Q3 2023 Surgery Partners Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to city, we're talking as third quarter of 2023 earnings call.
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It is not enough tissue to hand, you over to Chief Financial Officer, Dave Daugherty Pease go ahead Sir.
Good morning, My name is Dave Doherty CFO of surgery partners and I'm here with our CEO, Eric Evans, and our executive Chairman Wayne Tobias. Thank you for joining us for our third quarter 2023 earnings announcement.
During our call we will make forward looking statements there are risk factors that could cause future results to be materially different from these statements.
These risk factors are described in this morning's press release and the reports we filed with the SEC each of which are available on our website at surgery Partners' Dot com.
<unk> does not undertake any duty to update these forward looking statements.
In addition, we will reference certain financial measures that are considered non-GAAP, which we believe can be useful in evaluating our performance.
<unk> of this information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.
These measures are reconciled to the most applicable GAAP measure in this morning's press release with that I'll turn the call over to Wayne Wayne.
Thank you Dave Good morning, and thank you all for joining us today.
We are pleased to report another quarter of consistent growth in revenue and adjusted EBITDA exceeding our prior guidance.
Our non consolidated facilities, we performed over 172000 and surgical cases this quarter.
When adjusted for divested facilities and factoring in one less business day. This was nearly 6% more than 2022.
Other than the impact of Hurricane Ike, which marginally impacted our Florida, and Georgia facilities mid quarter, we did not experience any pressure from external factors as we continue to produce steady predictable growth in our key growth areas.
Strong case growth combined with increased acuity and contributions from recent acquisitions generated $674 $1 million of net revenue and $105 $5 million of adjusted EBITDA, resulting in a 15, 7% margin.
Dave will share more details regarding our financial results, but let me highlight a few.
Net revenue of $674 $1 million was almost 9% lower than the prior year with same facility revenue growth in excess of 14% in the quarter.
On a year to date basis same facility revenue growth was nearly 11%.
Adjusted EBITDA was $105 $5 million, representing nearly 10% growth over the prior year quarter, and a 14% on a year to date basis.
Adjusted EBITDA margins improved 70 basis points sequentially to 15, 7% as compared to the prior quarter.
Finally, we completed the acquisition of two additional short stay surgical facilities in the quarter and have deployed approximately $135 million year to date.
The pipeline of future acquisitions is robust, which allows us to be highly selective and remain disciplined in our acquisition strategy specifically.
Specifically, we have well over $200 million currently under LOI and a significant number of additional opportunities in early conversations.
We continue to be pleased with our balanced approach to growth with all pillars of our long term growth algorithm, either meeting or exceeding our expectations.
Just on the strength of our third quarter results and our continued positive outlook on our numerous investments in the business.
We're raising our full year adjusted EBITDA guidance to a range of $436 million to $440 million with approximately $2 $75 billion in consolidated revenue stable.
Dave will discuss our guidance in more detail later in the call.
With that let me turn the call over to Eric to highlight some of our operational initiatives and recent investment activities Eric.
Thanks, Wayne and good morning, everyone.
We are pleased with our third quarter results, which represented another quarter of consistent and predictable growth across all of our core service lines and consistent with our company's growth algorithm.
From an operational perspective, our specialty case makes its right, where we expected and volume was in line with our expectations with over 146000 consolidated surgical cases in the quarter.
Our non consolidated facilities, which are an increasing part of our portfolio exceeded our expectations with almost 26000 cases.
In the quarter, our same facility case growth was two 9% when compared to the third quarter of 2022 and net revenue growth per case was 11% we.
We expect to continue to see both volume and rate growth with rate growth in excess of our long term guidance throughout 2023 due to the strength of our physician recruiting and case mix acuity.
On the recruiting front, our various initiatives continued to drive strong year over year growth fueling growth and M. S. K procedures, particularly total joint cases in RIS fees.
Year to date, we've recruited nearly 500, new physicians to our short stay surgical facilities with approximately 40% representing M. S. K specialties, and we remain on pace to recruit more physicians than last year with an increasing focus on higher acuity procedures.
Provide some context, we continue to see strong growth in total black procedures performed in <unk>, which have increased approximately 60% year to date compared to 2022.
That's why I mentioned, we have deployed approximately $135 million year to date on 15 transactions, which includes three additional facilities closed in October.
We continue to rapidly integrate acquisitions into our operations, bringing the full benefit of our revenue cycle procurement managed care and physician recruiting teams yield significant synergies within the first 18 months of ownership.
We remain committed to our annual capital deployment goal of at least $200 million.
As it relates to divestitures, we have divested our interest in seven facilities as part of our disciplined portfolio management process. As previously discussed the timing of these divestitures has an ongoing impact on our revenue as we redeploy the capital.
Moving to our de Novo activity, we have been intentionally focused on syndicating with surgeons that recognize the importance of moving high cost procedures to a lower cost high quality purpose built surgical facility.
Based on deals we have under syndication, we have 17 short stay surgical facilities in various stages of our pipeline many of which are slated to open in 2024.
These facilities include both consolidated majority owned partnerships as well as minority interest unconsolidated partnerships.
They include a mixture of two way partnerships under development between us and physician partners and three way partnerships with our new health system partners.
