Q3 2022 Surgery Partners Inc Earnings Call
Greetings and welcome to the surgery Partners, Inc. Third quarter 2022 earnings call at.
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A brief question and answer session will follow the presentation.
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It is now my pleasure to introduce your host Dave Doherty. Thank you Mr. Ritchie you may begin.
Good morning, and welcome to surgery partners third quarter 2022 earnings call I'm, Dave Doherty the company's CFO . Joining me today is our executive Chairman Wayne debate and our CEO Eric Kevin.
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 filed with the SEC.
The company 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.
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 this morning's press 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.
Dave Good morning, and thank you all for joining us today.
This morning, we're pleased to report third quarter 2022, adjusted EBITDA of $96 2 million, a 26% increase as compared to the prior year quarter net.
Net revenue grew 11% to $621 million from a combination of case growth and an increase in net revenue per case from higher acuity procedures and rate improvements as well as our continued execution on deploying capital for high value acquisitions.
As we've experienced in prior quarters, we've manage the rate of supply cost inflation and premium labor cost pressures at levels consistent with our historical trend.
The combination of our topline growth and focus on controllable costs allowed us to report an adjusted EBITDA margin of 15, 5% 180 basis points above the prior year and 150 basis points above our second quarter margin.
Each of these results is within the expectations, we set internally and those that we guided to in our second quarter call. Dave will go into these results in greater detail in a few minutes.
As you know we operate in a sector or the health care landscape that has many immediate and long term tailwind the tailwind and the team's execution has allowed us to effectively manage the macro environment challenges that both our country and others in health care are experiencing.
As we discussed in the past. This team has been monitoring many of these pressure points and react with structural controls aligned incentives and rapid responses.
Today's reported results are continued evidence that this business model is durable and resilient and we have the management team engaged in the right areas to capitalize on core growth opportunities.
Although the impact of COVID-19 is still being felt across our country. We did not experience any material direct impact related to the virus and the third quarter.
We continue to proactively address the tertiary effects of the pandemic.
As we did in the third quarter, and we experienced atypical elevated levels of position clinical and support staff vacations. This summer as many individuals took some well on time with their families and friends after two years of restrictions.
You may recall that we noted the expected impact of these known extended vacations. When we reported our Q2 earnings and factored that into our Q3 guidance range for revenue and adjusted EBITDA.
Despite the headwind of Hurricane and we are very pleased that the outcome of the third quarter was in line with our expectations with revenue at the midpoint of our guidance, we shared on our last quarterly earnings call.
Eric and Dave will go into slightly more detail, but let me share a few highlights.
Same facility revenues increased over 5% compared to the prior year quarter with our 3% case growth and nearly 2% higher net revenue per case.
New physician recruiting efforts yielded over 155, new recruits to our facilities in the third quarter.
Our overall new recruits in the first nine months of the year to nearly 430 consistent with last year at this time with recruit spanning all of our core high growth specialties.
As our recruiting and Onboarding efforts become more refined we are benefiting from physicians that bring more cases and more revenue than prior recruiting cohorts. For example, the first year net revenue contribution from the nearly 430 physicians recruited this year is 56% higher than the initial revenue contributions from <unk>.
Last year's cohort.
The 2022 cohort is bringing more cases with higher overall net revenue per case than the prior year class did and.
And as we've discussed in the past as a recruiting cohorts mature there's a compounding effect for multiple years as it relates to our organic growth.
And finally, the transition to procedures out of traditional acute care inpatient settings continues to accelerate joined.
Joint replacements in our <unk> for the third quarter were up approximately 91% from the prior year.
Over the past three years, our total joint program has had a compounded aggregate growth rate of approximately 114%, while our cardiac program rate of growth is over 24% we.
We will continue to focus on the significant shift in site of care and our recruiting efforts acquisition and de Novo investments.
We believe our strong financial results reflect the numerous macro tailwind associated with the benefit of performing procedures and a high quality lower cost patient and physician centric setting.
With a total addressable market of over 150 billion. Our company is very well positioned to capture the significant shift of care to the outpatient setting.
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.
Late in the third quarter, we added another short stay surgical hospitals to our portfolio with the acquisition of Kansas spine and specialty hospital and acquired minority interest positions in to a S sees from value health.
The effective multiple on these acquired facilities was under eight times.
