Q4 2022 Surgery Partners Inc Earnings Call

Speaker 1: I.

Speaker 1: Re converter

Speaker 1: And.

Speaker 2: to the Surgery Partners Inc. 4th Quarter 2022 earnings call.

Speaker 2: At this time, all participants are in a listen only mode.

Speaker 2: A brief question and answer session will follow the formal presentation.

Speaker 2: If anyone should require operator assistance during the call, please press star and then zero on your telephone keypad. As a reminder, this conference is being recorded.

Speaker 2: It is now my pleasure to introduce your host, Dave Daugherty. Please go ahead, though.

Speaker 3: Good morning. Welcome to Surgery Partners, fourth quarter of 2022 earnings call. I'm Dave Dordy, the company's CFO . With me today is Eric Evans, CEO , and Wayne DeVite, our executive chairman. During this call, we will make forward-looking statements.

Speaker 3: 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.

Speaker 3: 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.

Speaker 3: A reconciliation of these measures can be found in this morning's press release, which is posted on our website at surgerypartners.com and in our most recent annual report on Form 10-K when filed. With that, I'll turn the call over to Wayne. Wayne? Thank you, Dave. And thank you all for joining us today.

Speaker 3: This morning we are pleased to report full year 2022 adjusted EBITDA of 380.2 million, 12% higher than the prior year, and over 20% year-over-year growth when adjusting for the non-recurring benefit of grants. Including our non-consolidating joint ventures, we performed approximately 680,000 cases in 2022, nearly 12% more than 2021, with all specialties growing in line or in excess of our expectations.

Speaker 3: despite the early 2022 impact from the Omicron variant. This strong case growth combined with improved rates and contributions from our recent acquisitions

Speaker 3: basis point improvement over 2021 when adjusting for grants.

Speaker 3: Dave will go into these results in greater detail in a few minutes. Our fourth quarter results continue to affirm the power of our business model and the value proposition we provide to our stakeholders.

Speaker 3: Net revenues increased 16% from the prior year to $707 million, with SANE facility revenues increasing nearly 11% compared to 2021. Physician recruiting efforts yielded over 150 new surgeons in the fourth quarter, bringing our overall new recruits in 2022 to almost 575. The 2022 recruiting class spans all of our core high-growth specialists,

Speaker 3: there is an earnings compounding effect for multiple years. As evidence, the class recruited in 2021 delivered 143% more cases and 156% more revenue growth in 2022. We have high confidence that both 2021 and 2022 cohorts will continue to grow in 2023.

Speaker 3: Finally, we continue to benefit from the transition of procedures out of the traditional acute care and patient setting, and we are not seeing those cases returns to the hospital setting as we exit the pandemic. Joint replacements in our ASCs for the fourth quarter were up 100% from the prior year, and almost 80% for the full year 2022 compared to 2021. We will continue to focus on this significant shift inside of care in our recruiting efforts, acquisitions, and denougo investments.

Speaker 3: Our management team, which has a tenacious focus on execution, coupled with the infrastructure we've built over the past five years, has positioned us to capture the significant shift of care moving to the outpatient setting within the $150 billion total addressable market. Rounding out our growth story, our M&A team continues its disciplined approach to sourcing and executing on strategically important acquisitions at attractive multiples and finished 2022 going just shy of $250 million.

Speaker 3: at a sub-eight times multiple. And our M&A engine isn't slowing down. Our team is currently managing a robust pipeline of potential targets in excess of $250 million. With the incredible support of existing and new investors, in November we raised over $850 million in a primary offering of our equity. Dave will provide greater detail on the use of proceeds from the offering, but by repaying a significant portion of our long-term debt.

Speaker 3: We reduced our annual cash interest costs by north of $40 million. Combined with strong operational execution and cash flow conversion, we expect to generate over 140 million of free cash flow in 2023 and to see 200 million in annual free cash flow by 2025. In addition to our projected operating cash flow, we start 2023 with over 820 million in liquidity. This liquidity position gives us further conviction into the continued long-term growth of the company. On behalf of the board, I'd like to emphasize that point. We have high confidence in the long-term growth prospects of surgery partners.

Speaker 3: This management team continues to demonstrate their ability to successfully navigate the challenges of our current macroeconomic environment, as it executes on organic and inorganic growth strategies to provide significant year-over-year growth. Off the strength of our fourth quarter report to results and continued investments, we anticipate 2023 Adjusted EBITDA to be greater than 425 million and with net revenue exceeding 2.75 billion. This outlook is inclusive of the anticipated headwinds and tailwinds that we will discuss in more detail. Let me conclude with an observation as to the journey the company has been on for the past

Speaker 3: future. With that, let me turn the call over to Eric. Eric, thanks, Wayne, and good morning everyone.

Speaker 3: I will echo Wayne's pleasure with our fourth quarter results as we continued our multi-year positive trajectory and execution that will extend into 2023 and beyond. Our continuously refined facility level operating system supported by corporate growth leaders empowers our physician partners to focus on delivering the best clinical care with the convenience and cost efficiency our patients expect, all while delivering strong financial results for all of our stakeholders.

Speaker 3: From an operational perspective, our specialty case mix is right where we want it to be, and volume was in line with our expectations with over 155,000 surgical cases in the quarter, 7.3% more than last year. On a same facility basis, net revenue grew by almost 11% in the fourth quarter. Our strong competitive position in the markets we serve, superior operational execution, and broader macro tailwinds drove a healthy same facility case growth of 4.3%, and our mix resulted in over 6% growth in revenue per case.

Speaker 3: Our organic growth initiatives, coupled with the acquisitions completed over this past year, have translated into a very strong top-line growth of nearly 16%. Dave will talk about this in more detail, but our adjusted EBITDA of $120.8 million for the quarter and $318.2 million for the year both represent new on-time highs for our company. Income recognized from CARES grants were not material in the fourth quarter or full year 2022 as they were in 2021. Looking at results purely without grants.

Speaker 4: the company's adjusted EBITDA grew by more than 20% in 2022. Our proactive, disciplined, and data-driven approach has enabled us to closely monitor and react accordingly to inflationary impacts in labor and supply costs. On the labor front, in the fourth quarter we experienced an overall reduction of premium labor as a percentage of salaries, wages, and benefits in most of our markets, with the overall utilization of premium labor abating, as is the contract labor rates that the market is demanding. As a reminder, premium labor represents approximately 3% of our total salaries, wages, and benefits, and we continue to be an employer of choice in this fluid labor environment.

Speaker 4: 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. When we do experience turnover in our facilities, we are able to fill the jobs posted in approximately 30 days on average. As it relates to supply costs, we continue to work with our group purchasing organization and key suppliers to mitigate inflationary risk factors that could impact our businesses.

Speaker 4: In the fourth quarter, supplies were approximately 27.1% of net revenue, 80 basis points better in the third quarter, and 100 basis points lower than last year. At this point, we are not seeing any unusual large price increases in commodities, implant costs, or deliveries, but we remain vigilant in managing this risk and have active initiatives underway to proactively address 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-wide expansions. As Wayne alluded to, these efforts contribute to higher overall revenue per case rates, as well as generate the highest contribution margin for our portfolio.

Speaker 4: Our physician recruitment team has been meeting the increased demand for new physicians by targeting the highest quality physicians. As part of our value proposition to new recruits, we have demonstrated a unique ability 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 our industry. In the fourth quarter, we added over 150 new physicians spanning our key specialties, bringing our 2022 total to nearly 575 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 strength of our current year recruiting class. As a point of reference, the average net revenue per physician in the 2022 cohort is $2.5 million

Speaker 4: is already 53% more than the very strong 2021 cohort that we recruited last year. All of this has helped fuel our growth in MSK procedures, particularly total joint cases in our ASCs. We performed over 28,000 orthopedic procedures this quarter, almost 13% more than prior year. We do not see this growth slowing, nor are we seeing cases returning to the inpatient setting. And as we have discussed, we are preparing for the next wave in cardiac procedures that we expect to migrate to outpatient settings starting in earnest over the next five years. 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.

Speaker 4: including sourcing and managing a robust M&A pipeline, as well as investments in robotic equipment, expanding existing facilities, and leveraging our partnerships with value health and select health systems, as well as the ongoing development of the NOAA facilities. These investments often require minimal spend, our finance at the facility level, and our only authorized when we determine that the ROI is strong in the near term. We look forward to updating you on the efforts to build upon hospital system partnerships as the year progresses. Thank you.

Speaker 4: Our 2022 capital deployment of nearly 250 million for acquisitions exceeded our annual commitment of $200 million. Since 2018, we have deployed $870 million on acquisitions with an average multiple of less than eight times earnings, expanding our footprints in California, Texas, and New York. We have selectively optimized our portfolio to unlock capital for redeployment with high growth short-stage surgical assets. This approach to optimizing our portfolio will continue in 2023, but does introduce complications for us as we develop our projections for revenue growth, which is affected by both the timing of acquisitions and the bestures, as well as the number of facilities in which we perpetuate a consolidating interest versus a minority stake.

Speaker 4: Despite the timing-related projection challenges on revenue, the team continues to prioritize bottom-line growth and adjusted EBITDA for both 2023 and our long-term future. As Wayne mentioned, we continue to manage a robust pipeline of acquisition targets, and our approach to capital deployment will provide meaningful contributions to future earnings in 2023 and beyond.

Speaker 4: Our 2023 guidance that Wayne laid out and Dave will discuss in more detail shortly provenly considers that we are still in a challenging macro environment and in a period of inflation that could pressure margins. As you can see from our results in 2022, we are confident we can effectively manage through these risks. Our teams are highly aligned and we are executing on our initiatives across business development, recruiting, manage care, procurement, revenue cycle and operations to achieve our goals.

Speaker 4: and continue to win in an increasing share of the rapidly shifting market. In summary, I am proud of the teams that come up with this quarter and for the full year of 2022. Our company provides a cost-efficient, high-quality and patient-centered environment in purpose-built short-state 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 and health as well as our 2023 outlook. Dave? Thanks, Eric. I will first talk about our fourth quarter financial results and liquidity before...

Speaker 3: As they attributed to this case growth, we saw revenues rise 15.9% over last year to $707 million. This growth is a combination of the organic growth factors Wayne and Eric described and contributions from our current and prior year acquisitions in consolidated facilities.