We expect this pipeline to grow significantly over the next few years and to provide us with future buy up opportunities Dave will share how we think about the financial performance of these unconsolidated facilities in his remarks, but our growth in this area further enhance this confidence in our long term mid teens growth expectations.
Before I turn the call over to Dave I'd like to take a moment to address the current environment as it relates to anesthesia providers as well as some of the questions. We have received regarding the impact of G. L. P. One on our long term growth algorithm.
Starting with anesthesia I would like to point out that anesthesia availability and cost pressures are not new but rather something that we had been managing for a few years. It's widely known that the current supply of anesthesia providers from NDS Juicy Rnas is constrained and at recent reimbursement changes for their services has impacted their profitability.
Other than the limited number of providers that we employ the anesthesiologist or see RNA is responsible for billing and collecting for their services performed in our facilities. These providers have chosen to work with us in our facilities for the same reason, our surgeons and other stakeholders to for the convenience of efficiency and clinical quality, we are known for.
In other words, they generally prefer working with our surgeons in our facilities.
With the pressures facing the service line, we have been working with our anesthesia providers to ensure they remain engaged and profitable we have many opportunities to assist them, including realigning surgical schedules to maximize their O. Our time working with our managed care teams on improved payer interactions or in some cases offering a revenue guarantee a stipend.
Despite the increased focus on this subject we have not experienced any delays or canceled cases because of this issue nor do we expect to see material changes to our operations or financial results in the future. We are however, taking the opportunity to find innovative ways to partner with national and regional anesthesia groups to alleviate pressures and these conversations have been very pro.
Just to reiterate this is not been a material issue for us and I do not expect this will be a material issue for us in 2024.
Moving onto G. L. P. Once we are proponents of a healthier population and have high hopes for success in pharmaceutical and behavioral changes that benefit individuals affected by diabetes and obesity.
We are encouraged by the promise of these drugs there is much to be learned about the overall effectiveness long term side effects and other factors, including reimbursement while.
While we do not know what the ultimate impact of these drugs. It is believed that such drugs will lead to fewer comorbidities and a healthier more active lifestyles, which generally bodes well for our short stay surgical facilities.
In short, we do not expect a change in our long term growth algorithm due to the expected impact of G. L. P ones and related treatments and would bias to more upside for purpose built short stay surgical facilities due to the continued shift of procedures from the inpatient to the outpatient setting, particularly for healthier populations.
In closing I'd been in this role for almost four years and I've never been more optimistic regarding our future and the number of tailwind impacting our business.
The desire and need to move more procedures to purpose built short stay surgical facilities has never been greater and our company has been positioning itself to capture industry, leading growth associated with these tail winds.
The combination of investments in both our existing facilities and new de novo's, coupled with our entry into three way joint ventures with high quality Health systems gives me increased confidence in our ability to grow high single to low double digit organically this growth coupled with an existing and growing M&A pipeline and a talented deep and experienced leadership team.
Provides further optimism for long term sustainable mid teens adjusted EBIT growth.
With that I will now turn the call over to Dave to provide additional color on our financial results as well as the outlook for the remainder of the year Dave.
Sir I will focus on our third quarter financial results key metrics for our unconsolidated advantaged facilities and our outlook for the remainder of the year.
Starting with the topline we performed over 146000 surgical cases at the facilities, we consolidated in the third quarter.
When combined with facilities, we don't consolidate we performed over 172000 cases, representing a slight increase over last year adjust.
Adjusting for divested facilities and one less business day in the quarter total K two grew nearly 6% these.
These cases spanned across all of our specialties with an increasing focus on higher acuity procedures, which is reflected in our double digit same facility growth this quarter.
The combined case growth in higher acuity specialties specific managed care actions and the continued impact of acquisitions supported consolidated revenue growth of eight 6% over the prior year. This growth was accomplished despite revenue headwinds associated with facilities divested in 2020 three.
On a same facility basis total revenue increased 14, 2% in the third quarter with case growth at two 9%.
Net revenue per case with 11.8% higher than last year, primarily driven by higher acuity procedures. There were no unusual events that affected the third quarters about 2022 in 2020 three.
Adjusted EBITDA was $105 $5 million for the third quarter, giving us a margin of 15, 7% in line with our expectations of continued margin expansion.
Inflationary pressures related to labor and supply costs have moderated this year, but we remain vigilant in monitoring these factors across our portfolio.
Consistent with prior quarters this year, the third quarter labor and supply cost or a lower percentage of revenue than the prior year.
As we mentioned in prior comments, we have increased investments in facilities that are not consolidated including both de novo and acquisitions.
Because they are not consolidated the earnings of these facilities are reflected in equity earnings of unconsolidated affiliates and management fee revenue.
Ponant of revenue in our income statement.
To provide some context on our non consolidated activities.
We have an ownership interest in 23 facilities that are not consolidated.
Revenue from these unconsolidated facilities grew 71% in the third quarter over last year, representing growth of over $66 million.
This revenue growth is a combination of acquired minority interests and the value proposition we bring to these partnerships.
We benefit from this growth in two ways management fees, which are based on revenue.
And our share of the income generated at the facility.
The adjusted EBITDA contribution from the unconsolidated and managed only facilities was $10 $2 million in the third quarter, which is approximately 30% higher than last year.