In addition, we purchased a minority interest position in three de Novo afcs from value health in the quarter.
Eric will speak further to the continued execution of acquisition opportunities related to our value health partnership in a moment.
Our balance sheet remains strong with no exposure to interest rate changes until 2025 and no material debt maturities until 2026.
We believe our existing acquisition pipeline, our transition to generating positive free cash flow to support execution on that pipeline along with an accelerated focus on de Novo development further enhances our long term growth trajectory.
Based on our solid performance during the first three quarters of the year.
And our Q4 outlook, we are reaffirming our full year guidance for 2022, adjusted EBITDA to a range of 375 million to $385 million and we anticipate full year 2022 revenue in the range of 2.5 to 2.55 billion, Dave will discuss in more detail our outlook for the remainder of the year.
With that let me turn the call over to Eric Eric.
Thank you Wayne and good morning, everyone.
As Wayne mentioned, we are very pleased with the results of our third quarter as we continue our positive trajectory that started before the pandemic. We have learned much regarding the resiliency of our business model and the requisite tools in the toolbox needed to earn market share throughout the pandemic and current broader macro environment.
Specifically, we have seen the strength of leveraging our data driven culture with strong partnerships that have been created with our physician partners. These.
These partnerships coupled with our data different driven approach to decision, making truly enhance patient quality of life.
From an operational perspective year to date, our specialty case makes us stabilized with all core specialties growing in fact, our overall cases have grown at four at a 4% CAGR over the past three years.
As we noted last quarter, we experienced some extended vacations in the quarter, but those were in line with our expectations.
We did not anticipate however was hurricane in which had a significant impact on our <unk> in the Florida region out of an abundance of caution for the safety of our teams in patients we significantly limited operating hours and canceled or rescheduled cases that were planned for the last week of September .
During that week 19, Acs and 15 practices that were located in Hurricane warning counties were impacted with canceled or rescheduled cases.
Although many of our colleagues were impacted we did not experience any loss of life or catastrophic injuries. We continue to reschedule canceled procedures and still have some facilities under repair.
We expect to fully resume operations in the region in the fourth quarter.
The Hurricane is expected to result in the cancellation or rescheduling of over 1000 cases, but the full impact is unknowable at many residents in the area are still in the process of rebuilding or re settling.
We have determined that the hurricane adversely impacted the third quarter earnings by approximately $1 $1 million.
As you May recall, we experienced similar losses in the third quarter of 2021, when hurricane item made landfall in Louisiana.
Much like last year, we have excluded the impact of the hurricane from our reported adjusted EBITDA.
Despite hurricane and the atypical vacations, we saw this quarter, we performed almost 148000 and surgical cases in the third quarter nearly 6% more than last year.
On a same facility basis net revenue grew by five 1%.
Our strong competitive position in our markets superior operational execution and broader macro tailwind drove a healthy contribution of three 3% same facility case growth.
Our organic growth initiatives, coupled with the acquisitions completed over this past year have translated into strong topline growth of 11%.
Adjusted EBITDA came in at $96 $2 million with a 15, 5% margin.
Income recognized from cares Act grants were not material in the third quarter.
This margin expansion of 180 basis points slightly exceeded our expectations for the quarter and is attributable to cost control discipline and robust revenue growth.
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.
And our third quarter, we did not experience system wide increases in premium labor, which we define as either contract labor or overtime.
In fact in most of our markets. The overall utilization of premium labor is abating as is the contract labor rates the market is demanding.
Premium labor as a percentage of our total salaries wages and benefits in the third quarter of 2022 continues to be consistent with the same ratio in pre pandemic periods.
Our favorable workplace environment allows us to recruit faster and is a key enabler to maintaining the high clinical quality and exceptional patient experience. We are known for in the communities we serve.
Yeah.
We are also working with our GPO and key suppliers to understand inflationary factors that could impact our businesses.
In the third quarter supplies were approximately 27, 9% of net revenues slightly improved from last quarter, and 70 basis points lower than the third quarter of last year, given the global environment and continued disruptions to the supply chain, we acknowledge the potential for increased cost moving forward at this point, we are not seeing unusually large price increases in <unk>.
<unk> implant costs or deliveries, but we remain vigilant in managing this risk and have active initiatives underway to proactively address.