Speaker 3: As a reminder, in 2022, many of our acquisitions were in non-consolidating facilities that provide us the opportunity to enhance performance through operational excellence and to buy up over time. For these acquisitions, we do not include their revenue in our consolidated net revenue. We will continue to be agnostic to the accounting treatment of the assets we acquire since our focus is to acquire high-growth, high-quality assets aligned with our targeted specialties at the most favorable multiple possible.

Speaker 3: I just did EBITDA for the full year was $380.2 million with a 15% margin in line with our expectations. Excluding the impact of income from CARES Act grants, margins expanded by 20 basis points in the fourth quarter and 80 basis points for the year. We continue to proactively manage inflationary pressures affecting our labor and supply costs. Although we are not immune, these factors were not material to the results we...

Speaker 3: proactively deploying cost mitigation tactics to help offset potential pressure. As you know in late November , we completed a primary equity offering that generated net cash proceeds of approximately $860 million.

Speaker 3: This transaction was immediately de-leveraging, taking almost two turns off our ratio of total net debt to EBITDA. We utilized approximately $585 million of these proceeds to repay long-term debt and finalize the acquisition of Kansas Spine and specialty hospitals, with the remaining proceeds included in our consolidated cash balance. These transactions resulted in a fourth quarter ratio of total net debt to EBITDA, as calculated under the company's credit agreement being 4.3 times. A $40 million reduction to our annual cash interest cost and the elimination of a springing maturity in our term loan that would have brought it due in 2025.

Speaker 3: Further, to enhance our liquidity position, in January we worked with our banking syndicate, along with new members joining the syndicate, to expand the borrowing capacity under our revolving credit facility, bringing the total capacity under that instrument to just over $550 million, which remains undrawn. We ended the quarter with $283 million of cash. As we enter 2020-23, our liquidity position is greater than $820 million, enhancing our confidence in our ability to navigate this current macroeconomic environment.

Speaker 3: and continue to fund a creative M&A. We reported negative free cash flows in the fourth quarter, which was due to the timing of spend on growth initiatives.

Speaker 3: a $20 million payment for the tax receivable agreement, $11 million for the payment of accrued interest in connection with the early retirement of portions of our long-term debt, and $9 million for deferred payroll tax payments. For the year 2022, we generated negative free cashflow of $10 million consistent with our expectations. With the exception of spend on growth initiatives, which we will isolate for you going forward, we do not expect these significant, unusual outflows.

Speaker 3: to impact our free cash flows in the future. We remain confident in our ability to deliver greater than $140 million in free cash flow in 2023, and lower net debt leverage as we progress to our target of mid three times by the end of 2025.

Speaker 3: In 2022, excluding our Genobo investments, we have deployed $246 million on 13 transactions at a sub-A times multiple. These centers are primarily focused on MSK procedures and are well positioned to support and strengthen our same facility growth trends in future years. Additionally, as mentioned in prior calls, we continually refresh our asset portfolio to align with long-term market growth trends. Proceeds from any Devastiture activity will be redeployed as incremental M&A. As we intend to sell certain assets at a relatively high multiple, and then redeploy the capital at a relatively low multiple, with stronger future growth prospects. While the timing of the Vestiture and Related M&A activity can be challenging to predict.

Speaker 3: We believe our 2023 full-year revenue outlook reflects a conservative view. On the debt front, we ended the year with less than $1.9 billion in gross debt at the corporate level. All of this debt is effectively fixed at 6.7 percent as a result of the favorable benefit of the interest rate swaps we entered into in prior years, leaving us with no exposure to incremental interest rate fluctuations. In connection with the $150 million paydown of our term loan, in January , we terminated a corresponding amount of our interest rate gaps. We have no material debt maturing until 2026.

Speaker 3: With today's interest rate environment, we are not exposed to significant rate risks, which is another factor giving us confidence in our free cash flow growth. We are carrying the momentum of the strong finish to 2022 into 2023, and we are setting our initial guidance for 2023 at Justcy DeBida to greater than $425 million, representing 12% growth over 2022. 2022.

Speaker 3: On the top line, we expect 2023 revenue to be greater than $2.75 billion. We expect to deploy at least $200 million of capital on M&A, with additional spend depending on the timing of any portfolio management opportunities on the way. Our Justin Ibiza and revenue guidance is informed by a balance of case growth and rate growth as a result of organic growth efforts from investments we've made in physician recruitment, revenue cycle, supply chain, and managed care initiative. 2023 and these fundamentals that will be driving.

Speaker 3: EBEDA and revenue representing an estimated 20% and 24% respectively of our full year guidance.

Speaker 3: 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 2022 results speak to the strength of our operations and our business model. And we believe that in 2023, we will continue to capitalize on that momentum. With that, I'd like to turn the call back over to the operator for question. Operator?

Speaker 2: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Please limit your questions to one question and one follow-up question. You may press star and then two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star key.

Speaker 3: and demand across your facilities in 2023. You previously suggested buying growth about 23% on a normalized basis, but the contact is about 8% or gain growth for 2022. or there's new answers that we should be mindful of, including a difficult comp. Up, hey Ben, good morning and thank you for the question.

Speaker 3: year and a big portion of that was the fact that our volume on a full year basis was closer to 3.9%. You know as we built our plans for the upcoming year we we will continue from an algorithm standpoint remain conservative on our posture but we do believe our outlook would support us you know being at the high end of that two to three percent in volume if not if not better. Again it's early in the year we'll see how it progresses but we are encouraged by what we've seen through January already.

Speaker 3: That was the fact that our volume on a full-year basis was closer to 3.9%. As we built our plans for the upcoming year, we will continue from an algorithm standpoint remain conservative on our posture. But we do believe our outlook would support us being at the hind of that 2% to 3% in volume, if not better. Again, it's early in the year. We'll see how it progresses. But we are encouraged by what we've seen through January already. Got it. Thank you. Thank you.

Speaker 4: This is a quick follow-up on demand for some of your value-based arrangements. Just turning to commercial contracting, any color you can share on what you're seeing in terms of demand for those value-based arrangements and whether you're seeing more from the managed care side or primary care practices? Yeah, I appreciate the question. This is Eric. Hey, I would say a couple of things. First of all, I always remind everyone when we start to talk about value-based care that we are a value-based care player in the fee-for-service world. So just moving cases to our side of care tends to save 40 to 60 percent. So before we start about anything else, why take risks when you can drive the savings that way? I would say that there's continued interest. As you know, we have the partnership with Value Health. We have some facilities that are gaining traction in that area. It's early innings. But I do believe there's, again, continued interest. I do expect that over the next several years, you're going to see more of our revenue flow through that. That's really a good thing for us just because we are such a cost savings. It allows us and our physician partners to participate.

Speaker 4: in the savings we create. So we are a natural catcher's mitt for whether that be payers that are interested in driving value-based care or whether that be, as you mentioned, large primary care groups or pay viders that are interested in that. We tend to be, because we are an independent peer play kind of source day surgical provider, we tend to be the right catcher's mitt for that. So I would not say it's overwhelming at the moment, but there's a lot of interest and continues to be, I think, a slow steady migration. Okay, great. Really appreciate the color there. Thank you. The next question comes from Kevin Fishbeck from Bank of America. Please proceed with your question, Kevin.

Speaker 3: Great, thanks. We'd love just to get a little bit of color on your view about the competitive backdrop right now. It seems like there's a number of companies looking to buy surgery centers and open up new centers and things like that. Have you seen anything change there from a mobile perspective, from an ability to source a physician's perspective? And I guess, how do you differentiate your story when you go into market? Hey, thanks, Kevin. Good to hear your voice. Let me first start by saying that we are seeing no slowdown at all in the number of facilities available, the quality of the facilities available, or any changes in the multiples. So from that perspective, I would say, even though, to your question, it sounds like others are engaging, the one thing I would highlight is there's a huge difference between acquiring the surgery center versus actually knowing how to run.

Speaker 4: that are aligned with really changing the healthcare dynamic and the quality dynamic, and more importantly, really removing costs from the system. And those are the ones that really want to align with us for the long term. But in general, I don't see our pipeline slowing down at all. Yeah, Kevin, I would only add on the value proposition question. I mean, we differentiate ourselves in competitive situations for centers by being that independent, you know, operator that doesn't come with any conflicts. We're not owned by a health system. We're not owned by a health plan. These positions that have created very successful independent centers.

Speaker 4: They did that for a reason. They didn't want conflicts. And so that allows us to move quickly on adding any service line we want, moving to create the most value we can without any other reasons not to do that. So I think that's a differentiator for us. We're also very quick in our ability to move on opportunities and think all those things play well for us. But I would agree with Wayne's comments wholeheartedly that if anything, the pipeline's a bit better. And I would say that we're probably as well positioned as we've ever been to continue to win a majority of the centers we want. All right, great. And then I guess I'm a pricing side of things that you mentioned in inflation. It's something that you're keeping an eye on the managing pretty well. What's the rate outlook going forward? I guess.

Speaker 3: and update on the re-contracting dynamic you guys spoke about over the last few years. So first and foremost, as we go back to the simplicity of the algorithm of the 2-3% volume and then 2-3% rate, we clearly expect to be north of the 2-3% on rate. I think we would tell you that what we're seeing both on the Medicare side and the final rates that came through and more importantly, coupled with our initiatives on the commercial front give us high confidence. In fact, Dave, I'm going to let you chime in. I think you just shared this stat with our board the other day. The idea that what percentage that we currently have under contract as we go into this year to give our shareholders some high confidence and why we believe we will be north of that 2-3% on the same store. Yeah, happy to do. And this does go into the confidence.

Speaker 3: we speak to going into 2023. Our managed care initiatives constantly underway. As you know, Kevin, we do, generally speaking every three years, and then we'll pop in in a off cycle if we find that we're way outside of market and there's opportunities that kind of exist. And so that component of our rate environment, we're 97% locked in as we head into 2023. In other words, our rate environment and what we kind of project going forward is for the most part locked in. The difference, obviously, there's some additional opportunity that we'll see as we acquire new companies and we bring that managed care sector to bear for those. And on the other side of the P&L, supply chain side, and on the labor side, of course, we've talked about labor every quarter last year. I think you know what our story is there. But on the supply chain side, we have this similar dynamic in that most of our cost is protected by the GPO, which has proven to be very favorable for us. And inside that GPO, similar to our managed care contract, they generally follow a three year cycle.