In addition to our existing facilities, we have 17 de novo's in various stages of development with 10 that are expected to open over the next 18 months.
On a robust de novo pipeline and momentum we would anticipate opening double digit de novo facilities annually for the foreseeable future.
The development costs for de Novo's are not material to the company in.
In the quarter, we incurred approximately $200000 of development costs associated with them.
Okay.
Moving to cash flow and our balance sheet.
As we've noted in the past, we expect to produce at least $140 million of free cash flow in 2023.
In the third quarter, we generated free cash flow of $63 $2 million and on a year to date basis, we have generated $91 $4 million.
We remain confident in the ability to meet our target of at least $140 million of free cash flow in 'twenty three based on our current growth algorithm, we anticipate free cash flow to receive $200 million annually by 2025.
We ended the quarter with $236 million in consolidated cash and an untapped revolver of $545 million.
When combined with the free cash flow, we are projecting we believe our current and future liquidity positions us well in this macroeconomic environment, while giving us flexibility to maintain our long term acquisition posture of deploying at least $200 million per year for M&A.
As a reminder, our corporate debt is less than $1 9 billion with an average fixed interest rate of six 7% with no material debt maturing until 2026.
We are continually reviewing our debt stack for opportunities to extend our maturities well past 2026, while minimizing the impact on our projected free cash flow.
We are monitoring the rate environment and forward interest rate curve as we consider both factors for any potential refinancing and the ability to limit interest costs through an appropriate hedging strategy.
Our third quarter ratio of total net debt to EBITDA as calculated under our credit agreement was four one times.
With the earnings growth. We expect we are confident this ratio will continue to decline.
Eric the momentum of our third quarter results, we remain optimistic and confident about the company's growth.
And are raising our outlook for 2023, adjusted EBITDA to a range of $436 million to $440 million with the midpoint, representing over 15% growth compared to 2022.
Further our outlook for consolidated revenue is approximately $2 $75 billion representing over 8%.
Growth from 2022.
And is inclusive of overcoming more than $100 million of divested revenue.
As we've discussed previously our revenue and adjusted EBITDA guidance is impacted by the timing of acquisitions and divestitures.
We are currently in the midst of our planning process for 2024, but wanted to provide investors with some thoughts on the factors. We are considering for 2024 girls calls with our senior leadership team and board of directors.
At this time, we do not foresee any material headwinds as we head into 'twenty 'twenty four we believe that consistent momentum of our business that we have been experiencing will continue in 2024.
Specifically, we expect organic growth above our long term growth algorithm supported by continued surgical case migration from higher cost settings, and efficiency initiatives, leading to topline growth and continued margin expansion.
Our margin expansion reflects ongoing investments in procurement and revenue cycle as well as the integration benefits from recent acquisitions and doing all of those.
Additionally, our 'twenty 'twenty four contracted managed care rates are already 90% negotiated and we will continue to benefit from the compounding effect that physician recruiting as we enter 2024.
Finally, our ongoing acquisition strategy supported by a robust pipeline of potential acquisitions combined with contributions from de Novo facilities. We expect to open in 2024 provides a further tailwind in support of our growth algorithm.
At this early stage in our process, we remain confident in our ability to deliver mid teen adjusted EBITDA growth, we look forward to providing greater visibility into our 2024 projections for revenue adjusted EBITDA free cash flow and capital deployment targets in a future presentation.
With that I'd like to turn the call back over to the operator for questions.
Operator.
Thank you, Sir ladies and Chancellor will now be conducting a question and answer session.
Oh succession piece very strong things one I'm just trying to fund key parent.
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Our first question comes from Kevin Fischbeck of.
Oh, great. Thank you I guess, maybe to start off the price number looked really strong in the quarter could you just remind us kind of where the actual core pricing is versus kind of the acuity benefits in our payer mix shifts that might happen.
Year over year and was there anything unusual in the quarter on that.
Revenue per case that.
Hey, Kevin Good morning, I'd start by saying no nothing unusual other than we continue to bias towards the higher acuity cases as you saw in the prepared remarks. The total hips enjoying started our outpatient settings were up over 60% against the prior year backdrop, which as you know had strong growth that year as well so I'd put it more on the fifth.
<unk> 50 bucket of how much is acuity mix impacting the revenue component versus how much is really just the oh, the core growth and managed care rates that we're getting along the way.
And then I guess in your prepared remarks, you guys made a comment that the consolidated cases, where basically as expected, but the unconsolidated cases came in better than expected is there is there something behind that is there is there a point that you're making there about the kind of the power of our you know having maybe if there are three way joint venture or more syndication or is there anything.
After that well I think I think it's fair to say that part of the reason we've been biasing to this additional growth lever is a we think it's an untapped opportunity for employed doctors that are part of systems and it gives us unique way of bringing kind of chassis in our playbook to it so.
I wouldn't say, we're over indexing on that but I think ultimately we wanted our investors to understand the strategy is working out at it and it's slightly better than we had expected so far and we don't really see those trends diminishing at this point I think the key thing is as you know Kevin because they're not consolidated those metrics do not end up in our same store AR either in terms of the ball.
I am component.
And so ultimately you know.