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 in our short stay surgical facilities by targeting the highest quality physicians.
As part of our value proposition to new recruits we have demonstrated a unique ability in our industry to predictably consistently and cost effectively staff our facilities with high quality front office and clinical teams a capability that often contrasts with and separates us in the eyes of our physician partners from alternatives in the market.
In the third quarter, we added over 155, new physician spanning our key specialties, bringing our first three quarters total to nearly 430, new surgeons using our facilities.
As Wayne highlighted each of our recruiting cohorts continues to drive strong year over year growth and we are encouraged by the early strength of our current year recruiting class.
As a point of reference the average net revenue per physician in the 2022 cohort is already 55% more than the very strong 2021 cohort that we recruited last year.
All of this has helped fuel our growth and M. S. K procedures, particularly total joint cases in our <unk>. We performed approximately 25000 orthopedic procedures this quarter, 9% 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 a robust M&A pipeline as well as investments in robotic equipment renovation of existing facilities and developing de novo facilities. These investments.
Often require minimal spend are financed at the facility level and our only authorized when we determined that the rois strong in the near term as Wayne mentioned late in the third quarter, we acquired Kansas spine and specialty hospital as well as value health minority equity Stakes and management agreements into <unk>. We are very excited to integrate Kansas by in specialty <unk>.
Spittle into our portfolio as it provides additional capacity to expand our high value higher acuity <unk> service line.
This hospital was recently named one of 2023 to 100 best hospitals for spine surgery and is widely known as the Premier Neuro orthopedic surgery hospital in the Wichita market and complements our existing Cypress ASC in the market. We also acquired interests in three value helped de novo's. We expect these facilities to grow disproportionately over time leveraging.
Our differentiated and specialized operating system.
These transactions represent the continuation of our partnership with <unk> health as we maximize our combined strengths and capitalize on the rapid migration of high acuity cases to the high quality short stay facilities that we own and operate.
In addition to the initial syndicated projects acquired in value health. There are multiple other de novo is in development across our portfolio.
With the acquisitions of Kansas spine, and specialty hospital and these ASC, we have achieved our capital deployment commitment for 2022.
We continue to manage a robust pipeline of acquisition targets, including the remaining opportunities we are evaluating with IU health.
Our approach to capital deployment will provide meaningful contributions to future earnings in 2023 and beyond.
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 results. So far this year. We are confident we can manage through these risks. Our teams are highly aligned and we are executing on our initiatives across business development recruiting managed care procurement revenue cycle and operations to achieve our goals.
In summary, I'm very proud of the team's accomplishments this quarter. Our company provides a cost efficient high quality and patient centered environment in purpose built short stay surgical facilities that provide meaningful value to all of our key stakeholders.
With that said I will turn the call over to Dave to provide additional color on our financial results as well as our outlook Dave. Thanks, Eric I will first talk about our third quarter financial results and liquidity before providing additional perspective on our outlook for the remainder of the year and broad perspectives on 2023.
Starting with the topline we performed almost 148000 surgical cases in the third quarter of 2020, 256% more than the same period last year with strength across all of our specialties, especially in orthopedics, where we grew by nine 1% versus prior year.
We believe our volumes are near normalized levels as we have effectively managed the continuing impacts of the pandemic through enhanced visibility and proactive efforts to rescheduled procedures canceled due to patient or physician illness.
This growth was in line with the expectations that we shared with you last quarter. Despite the impact of Hurricane Ian had on many of our Florida centers.
Largely attributed to this case growth, we saw revenues rise, 11% over last year to $626 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 a non consolidating facilities that provide us the opportunity to enhance performance through operational excellence antibiotic over time.
Because of its ownership structure, we do not include their revenue in our consolidated net revenue.
I noted last quarter that when we evaluate M&A opportunities, 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 profitable.
On a same facility basis, which we report on a days adjusted basis total revenue increased five 1% in the third quarter with case growth at three 3% net.
Net revenue per case was approximately one 8% higher than the prior year period.
Our same facility revenue growth was negatively impacted by approximately 40 basis points due to the effects of hurricane in.
Adjusted EBITDA was $96 2 million in the third quarter, which included approximately $300000 of benefit from the recognition of grant income from Cares Act grant.
Adjusted EBITDA margin was 15, 5% a 180 point.