Speaker 3: And again, our relationship with HPG has given us an enormous amount of visibility, so we can predict with a high degree of certainty where we're seeing inflation. Generally, it's going to be in contract that are up for renewal inside the HPG contract, and then those contract that are outside of the GPO. And so you can isolate pretty clearly which of those supply costs may be subject to a higher rate increase than normal cost-deliving.

Speaker 4: and a large majority of our spend, in fact, is already locked in for 2023. So again, good strong visibility up for the supply chain side and our forward look on inflation, although not at high as the managed care rate side is still very strong on the supply cost side. Yeah, David, I might just add, just to get a little more color there. A couple of things on the managed care side that are favorable for us. Number one is just the pricing transparency rules. As that data gets kind of vetted through a more public and almost every market, that's a winner for us. It gives us an opportunity to talk about our value story to push for appropriate rate increases for the value we're creating. We always balance with payers, the volume versus rate discussion. We want to be a value player. We're never going to be the price leader, but we certainly want to be a place they want to steer business to and want to find ways to grow with us.

Speaker 4: And then the last thing I would point out that's really changed, I think the dynamic the last three or four years for the ASC space is as we continue to add higher acuity service lines, joints, spine, cardiac. It provides us the opportunity to show the difference in the value creation for payers and for the health system. So those opportunities allow us to come in with a very favorable, non-trended rate and just pure savings and work to make sure we capture our fair share of the value. That also applies to our genoa facilities. So all of those things affect that rate dynamic but we're very confident as Wayne said that that 2 to 3% that we use in our algorithm is conservative.

Speaker 3: Thank you. The next question comes from Tao Kuo from Stifold. Please proceed with your question, Tao. Thank you. Good morning. I think I heard you contemplate doing a little bit more of the rest of the chairs in 2023. Any additional colleagues you could provide there in terms of the specialty focus and what kind of multiple catching markets? Tao, thanks for the comment and question. One thing I want to highlight is we believe that part of our core business every year is to look out over the next several years and understand what facilities we think have appropriate growth drivers or further opportunity around position recruitment or ecosystems that we build. And so every year we are doing a pruning analysis with the idea that we would prune assets that we think have hit their multiple growth and generally at a multiple higher than we would in turn acquire assets in new markets that have high growth and high position recruitment opportunities.

Speaker 4: We talked about this a lot more in 2018 and 2019, and again, continue to start doing this again last year, and then this year you'll see it here more about it. 2020, there was not much focus on it simply because that was the initial year of COVID and all of our efforts and energy were really around making sure the business was not only stabilized, but that we continue to invest during that difficult time. But I would tell you that we have three to four facilities every year that we put into that category. We generally will sell for multiples that are north of the seven or eight times EBITDA, and then we will turn around and redeploy it generally at that seven or eight times, trailing 12 months pre-senergy EBITDA. So these end up being ultimately not only value added, but reposition the portfolio every year to be in the highest growth.

Speaker 4: facility. So the thing is you know though with M&A on the acquisition side also applies on the best side. It's lumpy. We don't need to sell these assets. They are generally quality assets, but we do really look at them with you know how much runway they have from a growth trajectory. And if we can find a better owner that recognizes the value that we brought to the facility and get that higher multiple you will see us transact more of those throughout the year. The important point to take away though from your question is this we are committed to deploying at least 200 million for M&A this year. Exclusive of redeployment of anything we invest. So to the extent we invest something that will be additive to the 200 million to replenish the EBITDA that we sold. God you that's very helpful just to follow up on their investment comments you know I think now you paved down your bed and you have very strong operating cash flow forecast no only 40 you know for this year and you are going to 200 million by 205 because that change your viewing terms are how you look at your investment pipeline. I know that you did a bit more minority investment.

Speaker 4: So the thing is you know, though, with M&A, on the acquisition side also applies on the defense side. It's one thing. We don't need to sell these assets. They are generally quality assets, but we do really look at them with, you know, how much runway they have from a growth trajectory. And if we can find a better owner that recognizes the value that we brought to the facility, I can get that higher multiple. You will see us transact more of those throughout the year. The important point to take away, though, from your question is this, we are committed to deploying at least 200 million for M&A this year. Exclusive, agreed deployment of anything we divest. So to the extent we divest something, that will be additive to the 200 million to replenish the EBITDA that we sold. God, you're that's very helpful. Just to follow up on their investment comments, you know, I think now you paved down your debt and you have very strong operating cash flow forecast. No, only 40 in the year and going to 200 million by 2025. Because that change your viewing terms are how you look at your investment pipeline. I know that you do a, there have been more minority investment, 202. You know, what's your thoughts on minority business?

Speaker 4: and I'll straight acquisitions at this point. The managers of the facilities, right? The operators of the facilities. So we basically get to bring our synergies to these. We get to bring our processes towards quality and clinical procedures. And more importantly, we have bioportunities over time then to move these into a majority position potentially. So I would say we view these as highly attractive. We view them as not necessarily mutually exclusive from our broader M&A, but really just another tool in the toolbox that gives us real flexibility on attractive multiples and opportunities to penetrate new markets. Thank you. Thank you. The next question comes from Ben Hendrix from RBC Capital Markers. Please go ahead with your question, Ben. Great. Thank you. I was wondering if you could give us a little more detail about the CAPX outlook for the year. I talked in the past about investments in robotics and other capabilities to support recruiting and wondering kind of how you're viewing that for 2021. 23.

Speaker 4: Hey, Ben, thanks for the question. I'll start and then I'll hand it to Dave. You know, our general cat-backs across kind of the existing portfolio is really capital light. You even think about the robotics programs. Most of those are funded locally or on a lease basis with really strong ROI. So I don't see any difference in kind of the core capital. We will occasionally look if we can add a service line and expand and add a couple of OARs where it makes sense in the near term when we do that all the time. But that's kind of normal course for us outside of the novos that we talk about. So if you think about just general cat-backs, you know, pretty cat-backs like compared to healthcare services in the industry. But certainly, you know, we continue to be very opportunistic on adding technology or adding OARs where we have capacity constraints. And Dave, maybe you can talk a bit about kind of how that plays out in specifics. Yeah, sure. Thanks.

Speaker 3: So as we ended the year, we ended the year with just under $81 million of cat-back over the course of the year. And what we like to think is, as well as update this on version going to next year, that roughly 40 to 50 million of that is normal maintenance cat-back. So the remaining portion of that is growth cat-back. Growth cat-back for us includes robotics, but it also includes kind of almost like the easiest form of the no vote. An existing facility for which we know the market really well, we know all of the positions. We know the growth trajectory. If we have the opportunity to expand our existing footprint either with the building that we have or adjacent properties to it, we will make that investment, again, applying the normal discipline approach to any investment dollars going on. And in the coming year, I think we will have a couple of those that...

Speaker 4: that are a little bit more knowworthy that we'll talk about going forward. We'll split that out as we headed to 2023 just so we have good visibility to that. But the way you would normally think about this in a steady state portfolio, so we've been $40 and $50 million to maintenance, CapEx. That's it. Great, appreciate that. Just a quick follow up on the prior question, how much of an increase should we expect this year in equity methods and found related to that value health partnership in minority interest there? Thanks. I think at this point, I couldn't give you an exact number. I know what our pipeline is and how many additional facilities we're looking at now. Consistent with our past practice though, we will call each quarter what acquisitions we did and we will highlight for you what is minority versus majority since we recognize that affects.

Speaker 3: kind of how you do a top line revenue because of the non-consolid and gas effects. But I would tell you the pipeline is there. It's real. We have many under LOI already on the minority facilities, but we're in the midst of due diligence right now. Yeah, I don't think you don't mind way enough to come over the top a little bit there. Last year about a quarter of our asset acquisitions were in minority interest zone assets. And as I mentioned earlier in the paired remarks, we're agnostic to whether they're consolidating or not. We like the underlying growth story of each one of these assets and the potential that it provides for us in the future, which may include a buy-up.

Speaker 4: Thank you. The next question comes from both. Fabolin from bench bar. Please proceed with your question, though. Thank you. Morning, guys. That case falling growth caught my eye in fourth quarter, you know, as it compares to the market that I've seen. Um.

Speaker 4: What would you rank order the factors there for your really strong case growth in the quarter? You'll be like, I would say the first thing that I would say is keep in mind the compounding effect that we talk about with recruiting efforts. And so as you know, while we added a large number of docs, around 150 plus just in Q4, many of those docs, though throughout the year, the 500 plus that we added throughout the entire year, you know, came in in January February , March, April , May. And ultimately, you get you get them more comfortable throughout the year with what your facilities can do for them. You get their block time more line before they want to get at. And so you start getting that really high compound effect by Q4. And that's all organic for us. And then of course, you know, add to that the compounding effect of the previous year cohort. And you heard how much the volume was up on that cohort from 2021 coming into 2020 to north of 140 plus percent.

Speaker 4: And so I would say first and foremost, the recruiting engine is working at optimal level and continues to produce the results that we would expect. And we are not seeing that slow down in 2023. The second thing I would highlight is keep in mind that clearly are denobos that we've been putting out. Each year we're putting two or three small denobos. We have our Idaho Falls Community Hospital. All those are going to have an extra pointer to over what I would call normal, you know, a trend. And so those of course continue to grow and we continue to elevate from there. As we've said, you know, while the algorithm supports a two to three percent volume, you know, we really do think we have an opportunity to be at the hind of that or exceed that on a consistent basis going forward. And I would like to see those trends continue into the current here. And I think that is the expectation of a board of directors as well.

Speaker 4: Yeah, and Bill, I just say, you know, look, you guys, again, I can't speak to why the market is where it is or other companies are where they are. This was our expectation. I mean, we kind of built, we knew what we had, we knew what we expected to do in the fourth quarter. It matched our expectations based on all the different programs, whether it's recruitment or new service lines. You know, this came in where we expected it to be and kind of, you know, continues that long-term trend of real consistency on how we build that growth into our operating system. So, you know, we expect to continue to execute on this. We were happy with the fourth quarter. Obviously, it's always seasonally a big quarter. We had some new service lines, but in general, it has just continued execution on the long-term strategy. Got it. And as you look at your pipeline of investments, you know, majority and otherwise is the, is it largely a mix of

Speaker 4: MSK and cardiac at this point? Happily weighted, yes. Yeah, yeah. Very heavily weighted. We'll certainly look at other service lines where we can expand into those higher acuity within an existing facility. So I won't say it's all we'll buy, but if you wanted to weight them, it's absolutely MSK cardio weighted. Okay. Thanks guys. Thank you. The next question comes from Lisa Gill from JP Morgan. Please proceed with your question, Lisa. Great. Thanks very much. Good morning. I just wanted to go back to your early comments. When you talked about hospital partnerships, can you talk about how to think about the economic model and how that flows through the income statement for surgery partners?