We feel very good about how we're kind of running into the new year with the M&A pipeline as well as with our same store metrics and Kevin I, just add to that difference differential I mean, we are pointing out the strong growth there, but part of that is you know we bring things on when they're new we bring a lot of synergies and so we expect there'll be kind of outsized growth early on we've been pleased with how those have taken off and certainly it's a big part of the growth story.
Alright, Great and then maybe just last question I appreciate the commentary on the professional fees. It seems to be a hot topic is there can you just help the size that for us like what is that level. This is especially you're spending in the quarter.
Yeah, So I'll, let I'll, let Dave sides of that in a second just just to readdress kind of you know when you think about it.
Physician services, you know in our business again, because we're not a traditional acute care company, where short stay surgical the only exposure. We have is on anesthesia. We don't have a hospital has been out of the yard dogs per se. So we have exposure on anesthesia, we've had exposure for a number of years, but quite honestly, our our site of care as the preferred site of care for anesthesiologists when I lived in the traditional acute.
Care World I used a S sees in surgical facilities short stay surgical facilities as a way to try to lower subsidies or try to get a good deal with anesthesiologist. So we're in a preferred setting.
We have you know a few places where there's pressure, but it is it is really immaterial we talk about managing this I mean, we're certainly proactively managing the pressures that anesthesiologist feel by helping with scheduling getting more efficient you know being really proactive in being a good partner with them but.
But the size is immaterial. They maybe you can give me just a rough size of the risk we see next year, Yeah. Yeah sure. So first off and you can see this in our in our P&L, which is in our press release. This morning, we will give more details obviously in the Q, but in the quarter just over $70 million of total professional fees as well.
Get recorded in there and those professional fees include.
A number of different activities, including a mean other.
Oh supply costs that we have and malpractice insurance on all of those other things the component that relates to anesthesia, which has been talked about a lot.
Most recently a of that is.
Is relatively small.
That variance so we're looking at as no more than a few million dollars. So easily something that we can absorb them as we go into it I think one of the things that just just to reiterate a point that Eric mentioned earlier.
Because you've gotten this question a couple times anesthesia has this pressure that you are that we cite on a cost side and profitability for them has not impacted in any way. Our cases, we've not had to cancel one case due to anesthesia related matters. This past year.
So we don't believe that this is a problem area for us as we've seen elsewhere in the services industry.
Alright, perfect. Thank you.
Thanks, Kevin.
The next question comes from Jason Crystal City.
Please go ahead.
Oh, great. Thanks, Good morning, I just wanted to go back to the same facility revenue per case in the quarter did that include any benefit from insurance proceeds related to the cyber impact and I guess, you know what that level of growth that would imply perhaps a bit more margin expansion just given the flow through of rates. The bottom line, you said that 50% of that growth was related to.
Acuity, but maybe can you just help.
On the pricing flow through.
And then you know the likely kind of margin offset that would come with a focus on higher acuity cases, just any more color would be helpful. Thanks.
Yeah. So first the short answer is no. The same store did not benefit from any unusual items that did not have any cyber recoveries and that's.
In terms of the margin expansion.
I would say that we're actually very pleased because sequentially. It's up 70 basis points I understand you're probably the math youre applying I think you'll see further expansion going into Q4, we did make more additional investments in the quarter at anytime we see strength in the quarter were going to take advantage of that to make additional investments and candidly you know our compensation structure is reflective of the fact.
Our team continues to outperform expectations and so theres additional accruals in the quarter related to bonus etcetera, but but no no concerns on our end and I think you'll see margins expand not only in Q4, but you'll continue to see that expansion as we go into 2024 and Kevin what one point of a little additional clarification I think Wayne answered that question 50, 50, I you know I think roughly.
Right, probably more on the side of acuity than rates that will be clear on this this is we havent really a drumbeat that's been based on really nice acuity growth. This quarter. We've had some nice managed care rates, but you know I wouldn't say the half that 14 is managed care. So we've got some rates were certainly working on that but the majority of this is finding and attracting the right high end cases and driving into our.
Cities.
Great Awesome. Thank you for the clarity and then just a follow up I wanted to ask on capital deployment, I guess relative to your 200 million plus for the redeployment of our divestiture activity target I guess given year to date spend at 135 million.
And your comments on your pipeline just curious on the timing of that spend that seem to slow a bit in the third quarter or is that just kind of timing related in anyway, and I guess, it's probably any commentary or incremental commentary on the capital deployment environment would be helpful. Thanks.
Great Let me start by saying in the six years that this team has been together.
The current pipeline of opportunity and what we have under LOI is greater than we've seen in any single year.
And we don't see that slowing down as we head into the new year.
Regarding timing, we actually anticipate with the over 200 million under LOI that some of these will get closed in the fourth quarter and still feel pretty confident about our targeted $200 million goal for the year. If it was to slip. It we're really talking about slipping into the first half of next year, which we don't really see us as a deterrent towards our long term growth all the rhythm but actually.
No concerns on our end, we continue to apply appropriate due diligence on all facilities and Eric and Dave continue to remind the teams that you know we don't manage to the quarter. We managed to the long term growth algorithm and so we're not necessarily going to accelerate or close to achieve a near term goal, but I would tell you no concerns at all on the.
The kind of run rate of 200 plus million and if anything I would argue we're probably going to jump out of the gate, even stronger next year.