Expansion from the prior year.
As I've mentioned before we are diligently managing inflationary pressures affecting our labor and supply costs.
Though 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 supply costs were in line with prior year pre pandemic levels and our expectations.
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 future guidance.
We ended the quarter with approximately $155 million of cash.
<unk> of the 2020 Medicare advanced payment has largely occurred with an immaterial amount remaining as deferred revenue on our balance sheet.
We reported negative free cash flows in the third quarter, which was due to the timing of spend on large capex initiatives and seasonal working capital we generated $30 million of cash flows from operations at $53 million of distributions to our partners in Capex and repaid $13 million of Medicare advanced payment.
<unk>.
On a year to date basis, we have generated positive free cash flow of $37 million.
Through October of this year and excluding our de Novo investments, we have deployed approximately $243 million on 12 transactions at a sub eight times multiple.
Centers are primarily focused on mfk procedures and are well positioned to support and strengthen our same facility growth trends in future years.
The company's ratio of total net debt to EBITDA at the end of the third quarter as calculated under the Companys credit agreement was six times consistent with our expectations and the second quarter.
We expect this leverage to float in the upper fives to lower six times range in the near term as we continue to deploy capital for accretive assets.
To enhance our liquidity position in the third quarter, we worked with our banking syndicate to expand the borrowing capacity under our revolving credit facility, bringing the total capacity under that instrument to $350 million.
On September 30, we did not have any borrowings outstanding under the revolver.
As a result of this expanded capacity our total liquidity at the end of the quarter was almost $500 million.
Representing consolidated cash of $155 million and our Undrawn revolver capacity.
It is worth noting that the acquisition of Kansas spine and specialty hospital was partially settled in October .
This solid liquidity position supports both our local facility working capital investments and capitalization as well as future M&A.
On the debt front, we have approximately $2 4 billion in gross debt at the corporate level.
All of this debt is effectively fixed with the benefit of the interest rate swaps and caps, we entered into in prior year, leaving us with no exposure to incremental interest rate fluctuations.
In addition, we have no material debt maturities until 2026, and approximately 15% of our debt due by 2025.
With today's interest rate environment, we are not exposed to significant rate risks.
Also as a reminder, we continually refresh our asset portfolio to align with long term market growth trends our portfolio refresh is anchored on the premise that we can sell certain assets at a relatively high multiple and then redeploy the capital at a relatively low multiple.
With stronger future growth prospects, therefore, when combining proceeds from these ongoing portfolio management activities, our current liquidity position as well as our generation of free cash flow, we are well positioned to approach the capital markets Opportunistically to be clear, we are confident in our ability to fill.
<unk> current and future M&A opportunities.
With the third quarter results. We released this morning, we are optimistic about 2022 and anticipate full year 2022 total revenue in the range of two five to $2 55 billion.
This reflects the impact of recent acquisitions, including those that are not consolidated.
The third quarter and continued impact of hurricane related closures and our view of the pandemic.
In addition, we are reaffirming our 2022 guidance range for adjusted EBITDA to $3 $75 million to $385 million.
We continue to believe this range is prudent given the macroeconomic environment we are facing.
In our business there is a large focus on the seasonality of the surgical cases, we perform.
Other than the pandemic affected 2020 in our fourth quarter, we typically experienced higher case count by patients with commercial insurance payers that have deductible limits that reset annually.
Our guidance for the fourth quarter anticipates, a similar level of demand late in the fourth quarter.
We are currently in the midst of our planning process for 2023, but wanted to provide investors with some thoughts on the headwinds and tailwind as we evaluate our 2023 growth goals with our senior leadership team and the board of directors.
From a headwind front items. We are contemplating include a full year impact of the return of Cms's sequestration, the potential elimination of the hospitals without walls program.
Minimal recognition of grant income.
Continued active management of labor and supply inflationary pressures and finally any impact of COVID-19 or unknown new variants.
These headwinds are offset by the <unk> of our 2022 acquisitions, which as I reported earlier is in excess of our $200 million commitment. In addition to 2000 2023 acquisition activity.
Organic growth and efficiency initiatives that we expect will continue to provide top line growth and continued margin expansion.
And contributions from our in process to novo's, including the continued maturation of the community Hospital, we opened in Idaho during the pandemic.