Hi, Lisa. So let me talk about first and foremost, when we talk about a hospital partnership, what that means to us. And I actually feel optimistic that we will be announcing some partnerships being signed this year. Again, we're close on a number of items, so hopefully we'll be able to talk about that in a very near term. But first and foremost, we have to be like-minded. And what like-minded means to us, that's surgery partners, is that we are aligned around supporting the ecosystems where we have patients, needs, quality metrics that need to be met, and continuing to be a unique value play to the market. Two is we have to be able to not only have ownership in those facilities, that those health systems have today, but we have to be the operators of those facilities. So when we talk about partnerships, view it as us most likely taking a minority ownership in existing facilities within health systems, but becoming the operator of choice for those facilities. And then finally, we want to know that there's a growth trajectory here to expand in the new markets with those health systems. And that is the last piece that I would highlight. And I would tell you that all of those, as we go through this, we weigh.

already weighted than what we are today. So I would say that that's a bit different, so it will be margin of creatives. And typically, like-minded partners that allow us to enter markets that might otherwise be difficult, are certainly ways we think about health system partners. Again, this will never be the majority of our business. One thing I talk about a lot here is our advantage being this kind of independent.

No, no conflict provider. But there are markets and there are partners who are not trying just to play defense. They want to go play offense. And in those places, as Wayne mentioned, we think it can be very helpful. I would tell you we'd expect that any economics we have in those centers to be at least as good as our current economics. And then just one last follow up would just be when I look at the guidance for 2023, it looks like there's about 30 basis points of improvement in the EBITDA margin. Is that mixed? Is that, you know, now that you have more visibility around labor and cost, which you spend a lot of time talking about today? Like, how do I think about your level of visibility around that improvement in margin in 2023?

You look, I'll let Dave comment on it. I think he'll tell you it's mostly mix. The one thing I would tell you though is we have said that over time we really believe our margins can migrate to high teens. And obviously the last two years have put some unusual headwinds against the broader industry. And so the true value create a lot of things we've been putting forward hasn't really been able to shine completely. And I think you're going to continue to see some of those come through. Especially as Dave mentioned because we know that much of our pricing is now fully locked in for the year and we already know our underlying cost structure. And so we can get pretty good line of side of that. But Dave anything you want to highlight on that comment release them? Yeah, maybe maybe just a couple things right. Yeah, just the emphasis at point you made way. This company still does talk about margin expansion in its core DNA. So we do fundamentally believe that there is more opportunity there available to us. More specifically in type 2023 you're right in a way that we do expect margin enhancement just through our normal growth levers.

of managing supply costs and managing better rates at the top of the house. But also the impact of last year's acquisitions and minority interest health entities which are now flowing through from a full year perspective which will again, those are just pure margin enhancement opportunities. So you should see elements of both of those things impacting that 30 basis point increase in margin that you cited. Great, thank you. Thank you. The next question comes from Gary Taylor from Cohen & Company. Please proceed with your question Gary. Hey good morning guys. It's had a few. One was I appreciate your comments about seeing some of the labor environment using and remaining employer choice. Just wondering, could you give us a sense about wage growth either per FKE or per case or how you kind of saw that wrapping in 22 versus what you're thinking in 23? Let me first start by highlighting Gary that we generally see premium labor which has been I think probably the topic to your in 2022 represents 2 to 3% of our volume of our total SWB. And so first and foremost, it's just not a material component. Back to

You'll notice that it was around 3% in Q4 versus historically two. But that's because we take advantage of the fourth quarter to stay open on some weekends and all that and really fill a big need. And so I would highlight that to say that one though that it's a really small portion for us when it comes to the premium labor that has really been cutting some distortions in the provider side. A couple of examples though of how much it has abated. And if you were to look at earlier in the year and I'll use a you know a state like California you would have seen premium wages more than that $85.95 an hour. They got to north to $200 an hour during the peak time frame. And it's migrated closer to this 115 range. So not fully abated yet but clearly migrating to the levels that you would want to see. And so from our perspective you know we continue to track and we monitor but we only use it when we feel like it really can be a differentiator. So we're doing our growth like we did in Q4 relative to broader you know wage structure. I don't know Dave anything you want to add or Eric you want to add you know out there but I would say that you know clearly we're paying you know our nurses a little more than we have in the past but it's important to recognize because we're a preferred facility to work at. And as Eric mentioned in his prepared remarks we can between data posting and filling we're filling within 30 days.

which we did quite well in 2022. I think there's opportunity there to have that move in a positive direction even more so than it has, which would be an upside to the way we're looking at the business today. I don't know if Dave, anything else you'd add.

Now, maybe just one point, right? And again, we've talked about this in the past. We saw this coming back in 2021 and we started to react, you know, in advance. And once I you should know about the culture of surgery partners, this is a partnership all the way down to the facility level where everybody's kind of watching out for each other. And so there is this kind of philosophy that we're going to make sure that everybody is protected inside the system that we have. So we started picking up this and started acting less defensive and more proactively. In 2021, we saw that trend continuing in 22 and as we just kind of poured it out. We have a little bit more hedging just in case we have some opportunities there. I guess I could have one more quick one. On your class of 22 that you've been, you know, appropriately bragging on how well they've.

They've done, is that primarily a function of, you know, specialist in their case mix why, you know, that revenue is trending so much higher or is there something else you'd location or, you know, that you'd point to, because obviously you'd hope to replicate that. Yeah, so I would just say, every year we continue to refine how we target our recruitment team. We use data. We use it, you know, in all kinds of ways to understand exactly where people are in the pipeline, how quickly we convert them into our facilities. I think we get better at it every year. Clearly as we grow a Q. We have more higher a Q. We can go attract to our facility. So as we add service lines as we add, you know, orthopedics or cardiology that opens up a whole new window of physicians with a unique value proposition. So, you know, I think it's really about targeting it is it is definitely targeting that higher a Q. We mix as we think about growing our facilities and that's showing up in our recruitment numbers. And it's certainly a database approach that we will continue to refine moving forward.

Thank you. Thank you. The next question comes from what my own from ACVB securities. Please proceed with the question, would. Hey, thanks. Just wanted to follow up on that on Gary's last question. Is there any way to frame the percentage of cases that were generated in 22 from either the class of 22 or 21? I hear you on the 140% growth, which is very, very high, but I don't have a sense of the denominator on those. So I'm just trying to get an idea of how much that may have driven the overall system-wide case growth for the year. Yeah, that's I'm trying to see if I can pull it up real quick while we're sitting here. If I can. Just trying to see if I can find before you real quick.

Thank you. Thank you. The next question comes from what my own from SVB Securities. Please proceed with the question, would. Hey, thanks. Just wanted to follow up on that Hungarians last question. Is there any way to frame the percentage of cases that were generated in 22 from either the class of 22 or 21? I hear you on the 140% growth, which is, you know, very, very high. But I don't have a sense of the denominator on this. I'm just trying to get an idea of how much that may have driven the overall system wide case growth for the year. Yeah, that's a. I'm trying to see if I can pull it up real quick with while we're sitting here. If I can. Just trying to see if I can find a 40 real quick. So 2021 covert was.

was 15,000 plus cases was the starting point from last year. And then how much those actually grew in 2022, you can just put the percentage on there and you'll be obviously more in the 37,000, 38,000 range. So gives you a little bit of a flavor or feel for it. But obviously each cohort is going to vary year to year, but it just give you kind of an example of how that plays out. That's really helpful. The second question is just for Dave, I'm trying to keep up with all of the items influencing cash flow this year. Can you just remind me the items that we should be adding back to 2022 that are non-recurring into this year and then what the separate non-recurring items are in 2023. I get the 40 million of lower cash interest. I'm just trying to make sure I can bridge to cash flow a little bit. A little bit easier here.

Yeah, yeah, I appreciate that. I mean, the good news is, next year you won't have any of this noise. So hopefully next year we have this conversation, you won't have to ask that question, because it has been a long run where we've had some things that have affected us. In 2022, the things you think about, and I'll start in the fourth quarter, we had the last of our largest TRA payment, the tax-dustivable agreement that were answered in two back in 2017. That was just north of $20 million. We had a couple CARES Act things that were happening. Most notably in the quarter was about $9 million related to the deferred payroll taxes. The second tranche of that was repaid in the second and final tranche was repaid in December . We still had Medicare Advanced Repayments this year. That was a big number and total, it was $60 million. In the fourth quarter, because we paid down that long-term debt, the approved interest got accelerated.

from its normal payment in 23. So that was another $11 million that came through inside the year. There was a handful of other kind of puts and takes, but those are the big ones that kind of factor into it. It's our cash flow bridge. Any other items as we think of 23 that won't recur that are separate from this reference other than the cash interest savings, okay? No. And, okay, the way in that cash interest will recur. So that's a permanent good guy for correct, correct. And then you read on the EBITDAW. Yeah, any reason you're cash flow wouldn't at least grow sort of in line with your adjusted EBITDAW. That's our plan. Okay. Thanks, guys. Thank you. The last question comes from Christian Schumann from Jeffries. Please proceed with your question. Hey guys, Brian , thank you. Good morning and congrats on the quarter. Wait, I guess as I think about recruitment, we've talked a lot about it today. I know you're very involved in that, right? So how do I think about, you know, what the pipeline looks like?

that you're pursuing. The second thing, though, that I think has been a real difference maker for us is we took some of our ASE leaders. In this case, Tony DiParo, who used to run about half of our ASEs as one of our EVPs over all of them. And we just said, Tony, we actually want to make sure, too, that when we recruit and we pursue that these surgeons understand that they're actually interacting with somebody who actually knows how a facility runs, who actually has been part of it for over two decades.

and is really integrated into the business. And then the last thing I would tell you is we have really shifted to onboarding efforts and then really satisfaction efforts. So it's not just about how do we recruit the surgeon, how do we get them their scheduling, how do we get them on their block time. But Eric, when he came in, really added a whole new level of kind of what I'll call creating the backend aspects of this, which is ensuring that the provider satisfaction is high, and when it's not high, why isn't it and what can we do to impact that? And so I think what you're also seeing in our strong organic growth.

is the fact that we should talk about the leaky tub, right? And that every year we were recruiting enough docs just to replenish those that were leaving us. And those that are leaving us has diminished meaningfully in the last three to four years. And of course, what we're recruiting has grown exponentially during that period. And so it's simple, though. It's basic blocking and tackling. It's data-driven execution that we look at every week, every week, not once a month, once a quarter, but every week. And it's having teams aligned with what those recruitment goals are and how they're compensated. I appreciate that, Wayne and Janee. I hope to see you soon at National. I guess my follow-up, Eric, as I think about your.

excitement for cardio and you know we obviously share the same optimism about the cardio opportunity but as I think about the catalyst for that to gain traction is this one of those things sound like with Orsa where we need to see CMS approval or is there you know any interest that you're seeing now from the Medicare Advantage guys from the commercial payers to start reimbursing for this and get that ball rolling. Yeah it's a great question I would say actually CMS has approved the largest volume procedures the PCI is the things that I think should move. I think the kind of the slow pace here at the beginning is clearly tied to this is this is a very very highly employed specialty not happily employed but highly employed by health systems. There's a lot of interest from cardiologists and what we're seeing initially is you know we started I think with five new cardiac rhythm management programs in our ASC this year so cardiologist coming over checking us out maybe even investing starting to bring over devices.