Great. Thank you.
Our next question will come from the 2 million.
Zinc partners Peter go ahead.
Thanks, Good morning, Dave can you go back and maybe just unpack the comments on the managed care actions that you undertook in the quarter and I guess the corollary to this question is really just maybe an update on.
Our revenue cycle initiatives the focus on revenue conversion now that you're I think calling one clearinghouse. My my sense is these numbers are small so maybe just any update around those would be helpful. Thanks.
Hey, good morning, laminate I'm not jumping on the managed care question I'll turn it to Dave of revenue cycle. There was no specific managed care accident quarter I mean other than our normal contracting. We clearly continue to developed strong relationship with payers are explaining and using math to show them our value proposition I think we're getting increased traction with that or.
Time as they see the benefit of what is primarily an independent model S and docs the benefit we bring to them from a cost perspective, and so as Dave mentioned, we do have 90% of that of our planned increases for next year already in place contract wise, but theres always negotiations happening there as we add new service lines and procedures, there's always a chance to go back and say Hey, we're going to.
A bunch more value for you how do we how do we work together for a win win so I'm really really proud of our managed care team they've made a lot of gains but I also think some of the gains they've made it is being proactive and getting us set up to take on those higher acuity cases, and so some of this is just access to the right payers with the right incentives for physicians and some of it is ongoing.
Rate negotiation, but there was nothing particularly different in this quarter with that maybe talking about revenue cycle. Yeah, maybe maybe just wanted one additional point of context as to why I said, what I said, 90% in there like we were in the middle of doing our budget process and so Eric and I had the pleasure of talking to our board about kind of progress and our confidence that we have going into 2024.
And some of some of what you see as Eric was mentioning managed care is an ongoing effort that we do day in day out our dedicated team kind of focuses on this and what gives us some degree of confidence when you look at the contributions on the topline side is how much work that team has done and contracted going into next year. So when we give guidance.
And as we give the visibility into 2024, our confidence is driven by the fact that we've already got 90% of our contracting baked in this space. So so that's that's why it's there and it is again when you go back to what we have where we have built over the past several years is a consistent plan.
But allows us to have some degree of predictability to it.
And I'm glad you asked on the revenue cycle front, we have talked about this in the past revenue cycle represents two opportunities for US one is cash flow generation on a on a faster basis. It also allows us to get greater yield.
Through our results and.
In yeah, Rev cycle kind of the it's a difficult job as you know in the health care services sector for US you know we deal with Payors. You know that are that are constantly trying to find the right way to move our business into our facilities and so we're we're always dealing with the managed care.
Providers, making sure that we're following there.
Protocols appropriately and making sure that we do the right things on the front end to make sure that we decreased denials on the backend and then when we do have an eye also on the back end that we're actively managing those in accordance with our contracts with the payers. When you do that properly you get increased yield opportunities.
Done a pretty good job with that and the build that we have done over the years, we get to apply that logic every time, we do an acquisition. So this is one of the values that we provide when we do M&A. So when we often talk about you know buying companies and they're taking a turn off of those effective multiples in the second year in a half a bonus.
Part of that is applying our Rev cycle approach getting better yield and accelerating cash.
Yeah.
That's helpful. One just follow up can you just out the seven divestitures that you've made year to date can you just maybe size kind of how you're tracking relative to that $100 million target. Thanks, guys.
Yeah. So in the quarter, we estimate roughly a $35 million plus or minus of revenue that we're jumping over this year from revenue that we incurred last year in the in the third quarter that we don't have this year from those seven acquisitions. So yeah. We don't we don't spike that out separately with you.
That intentionally because I think we're proud of the growth that we have but but that's the business that we would have disposed of earlier this year.
Thanks appreciate it.
Okay.
Our next question comes from Brian <unk> of Jefferies. Please go ahead.
Hey, good morning, guys and congrats on the quarter maybe.
Maybe winter Eric as I think about your comments NGL piece, maybe if you can just walk us through maybe a little more detail.
How you think that is a positive.
If there's a near term benefit from procedures getting done just because people are healthier just how are you.
Maybe if you can help us think through the modeling of that impact at least near term and medium term. Thank you.
Hey, Bryan. Thanks for the question look there's there's not a ton of information out here right, where we have done our research on the best we can based on what we think the uptake could be what the potential impact could be there are puts and takes as you can imagine you know there are patients that are ineligible for surgery today because of weight that will become eligible there are patients who are.
Overweight, who might lose weight and become more active and when you look at the types of procedures, we do which tend to lead towards things that are less affected by co. Morbidities. If you look at the overall patients we have for US you know, we see definitely impacts of people that will become eligible we understand there might be some people who are healthier longer but they also become more active we have a lot of stuff that.
You know is based on activity and wear and tear we think about things like Gi doesn't affected by this in particular as far as risk of what we can tell our ophthalmology. Obviously a lot of that is some of that can be diet related a lot of it's not a we look at the pros and cons, we looked at the relative size of the market and the reality for US is we don't see this as material to our business and.
So maybe there'll be data that comes out in the future that changes that opinion, but at this point, Brian like if anything it allows more patients who have fewer comorbidities to be taken care of in our sites of service. We think that's a net benefit but we still see the relative impact on an overall population of procedure, that's being relatively small so that's that's it.