As we evaluate these headwinds and tailwind at this early stage in our process, we remain confident in our ability to grow adjusted EBITDA double digit with our team focused on actions that will help us achieve our targeted long term mid teens growth.
We look forward to providing greater visibility into our projections for revenue adjusted EBITDA and capital deployment targets in a future presentation.
We have stated for years now that we believe we have a powerful and unique business model that benefits from favorable organic trends demographics, and a fragmented marketplace that provides ample opportunity for consolidation.
Our year to date 2022 results speak to the strength of our operations and our business model and we believe that 2023 should continue to capitalize on that momentum.
With that I'd like to turn the call back over to the operator for questions.
Operator.
Thank you.
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Okay.
Our first question is from Brian <unk> of Jefferies. Please go ahead.
Hey, good morning, guys.
That's in the quarter I know it.
Isn't easy so I guess my first question for you I mean I.
I appreciate all the color on your views on the.
The capital needs of the company and.
The access to capital right now, but as I think about your views longer term on acquisition spend.
A lot of investors are still wondering if youll need to tap the equity markets or the debt markets at some point.
Just wanted to hear your thoughts on that and how you're thinking about cash flow generation.
Capital deployment, as we think about 'twenty three and beyond.
Hey, Brian Good morning, and I appreciate the question.
Let me anchor on a few things for all of our listeners and shareholders first and foremost big part of our of our long term growth model is a combination of not just the organic initiatives and the de novo's and the physician recruitment, but clearly is around capital deployment and with over 4000 independently owned ASC is out there we like the opportunity of continuing to do this.
At an aggressive pace, especially at these highly attractive multiples.
Our model has been baked on to get to the mid teens growth that we target on us deploying at least $200 million a year and I would like to get folks at least anchor on that number one because I think that's the important one to anchor on as you think about the long term.
As you heard Dave say in the prepared remarks, we have about $500 million of liquidity right. Now when you look at both kind of consolidated cash flow as well as our undrawn revolver as of September 30th.
What you can't see in our current results is that our run rate cash flow is positive free cash flow. We had the remaining payments to CMS. This year for Medicare we had the tax payments I say all that to say that as we go into next year, we believe and are forecasting that we will do approximately $100 million.
Free cash flow that.
That can be used towards M&A and as you think about that that says when you have a gap roughly of 100 to get to your at least number.
But we also have about $5 billion.
Opportunity there between our revolver as well as our consolidated cash.
So I say that to say that we have a path to weather. This what we think is hopefully a storm that will start to subside in this upcoming year and then we'll have an opportunity to further evaluate then where we see the markets.
Would love to refinance some of our debt, but I'm not sure that we view that long term is the right place to go and put more debt on this asset quite the contrary, we've committed to taking our leverage down and we've been doing in that and we will continue to do that and we.
We'll be opportunistic if we think the right opportunity exists that we can raise capital for our shareholders. While delevering, we will do that but I would tell you that we feel very confident in our ability to deliver for the next several years on that commitment that cash flow number will continue to grow because of the way converts all of our substantial onetime payments related to either the cares.
Act in those items that had to be refunded or related to the tax agreement. We had subsided. After this year and so I think you'll really start to see the power of this engine and its ability to fund M&A from free cash flow.
No I appreciate that I guess, Eric just for you so.
Obviously CMS put out their final rule for Ase's recently, and as we think about 2023, how should investors be thinking about both commercial rate trend and your interpretation of the benefit or impact to you guys from the CMS rule.
Good morning, Brian and thanks for the question and the kind words to start the quarter. We're obviously very pleased with the quarter.
With the CMS ruling obviously better than initially came out so we'll take that certainly we feel we feel good about the impact that that has on the <unk> I think there is still some arguments that given inflation that we were hoping for a little bit more but better than we expected I would say this we continue to believe with our positioning.
With the commercial payers that because of our value position, we're able to find a really nice happy medium that allows us to grow revenues appropriately and we feel good about where those negotiations are.
With Medicare coming in near 4% clearly, we have some room on revenue and on the on the on the commercial side. Those negotiations are always a little bit of a dance between steerage and being the high value player and making sure we're paid fairly and.
A third of those come up each year, we are we feel well positioned on that clearly we are trying to make sure that we more than impact or more than offset inflationary pressures and that's the focus of the managed care team and I feel really good about their ability to do that and certainly the Medicare increase helps offset that and was it was a net positive to where we started.