But the really big wave here, Brian , is as doctors figure out what they can have ownership of it, is what they can move safely and add a really good value for their patients to the space. As they learn that, I think this is really it. This is a flywheel. It's starting slow. We're going to see a nice growth of a small number, much like we did with Lord the Petics. I remain very optimistic just because the value in cost savings is so large for the health system. And the opportunity for cardiologists to control and be more independent is so large. I do believe it happens. It'll be different paces about half the states, a little less than half still have restrictions on this that are more restrictive than Medicare. Almost all of those states, there is active legislation going on, active work going on to change that. So all of these things kind of have to fall in line. And you and I both share this optimism. I definitely think it's a big opportunity. Some states will go faster than others.

Once this starts to get a foothold and people realize the amount of value it creates for the health system, it will be a natural push. So I think it's going to be much like joints. You're going to see it kind of slowly tick up. It'll be a nice growth percentage, but it will hit critical mass. The question of when that is within the next five years, always difficult to predict, but I will tell you this, we will be prepared. And we are already having those conversations to build the foundation and starting on the cardiac rhythm management side. Awesome. Thanks, and we're going to see you guys. Thank you. Appreciate it, Brian . Thank you. This does compute the question session. I'd now like to turn the call over to Eric, even for closing remarks. Thank you. So thank you. Appreciate it by its time this morning. And before we all walk away, I would like to just take a moment to recognize all the efforts and commitment to excellence of our 12,000 colleagues and nearly 5,000 physicians collectively. We take to heart the responsibility for providing the best environment for physicians to perform exceptional procedures of the highest convival quality and the privilege to serve over 600,000 patients and what is often their most vulnerable moment.

I'm so proud to work alongside these talented professionals as we work to more fully deliver on our mission to enhance patient quality of life through partnership. Thank you again for joining the call this morning and I hope you all have a great day. Thank you, sir. This concludes today's teleconference. You may disconnect your lines at this time and thank you very much for your participation. Do have a great day.

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Greetings and welcome to the surgery partners Inc. 4th quarter 2022 earnings call. At this time all participants are in a listen only mode.

A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the call, please press star and then zero on your telephone keypad. As a reminder, this conference is being recorded.

It is now my decision to introduce your host, Dave Dorti. Please go ahead, though. Good morning. Welcome to Surgery Partners, fourth quarter of 2022 earnings call. I'm Dave Dorti, the company's CFO . With me today is Eric Evans, CEO , and Wayne DeVite, our executive chairman. During this call, we will make forward-looking statements. Thank you.

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. 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 GAP. Our reconciliation of these measures can be found in this morning's press release, which is posted on our website at surgerypartners.com and in our most recent annual report on form 10K 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. This morning, we are pleased to report full year 2022, a just an EBITAB, a $380.2 million, 12% higher than the prior year, and over 20% year over year growth were in adjusting for the non-recurring benefit of grants.

including our non-consolidating joint ventures, we performed approximately 680,000 cases in 2022, nearly 12% more than 2021, with all specialties growing in line or in excess of our expectations, despite the early 2022 impact from the Army Crown variant. This strong case growth combined with improved rates and contributions from our recent acquisitions results in net revenue of 2.54 billion, 14% higher than 2021.

The combination of our top-line growth and focus on controllable costs allowed us to report an adjusted even a margin of 15 percent representing an 80 basis point improvement over 2021 when adjusting for grants. Dave will go into these results in greater detail in a few minutes. Our fourth quarter results continue to affirm the power of our business model and the value proposition we provide to our stakeholders.

Net revenues increased 16% from the prior year to 707 million, with same facility revenues increasing nearly 11% compared to 2021. Position recruiting effort yielded over 150 new surgeons in the fourth quarter, bringing our overall new recruits in 2022 to almost 575. The 2022 recruiting class spans all of our core high-grow specialties and is bringing in a higher volume of cases and generating more revenue than prior recruiting cohorts. For example, the first year net revenue contribution from our 2022 cohort was 40% higher than the year one revenue contributions from last year's cohort. Based on our experience as the recruiting cohorts mature, there is an earnings compounding effect for multiple years. As evidenced, the class recruited in 2021 delivered 143% more?.

has positioned us to capture the significant ship of care moving to the outpatient setting within the $150 billion total addressable market. Rounding out our gross story, our M&A team continues its disciplined approach to sourcing and executing on strategically important acquisitions at attractive multiples and finished 2022 deploying just shy of $250 million at a sub eight times multiple. And our M&A engine isn't slowing down. Our team is currently managing a robust pipeline of potential targets in excess of $250 million with the incredible support of existing and new investors.

In November , we raised over 850 million in a primary offering of our equity. Dable provide greater detail in the use of proceeds from the offering, but by repaying a significant portion of our long-term debt, we reduced our annual cash interest costs by north of $40 million. Combined with strong operational execution and cash flow conversion, we expect to generate over 140 million in free cash flow in 2023, and to see 200 million in annual free cash flow by 2025. In addition to our projected operating cash flow, we start 2023 with over 820 million in liquidity. This liquidity position gives us further conviction into the continued long-term growth of the company.

On behalf of the board, I'd like to emphasize that point. We have high confidence in the long-term growth prospects of surgery partners. This management team continues to demonstrate their ability to successfully navigate the challenges of our current macroeconomic environment, as it executes on organic and inorganic growth strategies to provide significant year-over-year growth. Off the strength of our fourth quarter report results and continued investments, we anticipate 2023 Adjusted EBITDA to be greater than 425 million and with net revenue exceeding 2.75 billion. This outlook is inclusive of the anticipated headwinds and tailwinds that we'll discuss in more detail. Let me conclude with an observation as to the journey the company's been on for the past five years. Despite a challenging macro backdrop, the company has experienced compound aggregate growth of 18% in Adjusted EBITDA and improved margins by 270 basis points. The cultural shift that started in 2018 has demonstrated the results we believe our company was capable of achieving. More importantly, our team is brimming with confidence and with the grit and determination to continue this strong.

and broader macro tailwinds drove a healthy, same facility case growth of 4.3 percent and our mix resulted in over 6 percent growth in revenue per case. Our organic growth initiatives, coupled with the acquisitions completed over this past year, have translated into a very strong top-line growth of nearly 16 percent. Dave will talk about this in more detail, but our adjusted EBIDA of $120.8 million for the quarter and $380.2 million for the year.

both represent new old time highs for our company. Income recognized from CARES grants, more not material in the fourth quarter or full year 2022, as they were in 2021. When looking at results purely without grants, the company's adjustity by more than 20% in 2022. Our proactive discipline and data-driven approach has enabled us to closely monitor and react accordingly to inflationary impacts in labor and supply costs. On the labor front, in the fourth quarter, we experience an overall reduction of premium labor as a percentage of salaries wage has been a fit in most of our markets. With the overall utilization of premium labor of fading, as is the contract labor rates that the market is demanding. As a reminder, premium labor represents approximately 3% of our total salaries, wage is a benefit, and we continue to be an employer of choice in this fluid labor environment. Our favorable workplace environment allows us to recruit faster and as a key enabler to maintaining the high clinical quality and exceptional patient experience we are known for in the communities we serve. When we do experience turnover in our facilities, we are able to fill the jobs posted in approximately 30 days on average. As it relates to supply costs, we continue to work with our group purchasing organization and key suppliers to mitigate inflationary risk factors that could impact our businesses. In the fourth quarter, supplies were approximately 27.1% of net revenue.

The average net revenue per position in the 2022 cohort is already 53% more than the very strong 2021 cohort that we recruited last year.

All of this has helped fuel our growth in MSK procedures, particularly total joint cases in our ASCs. We performed over 28,000 orthopedic procedures this quarter, almost 13% more than prior year. We do not see this growth slowing, nor are we seeing cases returning to the impatient setting. And, as we have discussed, we are preparing for the next wave in cardiac procedures that we expect to migrate to outpatient settings, starting in earnest over the next five years. With an increasing share of orthopedic and cardiac procedures moving into lower cost, high quality, short-state, surgical facilities, we are considering all options to capture our fair share, including sourcing and managing a robust M&A pipeline.

as well as investments in robotic equipment, expanding existing facilities, and leveraging our partnerships with value health and select health systems, as well as the ongoing development of the NOAA facilities. These investments often require minimal spend, our finance at the facility level, and our only authorized when we determine that the ROI is strong in the near term. We look forward to updating you on the efforts to build upon hospital system partnerships as the year progresses. Our 2022 capital deployment of nearly 250 million for acquisitions exceeded our annual commitment of $200 million. Since 2018, we have deployed $870 million on acquisitions with an average multiple of less than eight times earnings, expanding our footprints in California, Texas, and New York.

We have selectively optimized our portfolio to unlock capital for redeployment with high growth short-stage surgical assets. This approach to optimizing our portfolio will continue in 2023, but does introduce complications for us as we develop our projections for revenue growth, which is affected by both the timing of acquisitions and the bestures, as well as the number of facilities in which we purchase our financial structures that can solidate interest versus they may not already stay.