So we can tell you right now and I think that's if anybody is telling you more than that they have data that I've not seen so I think that's kind of where we all set.
No I appreciate that and then maybe Dave as I.
Think about your swaps just I know you said fixed or anything or is that just any color you can share on your swaps and then maybe also how we should be thinking about funding the 200 million.
Dollars of deals in the pipeline.
Yeah, Yeah I I appreciate you asking this question.
Because we obviously do look at this and we're aware of of how this is kind of viewed from the outside so let me let me start with free cash flow generation I mentioned it earlier in my prepared remarks, but hopefully the results that we printed this morning demonstrates the confidence that we have been having all year and our ability.
To generate free cash flow this year.
North of $140 million and I can assure you are modeling still shows as kind of progressing nicely up to 200 million plus of free cash flow in 2025. So you know from a from a cash flow generation you know get to that year and you can see that the business is generating sufficient.
Free cash flow.
To support its operations. So what we're really talking about here from an exposure areas. The gap here of 2024.
You know, where where you're gonna be generating between the 140 and a $200 million of free cash flow again, we're not going to give that guidance just yet we'll give it in upcoming calls and that's when you look at our balance sheet and our balance sheet right now.
Sits with $236 million of cash and an untapped revolver of nearly $550 million, So and management says and when I say that we have confidence we'll be able to support the growth that we've committed to have at least 200 and $200 million of capital deployment.
That's why we have that confidence.
Now we do are to your point, we do have a debt stack that we look at but yeah, there's no material debt coming due until 2026.
To your point, we have our interest rate swaps and caps in place mostly swaps at this point that fix our current term loan variable rate to just under 6% I think we're at five 9% effective interest rate, we'll have that all the way through March of 2025.
And then at that point in time, obviously, I hope that we have done a refinancing opportunity it will be close to that at that point in time.
So that will well timed the market in the most favorable environment that we can see and then we'll go out to the market and of course reestablish.
Our our hedging strategy and what's going to make sense to us I think what we are valued and I think our investors have valued is the predictability of our free cash flow. So our hedging strategy will always be important to us in.
In today's environment that means we have to look at the forward interest rate curve and see what kind of makes sense for us, but as we sit here today fully hedged in a position of strength because of that predictability that we have.
Over the next several years.
I appreciate that a.
Maybe one more question if I may I know there we've been asked a lot about site neutrality. How are you thinking about the proposals that are out there whether its from that back or whatever you're going around in D. C. Right now thank you.
Hey, Brian Thanks for the question I'm going to let Eric actually expand on there since you just provided the board an update along with some of our some of our long term outlook views. The short answer is we actually think this is a net positive to us, but Eric maybe expand on on kind of what we what we disclose to the board and under.
Yeah, Brian Let me start with the you know the whole thesis of our business is the savings we create in the system by driving patient care to the right side of care right that is that is absolutely why this company I think exists. It's why we create a lot of value. It's why we are part of the answer in health care. So for US you know any legislation that actually encourages patients to get their care done in the right place.
It's something we fully support so we set it up there I mean, secondly, say, we don't own and operate traditional acute care hospitals right. We have six surgical we have surgical hospitals that do take care of extended stay scheduled patients. Many of them don't have the Ars right. So you think about a given market and how we think about the world we like the opportunity in a gift.
Specialty whether that's worth a phoenix or cardiology to provide the whole spectrum of care to our physician partners. So if you think about our surgical facilities, where they may be something we've moved to an ASC. We're already doing that and you look at our surgical hospitals, we have ASC strategies. Many of them have ASC. So many of them multiple <expletive>. He's so the idea is we think it's a unique opportunity.
<unk> in our short stay surgical facilities again very different than traditional acute care. Their purpose built for higher acuity scheduled procedures as we think about that world, We love that opportunity with our partners to cover the entire gamut of acuity in a value based way that allows the patient go to the right side of care. So that's that's addressing any risk we might have the bigger the bigger issue is our.
Catcher men on the ASC side, you know we have 130 plus today, we're adding a bunch of de Novo said you know, we see that number growing on its way to 200 over the next few years all of those sites benefit from anybody, leaving the H O P. D Hospital side. So we feel like we're very well positioned and been proactive on moving into the right side of care and markets, where we have the higher acute.
D capabilities.
And then the other cases, we see that as a net positive. So it's again core to our business. We believe in it we're excited about it we think it's the right answer for the health system and so you know net.
Net net we think definitely not a risk and we really think are some opportunities there and Dave maybe you want to add something yeah. So you know of course, you can expect that we're tracking what's going on.
In D C.
No.
Kind of following the conversation as Eric mentioned. This is this is the company's thesis so logically it makes sense for us as we've looked at the closest proposal that we've kind of seen with some degree of specificity.
You know there are there's this concept that stuff might move out of our larger acuity centers into our ASC environments. If you take just a bearish case and assume that you know those types of cases in the environment that they've kind of setup. So again very worst case scenario.
In 2026 and beyond what we're talking about in our calculations is less than 1% of our business and I say when you look at just the bearish case, that's purely the bearish case right assuming that there is no further improvement opportunities inside of our ASC is and and no.