And I'll, let David do you want to talk to more about the specifics of yeah. Yeah. Yeah, I think I agree with you Eric It was obviously very good to see the Medicare rates go up a little bit from what we saw in the proposed rule.
We have we have three aspects of that rate that affect us.
Right I think came up at relatively favorable the headline news on the hospital rates.
Also was pretty positive however.
I would encourage folks to take a look at the impact of that 340, B drug program change, which did have a dampening effect on that headline number but obviously, we're still working through all of those things will factor into how we look at next year.
And of course, how much of that will flow through.
Through our commercial rate program, but generally positive versus where our expectations were in the middle of the year.
Our next question is from Kevin Fischbeck of Bank of America. Please go ahead.
Alright, great. Thanks, I, just wanted to dig into the margin side, a little bit because it's I guess a couple of comments there.
Left me wondering exactly how youre thinking about.
The margins if the guidance assumes a lower revenue number, but a higher margin than what you had previously it sounded like generally speaking things came in line with what you were thinking so just trying to bridge that.
That change in the guidance on the margin side. Thanks.
Hey, Kevin good morning.
Couple of things I would anchor on regarding margins first and foremost our business model has a fair amount of variable cost associated with it and we flex that up and down.
I would highlight the fact that one we were very much aware of what we saw being kind of the atypical vacation in July and we started flexing from that perspective, our G&A quickly and it was no surprise that the hurricane was on its way in fact, we took.
Took the initiative to cancel many of the procedure shutdown our facilities, but then flex our G&A accordingly that in and of itself.
Because of our ability to use data and drive those decision quickly didn't influence margin, but what it did do is it took away the headwind that you would typically see when revenue is being impacted from those type of factors such as the hurricane.
But outside of that I would point to a few things one is our G&A initiatives. We've been investing in years are really just continuing to ramp up I actually think our underlying margins would be even better if it wasn't for the current environment that we're in as we mentioned we now have almost all of our facilities on a standard data warehouse, we now have.
Our entire HR functions on one <unk> system over 90% of all facilities are on a single HRS system. These are all investments that we've been making over the last several years, but they've all been staged along the way. This is the first year that youre seeing kind of the full force and power of all of these investments coming together and kind of the long term benefits that come with that the second thing I would highlight for you.
<unk> is to keep in mind that we are doing much more acquisitions through this value health partnership arrangement, we have whereby we acquire a minority interest we take over 100% of management. So we get a management fee and we have the ability over time to buy up. The reason that is so relevant is that one because of the way the accounting rules work.
When those acquisitions occur you get zero revenue zero revenue associated with it because you have the inability to consolidate but you do get the impact of the EBITDA and so youll start to see a miss correlation of ties between whats happening with EBITDA versus revenue, but nonetheless, the quality of that earnings is quite strong and the cash flow continues to be quite strong and obviously to the.
Extent, we buy up to become a majority owner then that will flip where we will start recording 100% of the revenue, but that's the other factor that's been affecting us, especially in this year as we continue to move down these partnerships that we've been building.
Dave anything you want to add on the margin front, yes. It just because your question relates to our guide point from last year or from last quarter going into this quarter and yes, youre right. The reported adjusted EBITDA number is.
There's a little bit better.
Then what our guide was really at the top end of our range and revenue was right in the middle.
Which again in this market I think it was.
Every marketable outcome for the third quarter and really pleased with how the team managed that but mechanically when you look at where it gets reported and adjusted earnings.
You do get the benefit of.
Grant income that was received and recognized inside the quarter that was about $300000 and the impact of the hurricane.
That we took out of adjusted earnings is about $1 $1 million. So when you when you do the math behind those things, you'll probably find that our margins was in line, maybe a little bit better than our our Conservative guide point that we gave in the second quarter.
Okay. That's helpful. If I can squeeze in two quick two questions for my second question.
You mentioned as one of the headwinds the elimination the potential elimination of the half without walls program could you talk a bit about.
What that is how meaningful that is for you.
Then secondly, you mentioned.
The potential to sell some assets and redeploy them.
At better multiples I mean can you any way to size that opportunity. Thanks.
Yes, so thanks for the question.
Parcel without walls program.