Despite the timing-related projection challenges on revenue, the team continues to prioritize bottom-line growth and adjust that EBITDA for both 2023 and our long-term future. As Wayne mentioned, we continue to manage a robust pipeline of acquisition targets, and our approach to capital deployment will provide meaningful contributions to future earnings in 2023 and beyond. Our 2023 guidance that Wayne laid out and able to discuss in more detail shortly proved reasonably considers that we are still in a challenging macro-environment and in a period of inflation that could pressure margins. As you can see from our results in 2022,

We are confident we can effectively manage surface risks. Our teams are highly aligned and we are executing on our initiatives across business development, recruiting, manage care, procurement, revenue cycle, and operations to achieve our goals and continue to win in an increasing share of the rapidly shifting market. In summary, I am proud of the teams that complement this quarter and for the full year of 2022. Our company provides a cost-efficient high-quality and patient-centered environment in purpose-built short-state 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 2023 outlook. Dave? Thanks, Eric. I will first talk about our fourth quarter financial results and liquidity before providing detail on our outlook for 2023.

Starting with the top line, we performed over 155,000 surgical cases in the fourth quarter, 7.3% more than the same period last year. These are only cases that are included in our consolidated revenue, but if I include cases performed at non-consolidated facilities, we performed 182,000 cases. These cases span across all our specialties with an increasing focus in orthopedics where we grew by 12.7% versus prior year. Largely attributed to this case growth, we saw revenues rise 15.9% over last year to $707 million. This growth is a combination of the organic growth factors weighing in Eric described.

with our targeted specialties at the most favorable multiple possible. On a same facility basis, which we report on a day's adjusted basis,

Total revenue increased 10.7% in the fourth quarter, with case growth at 4.3%. Net revenue per case was 6.1% higher than last year, primarily driven by higher acuity procedures. For the year, same facility total revenue growth was 7.7%, with strong contributions from both volume and rate.

Adjusted EBITDA was $120.8 million in the fourth quarter, giving us a margin of 17.1%. Adjusted EBITDA for the full year was $380.2 million with a 15% margin in line with our expectations. Excluding the impact of income from CARES Act grants, margins expanded by 20 basis points in the fourth quarter and 80 basis points for the year.

We continue to proactively manage inflationary pressures affecting our labor and supply costs. Although we are not immune, these factors were not material to the results we are reporting this morning. As Eric mentioned, our salaries, wages, and benefit costs, as well as our medical supply costs, were both lower as a percentage of revenue compared to the fourth quarter of 2021, with 50 basis points of improvement in salaries, wages, and benefits, and 100 basis points of improvement in supply costs. Given the market dynamics, we will continue to carefully monitor these cost factors.

with the remaining proceeds included in our consolidated cash balance. These transactions resulted in a fourth quarter ratio of total net debt to EBITDA, as calculated under the company's credit agreement, being 4.3 times. A $40 million reduction to our annual cash interest cost.

and the elimination of a springing maturity in our term loan that would have brought it due in 2025. Further, to enhance our liquidity position in January , we worked with our banking syndicate, along with new members joining the syndicate, to expand the borrowing capacity under our revolving credit facility, bringing the total capacity under that instrument to just over $550 million, which remains on draw.

We ended the quarter with $283 million of cash. As we enter 2020-23, our liquidity position is greater than $820 million, enhancing our confidence in our ability to navigate this current macroeconomic environment and continue to fund accretive M&A. We reported negative free cash flows in the fourth quarter, which was due to the timing of spend on growth initiatives. A $20 million payment for the tax receivable agreement

$11 million for the payment of accrued interest in connection with the early retirement of portions of our long-term debt, and $9 million for deferred payroll tax payments. For the year 2022, we generated negative free cash flow of $10 million consistent with our expectations. With the exception of spend on growth initiatives, which we will isolate for you going forward, we do not expect the significant, unusual outflows to impact our free cash flows in the future. We remain confident in our ability to deliver greater than $140 million in free cash flow in 2023, and lower net debt leverage as we progress to our target of mid three times.

by the end of 2025. In 2022, excluding our Dinovo investments, we have deployed $246 million on 13 transactions at a sub eight times multiple. These centers are primarily focused on MSK procedures and are well positioned to support and strengthen our same facility growth trends in future years. Additionally, as mentioned in prior calls, we continually refresh our asset portfolio to align with long-term market growth trends.

Proceeds from any devesiture activity will be redeployed as incremental M&A. As we intend to sell certain assets at a relatively high multiple and then redeploy the capital at a relatively low multiple with stronger future growth prospects. While the timing of devesiture and related M&A activity can be challenging to predict, we believe our 2023 full-year revenue outlook reflects a conservative view. On the debt front, we ended the year with less than $1.9 billion in growth debt at the corporate level.

All of this debt is effectively fixed at 6.7 percent as a result of the favorable benefit of the interest rate swaps we entered into in prior years, leaving us with no exposure to incremental interest rate fluctuations. In connection with the $150 million paydown of our term loan, in January , we terminated a corresponding amount of our interest rate gaps. We have no material debt maturing until 2026. We have no material debt maturing until 2026.

With today's interest rate environment, we are not exposed to significant rate risks, which is another factor giving us confidence in our free cash flow growth. We are carrying the momentum of the strong finish to 2022 into 2023, and we are setting our initial guidance for 2023 adjusted EBITDA to greater than $425 million, representing 12% growth over 2022. On the top line, we expect 2023 revenue to be greater than $2.75 billion. We expect to deploy at least $200 million of capital on M&A, with additional spend depending on the timing of any portfolio management opportunities underway. Power adjusted EBITDA.

and revenue guidance is informed by a balance of case growth and rate growth as a result of organic growth efforts from investments we've made in physician recruitment, revenue cycle, supply chain, and managed care initiative. The annualization of our 2022 acquisitions in addition to projected 2023 acquisition activity and contributions from our in-processed denobos, including the continued maturation of the community hospital we opened in Idaho during the pandemic. While we are optimistic about 2023 and these fundamentals that will be driving growth, we believe our initial adjusted EBITDA and revenue guide are prudent given the macroeconomic environment and the headwinds related to the elimination of the

2, with first quarter adjusted EBITDA and revenue representing an estimated 20% and 24% respectively of our full year EBITDA.

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 2022 results speak to the strength of our operations and our business model. And we believe it in 2023.

we will 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. We will now be conducting a question and answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Please limit your questions to one question and one follow-up question.

You may press star and then two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handsets before pressing the star keys. One moment please while we pull for. The first question comes from Jason Kastorra from 50 Group. Please proceed with your question Jason. Jason.

Good morning. Thanks for taking my question. You have San Rossi. So thinking about 2023 volumes, when looking at your guidance of 2.75 billion in revenue, how should we think about value and demand across your facilities in 2023? You previously suggested buying growth about 23% on a normalized basis, but the context is about 8% organic growth for 2022. So we see some acceleration above that target for 2023, or there's new answers that we should be mindful of including a difficult comp.

Hey Ben, good morning and thank you for the question. Let me start by saying we have always talked about the simplicity of the algorithm that we pursue, which is the 2% to 3% volume and 2% to 3% rate, which from a same store basis we've always concluded ought to put us closer to the high end of that range if not better. And as you know in 2022 we exceeded that for the full year. And a big portion of that was the fact that our volume on a full year basis was closer to 3.9%. You know as we built our plans for the upcoming year we will continue from an algorithm standpoint remain conservative on our posture. But we do believe our outlook would support us you know being at the high end of that 2% to 3% volume if not if not better.

Again, it's early in the year. We'll see how progress is, but we are encouraged by what we've seen through January already. This is a quick follow up on demand for some of your value-based arrangements. Just turn to commercial contracting. Any color you can share on what you're seeing in terms of demand for those value-based arrangements, and whether you're seeing more from the managed care side or primary care practices? Yeah, I appreciate the questions there. I would say a couple of things. First of all, I always remind everyone we start to talk about value-based care that we are a value-based care player in the fee-for-service world. So, you know, just moving cases to our side of care tends to save 40 to 60%. So, before we start about anything else, I always, why take risks when you can drive the savings that way? I would say that there's continued interest. You know, as you know, we have the partnership with value health. We have some facilities that are gaining traction. So, in this area, it's early innings, but I do believe there's, you know, again, continued interest. I do expect that over the next several years, you're going to see more.

That tends to be a good thing for us just because we are such a cost savings. It allows us and our physician partners to participate in the savings we create. So we are a natural catcher's mitt for whether that be payers that are interested in driving value-based care or whether that be, as you mentioned, large primary care groups or pay viders that are interested in that. We tend to be, because we are an independent peer play kind of short stay surgical provider, we tend to be the right catcher's mitt for that. So I would not say it's overwhelming at the moment, but there's a lot of interest and continues to be, I think, a slow steady migration. Okay, great. Really appreciate the color there. Thank you. The next question comes from Kevin Fishbeck from Bank of America. Please proceed with your question, Kevin. Great, thanks. We'd like just to get a little bit of color on your view about the...

competitive backdrop right now. There's a number of companies looking to buy surgery centers and open up these centers, things like that. Are we seeing anything change there from a multiple perspective, from a ability to source positions perspective and I guess how do you differentiate your story with the going market? Hey thanks Kevin, good to hear your voice. Let me first start by saying that we are seeing no slowdown at all in the number of facilities available, the quality of the facility is available, or any changes in the multiples. So from that perspective I would say even though to your question it sounds like others are engaging. The one thing I would highlight is there's a huge difference between acquiring the surgery center versus actually knowing how to run, bring value, create both on the quality side.

around the medicinal aspects of running the business and more importantly the clinical aspects, but more importantly than really getting the advantages of scale. And I highlight that simply to say that, probably the biggest moat that we have is that it took 20 years for this asset to get to the size and scale that it is at today. And in the last five years, a real intentional effort of building a true platform so that through acquisitions, you could do a plug and play and really bring that value to our surgeon partners and our patients immediately. So I would say not concerned at all by those that are pursuing assets. There's a nice self-selection process. Eric always reminds us there's great self-selection. Those that are looking to simply sell their facilities to get their retirement funds are not those that we're looking to pursue, but rather we're more interested in those facilities that are aligned with really changing the healthcare dynamic and the quality dynamic and more importantly, the quality of life.

really removing costs from the system. And those are the ones that really want to align with us for the long term. But in general, I don't see our pipelines flowing down at all. Yeah, Kevin, I would only add on the value proposition question. I mean, we differentiate ourselves in competitive situation for centers by being that independent operator that doesn't come with any conflicts. We're not owned by a health system, we're not owned by a health plan. These positions that have created very successful independent centers, they did that for a reason. They didn't want conflicts. And so that allows us to move quickly on, adding any service line we want, moving to create the most value we can without any other reasons not to do that. So I think that's a differentiator for us. We're also very close.