Replacement of those cases outside of our larger facilities, which you know is unrealistic you know this company as you know is very strategically focused and if you have an effective date of 2026 or beyond overcoming a 1% headwind is not something that intimidates us in anyway.
Yeah.
Thank you.
Thank you, ladies and gentlemen in the interest of time I'll City, please limit yourselves to two questions.
Our next question comes from CRE chains, all kinds of research enrolled prescribing it.
Thank you.
I'll follow up on that train of thought.
That last question. So as you think about where you are investing to capitalize on the new regulatory environment.
Does that have a link to your case next I noticed the 40% of hiring that's coming in in the EMS K space is above your current <unk> evolving into that being a more dominant part.
You bet.
Yes, Eric Great question, I mean look I think we have been talking for quite some time that we are focused on growing in areas first of all higher acuity areas in our CS and surgical facilities. It is the highest contribution dollar per minute and so it makes logical sense, where focus there. We also know it's what matters most of the health system to payers to see them.
The amount of savings we can drive.
It is incredible for those procedures, often 10000 plus of case and that's why yeah, absolutely you should see that mix continue to change and that doesn't take away. The fact, we love our Gi business, we love, our ophthalmology, but isn't there a great businesses, but when you think about our ASC Ziegler de Novo's for example, almost all of them are ortho or cardio best So like we are very very focused on moving.
Where we can add the most value and that is certainly provides protection against lower acuity stuff that maybe does change spaces and look we don't talk about that but on the lower end of things things leaves our facilities and that's okay. Because it's the right answer overall I would like to point out to the <unk>.
CMS announcement, they added shoulders and ankles in particular total shoulders. You know we were really pleased during COVID-19 that we had some facilities that were accepted enable to do total children's we had fantastic clinical results, we say patients a lot of money initially they werent included coming off the inpatient only list. We were certainly pleased to see that and we see those kind of opportunities to continue to push.
Higher acuity patients safely into our space with a better experience better outcomes and you know it really just ultimately the best answer for the health care system as a tremendous opportunity one little set I'd throw out two going back to the site transition is still a three to one are the number of joint total joints that are in the H O P D versus the ASC environment. So we're in the early innings of a lot.
The stuff you will see us continue to change that mix to higher acuity overtime, just because that's where the person.
Great.
And then can you provide any color on your.
Okay.
<unk> volume by specialty.
Why not.
Uh huh.
Yeah, Dave.
Okay.
Dave is looking at it now just so we can give you the exact specifications and this this this information will be in our Q a little bit later today, just so you have it so so I.
The.
Nearly 3% same facility growth that we saw in cases. This year quarter is are our top three are all north are our top three kind of target areas ophthalmology G. I a N.
And M S K, particularly the ortho component of M. S. K are all north of 4% same facility growth. So those are all growing very nicely for us it's not going to change the overall mix of the business, but that's where you can see that higher acuity come through in our same facility.
Calculation. So I think it's fair to say much like we've seen all year Sara that the.
They are our growth engine is kind of running along all of our specialty so we're seeing kind of nice growth.
And every single one of those areas.
Yeah.
Thank you.
Yes.
Yes.
Our next question comes from Ann.
Mhm Securities. Please go ahead.
Hi, good morning.
Past you have talked about your revenue algorithm as two 2% case growth, 3% revenue per case growth.
And I feel like that's a little stale, given especially this quarter with revenue per case up 11% how should we think about that going forward just given the mix of higher acuity is changing.
My first question. My second question is just on Q4 seasonality of the EBITDA ramp going into Q4, it seems like a little higher than normal is there anything that you would call out for Q4 that would be great. Thanks.
And good morning, I'll take the first question then I'll have Dave talk about seasonality.
But.
North of the high end of that range right, which is clearly 6% we have no indication that that should slow. So I think that's a fair question, you're asking and it appears that we ought to be able to outperform that on a same store basis, we continue to target the 2% to 3% on volume because we want the team to be focused on the right procedures and the high acuity procedures and so if you were to look at it last year.
No we had a very strong year last year with three 8% volume growth on a year to date basis, you look at it. This year. We're at three 5% on top of that strong growth last year. So I still think that two to three is the right algorithm target, but we would bias towards the high end of that range, if not slightly better clearly where youre going to see this differentiated approach is going to be on the two to three that we talk about.
For the revenue component and I think a combination of the acuity mix, we were going after the combination of the new Rev cycle initiatives that Dave put forward et cetera, yes, we clearly will be north of that.
And again to give you an exact percentage we don't want get ahead of our board as a team is coming forward with the final plan for next year, but all in we should easily exceed our our 6% top line algorithm that we've laid out for you and let me let me just address that seasonality question, because and maybe you can show me the numbers that you're looking at but if you take the midpoint of our guidance.
And what would imply is our fourth quarter results should come in somewhere around you know the low thirty's around 32% of our full year guidance at that midpoint, that's consistent with what we have seen in the past.
With the exception of the Covid year.
If you go back to 2019 2018 to go back to last year, we have a higher proportion of our business in the fourth quarter. It's it's you know as the CFO, that's what makes it.
You know I always sweat Christmas because I'm I'm trying to see how those cases come in but that's all a result of you know our patience I'm kind of chasing after the deductible before it resets at the beginning of that Youll see a higher preponderance of commercial business and higher volume in both of those things typically come through.