It's not material, but we do have a number of centers that took advantage of the ability to become hospice light walls. It requires extra staffing it allows us to do higher acuity procedures, we're actually quite hopeful actually with the success of that program that Medicare is going to look at those procedures and continue to think about moving them permanently into the ASC space, but.
But clearly that program allows you to access.
<unk> Medicare rates for those specific facilities, it's not a huge number but it certainly is something we've got to overcome and we will overcome that in a couple of ways. One is hopefully.
Continuing to drive increased volume at those centers, which we've done and the second is using these as examples of the high quality work. We can do on what had previously been considered too high acuity procedures to be done in afcs, but actually we're done quite safely. So we were really excited about our ASC is that we're able to step up and provide that higher level of care.
Again, not at not a huge number of those that handful within our company, but it but it did make a difference for that period of time and it's something that we'll have to outgrow in other ways.
As far as your second question, which was on our portfolio management work.
That's going to be something ongoing that we're quite well.
We're quite excited about just because we think that increased diligence in that area allows us.
To proactively.
Make sure that our facilities are with the best natural owner there are times, where we see opportunities where our asset is highly valuable to someone else. We maybe don't have the same growth perspectives on that facility as we do on other opportunities.
And we think that can be relatively meaningful. So the idea here is we were in a particular market or particular facility, we sell it at a higher multiple than we could put the cash back to work for we have done some of that this year, we expect to do more of that going into next year all of those things take time, but it certainly gives us more confidence in our ability to deploy that 200 million.
Our cash number because it gives us a real arbitrage opportunity so.
As far as sizing that we haven't done that publicly but its meaningful yes, I mean, maybe Kevin to give you a gauge, though I would say that as a member of the board chair of the board we talked to manage all the time about we'd like to look at the portfolio as just that but we always look at kind of the bottom part of our portfolio and is it is it is it at the bottom because it has the ability to grow in.
We can influence and grow disproportionately or is it at the bottom because we'd maximize its growth potential and we have other individuals in a market that may like that asset and we have an opportunity then to get a unique arbitrage and so we're generally looking at something that has if you looked at all the assets combined that have EBITDA in the $5 million to $10 million range total so it's not a massive number if you think about what we would be doing but.
If youre thinking about five to 10, and if you can get a multiple thats potentially double digit and youre able to acquire at say sub <unk> sub seven you can see how quickly the math works and why it's an easy arbitrage for us and it also affects our long term growth rate and so we're constantly doing this every single year in the portfolio. We are always looking at the bottom group of assets that we want to understand better is to it.
Is this the right time to liquidate and redeploy that capital or is it the right time to further invest in.
But the teams done a real nice job of showing the power of that and I think it is another reason we have a lot of confidence not just in the $100 million of free cash flow, we'll generate next year, but the idea that that we have a lot of assets out there that we have a lot of very substantial interest in is what I would say, what we see as attractive multiples. If we can get them over the finish line.
Our next question is from Lisa Gill of Jpmorgan. Please go ahead.
Thanks, so much and thanks for the details. This morning I just wanted to go back to the headwind tailwind that that they've talked about.
I look at your current guidance and I look at consensus it looks like consensus is about 15% call. It mid teens growth on 2023.
That the right way to think about it and obviously you've talked about.
Few more headwinds in totality versus tailwind, but obviously that doesn't always aligned or how do we think about that and how that impacts the numbers. So that that would just be my first question is.
The mid teens growth on EBITDA is the right way to think about this or that.
Yes, Hi, Lisa Thanks for the question.
First off it is it is a little bit too early for us to be talking about how we kind of quantify that in responding to kind of the.
Consensus is out there is a little bit difficult because we don't know.
Obviously, our math looks a little bit different than how we build up our process.
I will say that Eric and I have gone through we're going through our budget process right now Eric and I have gone through how do we how do we feel comfortable that we're in double digit earner on.
Short term as well as on a long term basis and I'm looking at Wayne right now and he's definitely.
Shaking his head, but this is what the board expects of us and our ability to kind of get there. So.
We will be providing that guidance kind of how we think about that in our future calls, but at this point somewhat prudent for us to.
Stay a little bit quiet into the specifics of how we get there but double digits.
Okay I appreciate that.
Yes, just speaking on behalf of the board I can assure you that we continue to challenge this management team too.