First and foremost is we go back to the simplicity of the algorithm of the 2% to 3% volume and then 2% to 3% rate. We clearly expect to be north of the 2% to 3% on rate. I think we would tell you that what we're seeing both on the Medicare side and the final rates that came through and more importantly coupled with our initiatives on the commercial front give us high confidence.

In fact, Dave, I'm going to let you chime in. I think you had just shared this stat with our board the other day, the idea that what percentage that we currently have under contract as we go into this year to give our shareholders some high confidence and why we believe we will be north of that 2 to 3 percent on the same store. Yeah, happy to. And this does go into the confidence that we speak to going into 2023. Our managed care initiatives constantly underway. As you know, Kevin, we do, generally speaking, every three years and then we'll pop in in an off cycle.

you know, if we find that we're way outside of market and there's opportunities that kind of exist. And so that component of our rate environment, we're 97% locked in as we head into 2023. In other words, our rate environment and what we kind of project going forward is for the most part locked in. Now the difference obviously there's some additional opportunity that we'll see as we acquire new companies and we bring that managed care sector to bear for those. And on the other side of the P&L, the supply chain side, and on the labor side of course we've talked about labor every quarter last year. I think you know what our story is there.

But on the supply chain side, we have this similar dynamic and the most of our cost is protected by the GPO, which is proven to be very favorable for us. And inside that GPO, similar to our managed care contract, they generally follow a three-year cycle. And again, our relationship with HPG has given us an enormous amount of visibility so we can predict with a high degree of certainty where we're seeing inflation. Generally, it's going to be in contract that are up for renewal inside the HPG contract and then those contract that are outside of the GPO.

So there, you know, a couple of things on the managed care side that are favorable for us. Number one is just the pricing transparency rules. As that data gets, you know, kind of vetted through a more public in almost every market, that's a winner for us, right? It gives us an opportunity to talk about our value story, to push for appropriate rate increases for the value we're creating.

We always balance with payers the volume versus rate discussion. We want to be a value player. We're never going to be the price leader, but we certainly want to be a place they want to steer business to and want to find ways to grow with us. And then the last thing I would point out that's really changed, I think, the dynamic the last three or four years for the ASC space is as we continue to add higher acuity service lines, joints, spine, cardiac, it provides us the opportunity to show the difference in the value creation for payers and for the health system. And so those opportunities allow us that coming with a very favorable non-trended rate, just pure savings, and work to make sure we capture our fair share of the value. That also applies to our de novo facilities. So all of those things affect that rate dynamic, but we're very confident, as Wayne said, that that 2 to 3% that we use in our algorithm is conservative. All right. Great. Thank you. Thank you. The next question comes from Tao Kuo from Sticefold. Please proceed with your question, Tao.

Okay, thank you. Good morning. I think I heard you contemplate doing a little bit more of the rest of the lectures in 2003. Any additional college groups by there in terms of the specialty focus and what kind of multiple of the catching markets? Tallah, thanks for the comment and question. But yeah, one thing I want to highlight is we believe that part of our core business every year is to look out over the next several years and understand what facilities we think have appropriate growth drivers or further opportunity around physician recruitment or ecosystems that we build. And so every year we are doing a pruning analysis with the idea that we would prune assets that we think have hit their multiple growth and generally at a multiple higher than we would in turn acquire assets in new markets that have high growth and high physician recruitment opportunities.

We talked about this a lot more in 2018 and 2019, and again, continue to start doing this again last year, and then this year you'll see it here more about it. 2020, there was not much focus on it simply because that was the initial year of COVID and all of our efforts and energy were really around making sure that businesses not only stabilize, but that we continue to invest during that difficult time. But I would tell you that we have three to four facilities every year that we put into that category. We generally will sell for multiples that are north of the seven or eight times EBITDA, and then we will turn around and redeploy it generally at that seven or eight times, trailing 12 months pre-senergy EBITDA. So these end up being ultimately not only value added, but reposition the portfolio every year to be in the highest growth facilities. So the thing is, you know, though with M&A on the acquisition side also applies on the best side. It's lumpy.

We don't need to sell these assets. They are generally quality assets, but we do really look at them with, how much runway they have from a growth trajectory. And if we can find a better owner that recognizes the value that we brought to the facility, I can get that higher multiple. You will see us transact more of those throughout the year. The important point to take away, though, from your question is this, we are committed to deploying at least 200 million for M&A this year, exclusive of redeployment of anything we divest. So to the extent we divest something, that will be additive to the 200 million to replenish the EBITDA that we sold. God, you're that's very helpful. Just to follow up on their investment comments, you know, I think now you paved out your debt and you have very strong.

need to sell these assets. They are generally quality assets. But we do really look at them with, how much runway they have from a growth trajectory. And if we can find a better owner that recognizes the value that we brought to the facility, I can get that higher multiple. You will see us transact more of those throughout the year. The important point to take away, though, from your question is this, we are committed to deploying at least 200 million for M&A this year. Exclusive of redeployment of anything we divest. So to the extent we divest something, that will be additive to the 200 million to replenish the EBITDA that we sold. God, you're that's very helpful. Just to follow up on their investment comments, you know, I think now you paved out your bed and you have very strong operating cash flow forecast.

No, on your 40 in the year and going to 200 million by 2025. Because that change you're viewing to, I'll have you look at your investment pipeline, know that you do the, you've been more minority investment in 2022. You know, what's your thoughts on minority business kind of straight acquisitions at this point? Thank you. You know, it doesn't necessarily change our outlook. One of the things we like about these minority investments today and will probably continue not only into 23, but in the 24 is that many of these are in very attractive specialties and generally very large facilities. And as a reminder, we do not take a minority investment unless we become the, the managers of the facilities, right? The operators of the facility. So we basically get to bring our synergies to these. We get to bring our processes towards quality and clinical procedures. And more importantly, we have bioportunities over time and to move these into a majority position potentially. So I would say we view these as highly attractive. We view them as not necessarily mutually exclusive from our broader MNA, but really just another tool in the toolbox that gives us real flexibility on attractive multiples and opportunities to penetrate new markets. Great. Thank you. Thank you. The next question comes from Ben Hendrix from RBC Capital Markers. Please go ahead. I'll go through your question, Ben. Great. Thank you. I was wondering if you could give us a little more detail about the.

All right, an existing facility for which we know the market really well. We know all of the positions. We know the growth trajectory. If we, if we have the opportunity to expand our existing footprint either, either with the building that we have or adjacent properties to it, we will, we'll make that investment, you know, again, by the normal discipline approach to any investment dollars going up the door that you will have known us to do.

Great, appreciate that. Just a quick follow up on the prior question. How much of an increase should we expect this year in equity method income related to that value health partnership in minority interest there? Thanks. Yeah, Ben, I think at this point, I couldn't give you an exact number. I know what our pipeline is and how many additional facilities we're looking at now. Consistent with our past practice, though, we will call each quarter what acquisitions we did. And we will highlight for you what is minority versus majority.

minority interest on the asset. And as I mentioned earlier in the paired remarks, we're agnostic to whether they're consolidating or not. We like the underlying growth story of each one of these assets and the potential that it provides for us in the future, which may include a buy-up opportunity to get to a consolidated position.

So the pipeline that Wayne's mentioning does include both forms of that. It is the reason why our guide for revenue might be looked at with a little bit of cautiousness in it because that's the one that you will see potentially no revenue but all equity earnings. And so it's worth noting that there's a possibility of that. But as Wayne mentioned, we will provide that visibility as we complete acquisitions going forward into 23. Thank you. Thank you. The next question comes from both. Other then from bench bar please proceed.

we added throughout the entire year, came in in January February , March, April , May. And ultimately, you get them more comfortable throughout the year with what your facilities can do for them. You get their block time more line before they want to get at. And so you start getting that really high compound effect by Q4. And that's all organic for us. And then of course, add to that the compounding effect of the previous year cohort. And you heard how much the volume was up on that cohort from 2021 coming in in 2020 to north of 140 plus percent. And so I would say first and foremost, the recruiting engine is working.

at optimal level and continues to produce the results that we would expect. We are not seeing that slow down in 2023. The second thing I would highlight is keep in mind that clearly are denobos that we've been putting up. Each year we're putting two or three small denobos. We have our Idaho Falls Community Hospital. All those are going to add an extra pointer to over what I would call normal trends. Those of course continue to grow and we continue to elevate from there. As we've said, while the algorithm supports a 2-3% volume, we really do think we have an opportunity to be at the point of that or exceed that on a consistent basis going forward. I would like to see those trends continue into the current here and I think that is the expectation of reported directors as well. Yeah, I can't speak to why the market is where it is or other companies are where they are. This was our expectation. We kind of built these...

Yeah, very heavily weighted. I mean, we'll certainly look at other service lines where we can expand into those higher acuity within an existing facility. So I won't say it's all we'll buy, but if you wanted to weight them, it's absolutely MSK cardio weighted. Yeah. Okay. Thanks, guys. Thank you. The next question comes from Lisa Gill from JP Morgan. Please proceed with your question, Lisa.

So let me talk about first and foremost when we talk about a hospital partnership what that means to us and I actually feel Optimistic that we will be announcing some partnerships being signed this year Again, we're close on a number of items. So hopefully we'll be able to talk about that, you know in the very near term But first and foremost we have to be like-minded and what like-minded means to us at surgery partners Is that we are aligned around supporting the ecosystems?

where we have patients, needs, quality metrics that need to be met, and continuing to be a unique value play to the market. Two is we have to be able to not only have ownership in those facilities that those health systems have today, but we have to be the operators of those facilities. So when we talk about partnerships, view it as us most likely taking a minority ownership in existing facilities within health systems, but becoming the operator of choice for those facilities.