No.
Starting in late November and going all the way through the end of the year and that's just how the business kind of runs its predictable enough for us to kind of put that in there, but nonetheless, it's still does.
It contributes to that higher average growth rate that you see inside the fourth quarter.
Alright, great. Thank you.
Hmm.
Thank you, ladies and gentlemen, just to remind that you can house Christian welcome to Bristow I need one to place yourself in the question queue.
Our next question comes from Paul Sutherland Ops.
Benchmark company. Please go ahead.
Good morning, guys. Most of mine have been asked but hey.
Hey, Eric I'm kind of curious on the non consolidated deals are.
Are you are you I mean directionally is it moving in the same direction as the consolidated deals in terms of the mix of specialty and our U N. Second add on is are you all looking increasingly at multi specialty centers as you, particularly two three way deals.
Growth, we're driving and those facilities are both proves our value and it also has taken advantage of the synergies we bring to those facilities. So you know as we've talked about before we forget forgetting accounting for a second we're going to make the best earnings decision for the company and then figure out the best way to talk to you guys about it. So that's that's been something we've been very very pleased with overall and your second question sorry.
Multi specials around multi specialty multi specialty oh, yeah, so multi especially so you should know the vast majority of our lessees that are multi specialty and we do still have some single, especially a season in both ophthalmology and Gi, but yeah. The vast majority of our multi especially wherever we can which we turned the single specialty in a multi specialty and if you look forward I.
I would say what's interesting about our de novo's I think they will ultimately be multi especially if many of them are ortho focused what that allows you, though it's bigger rooms, you're building for more complex cases, which does allow you to fill in any gaps with other specialties over time. So you might see some of those come out of the gate really really specialized in taking off on those areas, but we see opportunities there over time to add that.
At service lines like we always do in our our bias is definitely towards multi specialty because it allows us to use all of our different growth tactics. Some levers allows us to really really leverage our recruitment team and so I'm you know over time, we would expect that continues to be the direction.
And so you're you're de novo's are more tilted towards the M. S. K then cardio.
Yes, there could be more tilted towards M. S K than anything else for sure and like I said, we're still in the early innings of that we're excited about that there is obviously some cardio there in Laguardia is one of those ones that it's gonna be again, it's going be a big it's going be a big growth number over the next several years on a small in.
Guessing when it reaches its full potential as a little bit like guessing wind orthopedics finally came over the hump, but we do expect to continue to see that take off in the coming years. Okay.
Great. Thanks very much.
Of course.
Yeah.
Our final question comes from Dan Hendrix of RBC capital markets. Please go ahead.
Hey, Thank you just a quick follow up question most of my questions have been answered but.
I appreciate the commentary early commentary on 2024, and the commentary about the strong rate growth being 50, 50 core growth and mix with maybe a little bit of bias towards acuity, but any thoughts on how that migrates into your early 2024 commentary. Thanks.
Yeah. So it's it is too early for us to talk about 'twenty 'twenty four so so all we're gonna tell you at this stages that we are we.
We do see our growth algorithm, continuing and again.
We've talked about this theme of consistency right that is what we want to be known for it is also just generally the way. This business operates right. There. We generally do not have kind of unusual events that caused spikes one way or another so there's a degree of predictability that you can assume from.
What we have accomplished so far this year and that ought to continue into next year, but at this stage I don't think we're going to give I know, we're not going to give guidance on 2020 for it we just got to finish doing the work and then making sure we get through our board.
Before we talk.
Then what I would reiterate and we continue to say this were a mid teens growth company. That's the expectation we have the opportunity to do that we don't see that changing there's nothing sort of with as I said in my prepared remarks, having sat in this seat for four years.
Got more opportunities and more levers and more tailwind than ive ever had and so when we talk about that long term mid teens growth, we've got as much confidence in that as we've ever had more more so and I'm Super excited going into 2024, we'll share more of that with you obviously in the coming months.
I.
Is that just very last one and apologies if I missed it within that double digits de novo growth any thoughts on how the mix of that pans out between kind of your consolidated non consolidated.
Our consolidated equity method mix going forward. Thanks.
Yeah, a lot of the de novo's, especially early on are going to be non consolidated so some of them will be non consolidated because we have a health system partner, which has unique advantages and you know probably won't give us the opportunity to buy up some of them are us and docs, where we will have distinct opportunities to buy up and so but the initially those will be non consolidated facilities in general.
Thanks.
Yes, absolutely.
Thank you ladies and gentlemen, it appears we've reached the end of the question and answer session.
And I'll hand, it over to management for closing remarks.
Thank you and I went I appreciate it really we appreciate once engagement today before we conclude I would like to reiterate just how proud I am of our team of professionals and surgeon partners, who worked so closely together to deliver on our mission, which is to enhance patient quality of life through partnership their work and contributions to allow us to deliver consistent and predictable results that we talked about today.
Also support a sustained growth for all of our stakeholders and continue to serve our communities with the highest clinical care in low cost settings with the convenience and professionalism. Our facilities are known for thank you. So much for joining our call today and hope you have a great day.
Thank you, ladies and gentlemen that concludes todays event.
Or attending and you may now disconnect your lines.
Okay.
Yeah.
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