To identify all opportunities and levers to hit our long term mid teens growth goal as you know I think we all can agree. This has been an incredibly unique year from a macro environment perspective, and if you strip out cares grants our growth rate year over year is over 20% and we're really proud of what we do with this company and how we push these guys.
And this entire team so.
I'd say as Dave said, the prepared remarks, we're quite intentional in saying we have high confidence that we will be double digit now we're just trying to figure out where we fall out relative to those mid teen targets that we've been shooting for and then.
How do we how do we continue to build more catalysts between now and going into the next year that helped give us high confidence that that will be achieved regardless of the environment that we're in and that's the piece of team is still working through.
And then just a bigger picture question around value based care I mean, you and Ive had conversations in the past. If you think about why did your relationship with <unk>, but you did move in the market towards value based care.
How do you think about that impact on one margins over time.
The actual shift in that direction, what we see more of that in 2023.
So it's a great question.
And you and I joked about this in the past right that I think we've heard people talk about value based care for about two decades now and it does seem like it's finally getting its real moment and real momentum behind the number of companies, including <unk> and others that have built the technology to really be able to track and monitor this.
I do think it will get more momentum in 2023.
I think I can I can assure you from our discussions with folks as we've said before.
We don't say this flippantly, we really mean this and believe this we are the value and value based care like we are the key components to make the math of all the technology that folks have built actually work the math that aligns with both the cost structure and the quality.
And so I think you will continue to see what I would call for the first time real proof points and BBC like real proof points.
That individuals can share within their existing bottle that we can share with payers that show that and then ultimately relative to margins. The 100% is the answer to your question, which is this will improve margins for us and this will allow us to start taking a bigger piece of pie over time.
Key for US is just proving to the world that it actually works because I think people have heard this for decades and they want to see that it truly does work, but we have a lot of confidence in it and we're excited about the early relationship with Caribbean, how thats, how thats proceeding.
And last question is from Ben Hendrix of RBC capital. Please go ahead.
Hey, Thanks, guys.
Surround supply costs amid the inflationary environment can you remind us how much of your supply falls under GPO arrangements in long term supply contracts, we've heard from comet commentary from peers about supply contracts coming due in the coming months do you guys have any large renewals coming up that could present, a material step up given the inflationary.
Pressure thanks.
Yes.
Ben.
Your your your question is a good one related to supply chain because our GPO.
One of the areas that we believe is a good technical hedge for us our structural hedge for us against against inflation, we have a great relationship with our GPO a majority of our supply spend is underneath that and we have more room to grow inside that it provides a huge amount of benefits for us.
In a number of ways, one that GPO gives us a lot of data visibility.
And with data you can make much more informed decisions and.
Spread out across our portfolio, so our operators and our clinicians can do their job much more effectively.
And from a cost management side that data gives us good strong visibility into into where cost trends are and the visibility that we have there is pretty tremendous our GPO is not up for renewal, but what you may be referring to what others have kind of talked about is underneath the GPO. They managed long term contracts with key vendors.
And so they can see on a cyclical basis when those contracts come up for renewal now the good news on that is you get good visibility to them, it's a staggered impact.
But the GPO is not limited to one or two kind of key vendors.
It gives us the opportunity again to see which vendors inside their portfolio.
Maybe maybe a little bit better priced and allows us to give that visibility again to our operators. So they can make more informed decisions inside there. So.
The GPO has been just a a great tool for us.
And it was one of the ways that we help to.
Navigate our expectations for this year it will definitely inform us as we think about 2023 and we provide that guidance.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session I would like to hand, the call back to Eric Evans for closing comments. Please go ahead Sir.
Thank you and I appreciate everyone joining us today before we let you go I would like to recognize the significant efforts and the commitment to excellence of our 11000 colleagues and nearly 5000 positions collectively we take to heart the responsibility for providing the absolute best environment for our physicians to provide exceptional clinical quality and a differentiated patient experience.
We know that more than 600000 patients each year placed their trust in us and what are often their most vulnerable moments I am privileged to work alongside these professionals and colleagues as we work to more fully deliver on our mission to enhance patient quality of life through partnership. Thank you all for joining the call. This morning and have a great day.
This concludes today's conference. Thank you for joining US you may now disconnect your lines.
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