And then finally, we want to know that there's a growth trajectory here to expand in the new markets with those health systems. And that is the last piece that I would highlight. And I would tell you that all of those, as we go through this, we weigh time and energy and effort versus what alternatives are available to us. And so, but in many cases, we do these as very attractive relationships when we align on those three kind of like-minded scenarios. And again, I'm optimistic. I think Eric, you would, he's nodding as we're saying this. I think Eric would say the same that we will be announcing some partnerships this year. And if I'm listening to correctly, Wayne, it sounds like you're saying that from an economic standpoint, it would be similar to what we see today when you're running a facility. It wouldn't be materially different. Is that correct?

I would tell you we'd expect that any economics we have, the no centers to be at least as good as our current economics. Okay, and then just one last follow-up would just be when I look at the guidance for 2023, it looks like there's about 30 basis points of improvement in the EBITDA margin.

Is that mixed? Is that now that you have more visibility around labor and cost, which you spend a lot of time talking about today? How do I think about your level of visibility around that improvement in margin in 2023? You look, I'll let Dave comment on it. I think he'll tell you it's mostly mixed. The one thing I would tell you though is we have said that over time we really believe our margins can migrate to high teens. And obviously the last two years have put some unusual headwinds against the broader industry. And so the true value create a lot of things we've been putting forward, hasn't really been able to shine completely. And I think you're going to continue to see some of those kinds of...

that we do expect margin enhancement just through our normal growth levers in terms of managing supply costs and managing better rates at the top of the house. But also the impact of last year's acquisitions and minority interest held entities which are now flowing through from a full year perspective which will

Again, those are just pure margin enhancement opportunities. So you should see elements of both of those things impacting that 30 basis point increase in margin that you cited. Okay, great. Thank you. Thank you. The next question comes from Gary Taylor from Cohen & Company. Please proceed with your question, Gary. Thank you.

Hey, good morning, guys. I just had a few. One was, I appreciate your comments about seeing some of the labor environment easing and Just wondering, could you give us a sense about wage growth, either per FTE or per case or how you kind of saw that wrapping in 22 versus what you're thinking in 23? Let me first start by highlighting a theory that we generally see premium labor, which has been I think probably...

distortions in the provider side. A couple examples, though, of how much it has abated. And if you were to look at earlier in the year, and I'll use a state like California, you would have seen premium wages more in that $85, $95 an hour. They got the north to $200 an hour during the peak time frame. And it's migrated closer to this 115 range. So not fully abated yet. W

our nurses a little more than we have in the past. But it's important to recognize, because we're a preferred facility to work at. And as Eric mentioned in his prepared remarks, we can between date of posting and filling, we're filling within 30 days. You know, I would say the equilibrium hasn't distortedly balanced to one side versus the other when it comes to compensating our associates at the facility level. We're generally open Monday through Friday only. Ours are highly predictable.

our nurses can be focused on exactly the specialties they want to do in those facilities and the surgeons they want to work with. And that really does create a much more favorable environment versus somebody who simply wants to earn a higher wage and move on. But I don't know anything else you want to have. Yeah, I would just maybe add a couple of things. So first of all, total agree with Wayne's comments. Clearly we've seen some improvement. I will say for our guidance purposes, we've assumed similar pressures in this year. And the reason we've done that is just because there are still certain markets where we see things pop up where we have to be relatively quick to match. But in general, what I would say is we believe that what the leverage we typically get.

We saw this coming back in 2021 and we started to react in advance. And once you know about the culture of surgery partners, this is a partnership all the way down to the facility level where everybody's kind of watching out for each other. And so...

There is this kind of philosophy that we're going to make sure that everybody is protected inside the system that we have. So we started picking up this and started acting less defensive and more proactively. In 21, we saw that trend continuing in 22 and as we just kind of poured it out, we have a little bit more hedging just in case we have some opportunities there. I guess I could have one more quick one. On your class of 22 that you've been appropriately bragging on how well they've...

they've done, is that primarily a function of, you know, specialist in their case mix why, you know, that revenue is trending so much higher or is there something else you'd location or, you know, that you'd point to, because obviously you'd hope to, you know, to replicate that.

Yeah, so I would just say every year we continue to refine how we target our recruitment team. We use data. We use it in all kinds of ways to understand exactly where people are in the pipeline, how quickly we convert them into our facilities. I think we get better at it every year. Clearly as we grow acuity, we have more higher acuity positions that we can go attract to our facilities. So as we add service lines, we add orthopedics or cardiology that opens up a whole new window of positions with a unique value proposition. So I think it's really about targeting it is definitely.

percentage of cases that were generated in 22 from either the class of 22 or 21. I hear you on the 140% growth, which is very, very high, but I don't have a sense of the denominator on those. I'm just trying to get an idea of how much that may have driven the overall system-wide case growth for the year. Yeah, that's, I'm trying to see if I can pull it up real quick with wallers.

the percentage on there and you'll be obviously more in the 37,000, 38,000 range. Here's a little bit of a flavor or feel for it, but obviously each cohort is going to vary year to year, but it just gives you an example of how that plays out. That's really helpful. The second question is.

is just for Dave, I'm trying to keep up with all of the items influencing cash flow this year. Can you just remind me the items that we should be adding back to 2022 that are non-recurring into this year, and then what the separate non-recurring items are in 2023? I get the 40 million of lower cash interest. I'm just trying to make sure I can bridge the cash flow a little bit easier here.

Yeah, yeah, I know I appreciate that. I mean, the good news is, next year you won't have any of this noise. So hopefully next year we have this conversation, you won't have to ask that question, because it has been a long run where we've had some things that have affected us. In 20-22, the things you think about, and I'll start in the fourth quarter, we had the last of our largest.

TRA payments, a tax-deceivable agreement that was entered into back in 2017. That was just north of $20 million. We had a couple CARES Act things that were happening. Most notably in the quarter was about $9 million related to the deferred payroll taxes. The second tranche of that was repaid in the second and final tranche was repaid in December . We still had Medicare Advanced Repayments this year. That was a big number and total. It was $60 million.

In the fourth quarter, because we paid down that long-term debt, the approved interest got accelerated from its normal payment in 23, so that was another $11 million that came through inside the year. There was a handful of other kinds of puts and takes, but those are the big ones that factor into it. It's our cash flow bridge. Okay, any other items as we think of 23 that won't recur, that are separate from this reference, other than the cash interest savings. Okay. No. Okay, the way in that cash interest will recur. That's a permanent good guy for a correct, correct. And then you read on the EBITDA. The idea is that you're raising your cash flow wouldn't at least grow sort of a...

look forward hopefully getting together soon in Nashville. Couple things I would highlight that I do think make us unique, summer, sexier than others, but maybe to start with the most basic, we are data driven in how we target physicians and markets that we want to pursue. So we know what each of our facilities can do. We know what rates we get reimbursed on facilities. We know what our commercial versus Medicare are.

And when you start something that way using data, you actually just get better at it, more refined at it. You start understanding ways to target the market differently and ways to actually have your recruiters target those surgeons that you're pursuing. The second thing though that I think has been a real difference maker for us is we took some of our ASE leaders. In this case Tony DeParo, who used to run about half of our ASEs as one of our EVB

to onboarding efforts and then really satisfaction efforts. So it's not just about how do we recruit this origin, how do we get them, they're scheduling, how do we get them on their block time. But Eric, when he came in, really added a whole new level of kind of what I'll call creating the backend aspects of this, which is ensuring that the provider satisfaction is high.

And when it's not high, why isn't it? And what can we do to impact that? And so I think what you're also seeing in our strong organic growth is the fact that we should talk about the leaky tub, right? And that every year we're recruiting enough dogs just to replenish those that were leaving us. And those that are leaving us has diminished meaningfully in the last three to four years. And of course, what we're recruiting has grown exponentially during that period. And so it's simple though, it's basic blocking and tackling.

It's data-driven execution that we look at every week, every week, not once a month, once a quarter, but every week. And it's having teams aligned with what those recruitment goals are and how they're I guess we follow up, Eric, as I think about your excitement for Cardio, and we obviously share the same optimism about the Cardio opportunity. As I think about the catalyst for that to gain traction, is this one of those things that we're seeing sound like with Ortha, where we need to see CMS approval, or is there any interest that you're seeing now for the Medicare Advantage guys, so the commercial payers do.

start reimbursing for this and get that ball rolling. Yeah, that's a great question. I would say, actually, CMS has approved the largest volume procedures, the PCI, the things that I think should move. I think the kind of the slow pace here at the beginning is clearly tied to this is a very, very highly employed specialty, not happily employed, but highly employed by health systems. There's a lot of interest from cardiologists. And what we're seeing initially is, we started...

I think it was five new cardiac rhythm management programs in our ASCs this year. So cardiologists coming over, checking us out, maybe even investing, starting to bring over devices. But the really big wave here, Brian , is as doctors figure out what they can have ownership of it, what they can move safely and at a really good value for their patients to the space, as they learn that, I think this is really, this is a flywheel. It's starting slow. We're gonna see a nice growth off a small number, much like we did with orthopedics. I remain very optimistic just because the value and cost savings is so large for the health system. And the opportunity for cardiologists to control and be more independent is so large.

I do believe it happens. It'll be different paces about half the states, a little less than half still have restrictions on this that are more restrictive than Medicare. Almost all of those states, there is active legislation going on, active work going on to change that. So all of these things kind of have to fall in line. And you and I both share this optimism. I definitely think it's a big opportunity. Some states will go faster than others. Once this starts to get a foothold and people realize the amount of value it creates for the health system, it will be a natural push. So I think it's gonna be much like joints. You're gonna see it kind of slowly tick up. It'll be a nice growth percentage, but it will hit critical mass. The question of when that is within the next five years, always difficult to predict. But I will tell you this, we will be prepared. And we are already having those conversations to build the foundation and starting on the cardiac rhythm management.

Thank you. Thank you. This starts to conclude the question, Fish, and I'd like to turn the call over to Eric even for closing remarks. I appreciate it by his time this morning. Before we all walk away, I would like to just take a moment to recognize all the efforts and commitment to excellence of our 12,000 colleagues in nearly 5,000 physicians. Collectively, we take to heart the responsibility for providing the best environment for physicians to perform exceptional procedures of the highest clinical quality and the privilege to serve over 600,000 patients in what is often their most vulnerable moments. I'm so proud to work alongside these talented professionals as we work to more fully deliver on our mission to enhance patient quality of life through partnership.

Thank you again for joining the call this morning, and I hope you all have a great day. Thank you, sir. This concludes today's teleconference. You may disconnect your lines at this time, and thank you very much for your participation.