the ROI or the other is.
It is the advancement and robotics enables us to kind of bring in these and it really rapid basis at.
At a leasing costs again, it's at the facility level.
So feel really good about that growth engine.
Okay. That's helpful and maybe just to go one level deeper.
Shang da Vinci, but you also mentioned that there is a there.
Robotics.
If you had them sorry, Jason could actually switch from NPA.
Inpatient acute.
Youre centers can you give us an idea of what those are.
What the specific specialties are or robotics that are allowing you.
To recruit new surgeons and Thursday.
Sure. So there's a number of systems out there and we used most of them. So if you think about in orthopedics theres a number of different vendor.
Vendors.
We use and it's basically based on physician preference, how they were trained et cetera.
Those have all been cases, where physicians were maybe doing total joints in the hospital setting. They were trained on the robot they feel more comfortable coming to the ASC setting same thing with da Vinci da Vinci. If you think about the service lines, it's gynecology and urology as general surgery. Those tend to be surgeons, who are trained extensively on da Vinci that may be the primary way they do procedure.
And so when we think about this opportunity that we have to think about is how do we give them. The same comfort for those outpatient surgeries when they can be done in a facility that's a better value to the patient so.
I mentioned three specialties beyond that it's really orthopedics and cardiology.
Not so much cardio orthopedics and spine are really the ones beyond the three that I mentioned Gee why in general surgery and urology when it comes to robotics, but we see that as a big opportunity because there are big chunks of outpatient procedural business.
That right now our only in an inpatient setting because of a piece of technology and we continue to focus on ways to.
Empower physicians to take those patients to the right setting with high quality, great customer experience for their customers.
Thank you.
Thank you.
I believe that was all.
Yes.
I believe that was the last question and we certainly appreciate it.
We certainly appreciate one coming on this morning before we conclude I would like to acknowledge the significant efforts and focus of our 11000 colleagues in 4800 positions across the country are collectively surgery partners. It takes to heart the responsibility for providing the absolute best environment for our physicians to provide surgical care and an exceptional patient experience with <unk>.
Know that more than 600000 patients annually placed their trust in us and what is often one of their most vulnerable moments I am privileged to work alongside these professionals as we work to more fully deliver on surgery partners mission to enhance patient quality of life through partnership. Thank you all for joining our call. This morning, and hope you guys all have a great day.
Thank you.
That concludes today's conference you may now disconnect your lines.
Thank you for your participation.